Ask Strong Towns, Question #8

We invite our members to submit their questions on anything that they would like our thoughts on. We’ll give you a Strong Towns answer or find an expert who can. This week, Rick S. asks:

On today’s webinar you gave the example where it would take an increase of $80 million over the 20 years for the project to pay for itself. i.e. Does that mean the value needs to ramp up an additional $80 mill over 20 years or it needs to be Plus $80 mill from year 1-20, 10-20 or at year 20? 

ROI calculation from the Neighborhoods First Report.That example came from our Neighborhood’s First report. It was a return-on-investment (ROI) calculation for College Drive, a road widening project here in my hometown a couple of years ago.

If local government were a business (it is not), then we would be talking about needing to measure the return from year 1 through year 20 because, if there was no return, it would not be a good project.

For a local government, the calculation is a little different. This project, as with a high percentage of local projects, was paid for by others. In this case, it was paid by state and federal dollars with a limited local match. This means that the first life cycle (those year 1 through 20 and even a little beyond) are covered.

So for this situation, ROI is not a matter of how much cash return we get for a specific cash investment (although that is important) but more about how we find the money to maintain this investment far in the future. The city just took on a $9.7 million long term liability. If the city is going to meet that obligation, they need to have their tax base generate $652,000 per year of revenue. That will only come from a tax base of $80 million.

So to directly answer your question, $80 million is what we are shooting for by year 20, although, as I said many times during the webinar, I don’t feel comfortable with using the math in that way. Instead, I would use this rough calculation to generate a different set of questions before the project had been undertaken (or even considered).

• Is an $80 million increase in the private-sector tax base reasonable?

• If an $80 million increase in the tax base is to happen, where would that occur? Would there be additional expenses/liabilities associated with it, thus making more than $80 million necessary?

• This is $80 million just to cover the cost of the roadway? More would be needed if this is going to generate the additional revenue necessary to cover snow plowing, ditch maintenance, policing, etc… not to mention “growth” that would actually improve the financial health of the community. Is that likely?

• In a worst case scenario, where little to no growth is generated by this investment, are local taxpayers going to be able and willing to pick up an additional $652,000 in tax obligation (a roughly 14% property tax increase) to cover the long term costs?

College Drive, an award-winning project that looks pretty from the air today but creates enormous long term financial obligations for a city already struggling to find the money to maintain basic systems.If these questions were asked and honestly answered, there is no way the city would have done the project because there is not even a remote chance that the project will create $80 million in increased tax base, whether from appreciation or new investment. We can look around at what has happened in other parts of the community and see that these type of investments have never generated anywhere near that level of new growth and appreciation. Since this project abuts primarily government land, the likelihood of this working out to be a net positive is approaching zero.

The conversation should essentially end there as the investment is not viable. The project would need to be abandoned or redesigned dramatically for it to proceed. That is what a strong town would do; make lower risk investments.

So understand that, at the end of the day, we’re not using these calculations to predict the future. We’re using them to put us in a position to ask more sophisticated questions. Our obligation today as public officials and community stewards is to pass along a financially strong and healthy city to the next generation. That means the left side of the ledger needs to balance with the right side; we need to have our tax base balance with our long term obligations. When we grow our obligations, we need to grow our tax base.

Until we do that, our cities are going to struggle – as my hometown does – to meet their most basic obligations.