Part 3: Illusion of Wealth

We're in the process of updating the Curbside Chat companion booklet. Here is the third excerpt from that project. You can get more information -- including audio, video and request your own chat -- on our Curbside Chat page.

Growth is bankrupting America’s cities.

It’s not that new growth doesn’t pay its own way. Often it does. Developers frequently front the cost of the necessary infrastructure and roll that expense into the price of the home. Federal and state infrastructure programs subsidize major communal expenses, often in the name of economic development. Billions in transportation spending each year creates a platform to make local growth easier.

America has become very good at finding ways to pay for new growth. It's fixing and maintaining all the stuff we build where we struggle.

There are some very powerful incentives at work here. When we experience growth, local governments are called upon to pay very little of the up front cost. There might be the need to up size a pipe or partially share in the road cost, but the bulk of the transaction -- the millions of dollars of new buildings, roads and utilities -- is generally paid by someone else.

This means the local government -- the local taxpayers -- experience the benefits of growth, in terms of additional tax revenue, at a very low cost. In exchange, the local government -- the local taxpayers -- agree to take on the long term responsibility to fix, service and maintain all of this new public infrastructure. Local governments are exchanging a short term benefit in cash for a long term liability.

There is only one of two ways that this transaction can work out positively over the long term. Either growth is going to continue at ever accelerating rates -- there will always be that many more Peters to rob today to pay for the Pauls promised service in years past -- or the pattern of development, the way we go about building and assembling our places, is going to generate more excess wealth for the community than it creates in long term costs. While the first is not mathematically possible, the second is not happening either.

Professionals who work on growth and economic development issues frequently hold to what can be called a Quantum Theory of Economic Development. They believe -- quite conveniently -- that the success of individual projects cannot be directly measured, that we need to trust that the aggregate effect of all the public investments being made add up to be more than the whole. This would be absurd even if we weren't able to observe cities struggling financially to simply do basic things.

Time and again, when we do the math we see that things don't add up. A cul-de-sac street constructed initially through the assessment process that now requires 75 years of tax payments from the properties served to pay for maintenance that will need to occur every 25 to 30 years. A roadway paid by a developer and rolled into the mortgages of the properties when they are sold now requires a 46% tax increase to cash flow long term. A business park built initially with a federal grant whose total ongoing revenues do not come close to covering the projected maintenance and repair costs. These kind of examples appear everywhere one measures and they always work the same way.

“New growth creates an illusion of wealth. Local governments experiencing growth look and feel successful.”

New growth creates an illusion of wealth. Local governments experiencing growth look and feel successful. They have high revenues and very little immediate costs associated with them. Long term, as the promises start to come due and the local government is called upon to fix the roads and the streets, the sidewalks and the curbs, the pipes, the pumps and the valves, that illusion begins to dissipate. More growth, higher taxes and debt extend the illusion for a while, but eventually it is revealed that a free road isn't really free.

While local governments are not businesses, there are some lessons that can be learned by thinking in that way. It is simple – extraordinarily easy – for a business to experience large amounts of growth today if it is willing to assume massive long term liabilities in the future. Take on debt, give employees huge pension guarantees, promise to clean up future environmental damage or give away product at a loss and the business will grow.

For a while.

We recognize these are short term market strategies, but we also understand that the market will punish a business that does not shore up their finances over the long term. Local governments are not businesses; they are stewards of the public purse. When a local government goes bankrupt, they are not replaced by a more savvy competitor. Thing go bad. People suffer. 

If anything, that immense responsibility, and the consequences of failure, should make local governments more risk averse, not less. More cautious, not less. When you factor in that, unlike a business, local government liabilities are perpetual -- there is no end date by which residents no longer expect their road fixed or their pipes repaired -- and governments should be absolutely paranoid when it comes to taking on long term obligations.

Yet, that illusion of wealth is so seductive that local governments of all size rush to take on all the long term obligations they can just to experience a little bit of success today. So embedded is this thinking in our approach that our accepted accounting practices count all infrastructure -- regardless of what it serves -- as an asset. Imagine that! A city can have miles of roads and pipes serving nothing -- absolutely no revenue -- and their balance sheet will show that they are wealthy with millions in assets and no associated liabilities.

Illusion: A thing that is or is likely to be wrongly perceived or interpreted by the senses.

Wealth: An abundance of valuable possessions or money.

The illusion of wealth has become a way of life for Americans. We're not as rich as we like to tell ourselves we are.

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