Does Your City Run a Profit? How Would You Know?

Image Credit: Jamar Penny

A core principle of creating financially strong and resilient communities is this: local government must run a profit. 

Before you balk, this doesn't mean local government must do things for profit, extract residents' private wealth, or charge for every service or piece of infrastructure. Far from it. We mean this in a more prosaic sense: local government must, at the end of the day, have enough revenues to match its expenses. It can operate at a loss for short periods of time, by taking on debt or spending cash reserves, but it cannot do so indefinitely, any more than any nonprofit organization or your household can. Government is like a business in that sense.

This simple observation is one of the core points we're hoping participants in the new Strong Towns Academy will come away mulling over. And that’s why early on, the completely free Strong Towns 101 course poses the question, "What does it mean for a city to run a profit?"

We, collectively, need to think about the second lifecycle and beyond of the investments we make. What happens when that road or sewer pipe or library building or water treatment facility needs repair or replacement? Will the private, taxable wealth in our community produce enough revenue to fund that repair or replacement? And how can we ensure that?

We posed these questions on the Strong Towns Community site to the participants in our Strong Towns 101 course, asking them to share their insights, proposals, struggles, or anecdotes from their own communities. Below are a few of the highlights so far from that discussion. If you’d like more like this, the Strong Towns Community plays host every day to active discussions about how we can help our places become more financially resilient. It’s a great place to get advice or ask a question or share the thought that’s been keeping you up at night.

And if you want a crash course in the elements of local financial resilience, check out the Strong Towns Academy. The first course is 100 percent free, and we will be rolling out a series of subscription-based courses that go into specific topic areas in greater depth throughout 2020 and 2021.

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Portland, Oregon. Image Credit: Zachary Keimig

Changing the Rules to Focus Development Where There is Existing Infrastructure 

One (anonymous) course participant shares his experience:

I live in a growing young city (pop ~ 1 million) surrounded by farmland. While I see the newer suburban development being much more dense than the historic stock, I also notice that the suburbs are located quite far from most employment sectors (downtown and industrial business parks). Without doing the math my gut says that even with the increased density on the outskirts the additional roadway to move people daily from the suburbs to their jobs and back mean that the taxes still do not pay for the second lifecycle. 

One item that has been changed recently is city council has allowed for almost all of the pre 2000 single family lots to be split, and remov[ed] the minimum parking requirements. 

While this is a good move there still must be more of an incentive to use the existing infrastructure, meaning more people must have a way to live comfortably on the existing land stock.

Tying Public Investment to Growing Private Investment in a Virtuous Cycle

Another user writes:

I feel like I have an example of a project in my small town that exemplifies many of the concepts in this lesson. There has been a multi year effort by the city to improve the core downtown area in our small town. First new apartment buildings were constructed as well as new townhouses and condos.  Many of these were built on open lots in the area.  Additionally a couple of local business people built new buildings or rehabbed existing ones to house their mid size businesses. 

Much of this new property tax revenue was used to help finance an infrastructure project in the downtown area. Replacing decaying 100 year old water main pipes, etc.  On top of that, the streetscapes have been redesigned to allow more pedestrian use and also use for restaurants, for example, to have outdoor seating. 

I am seeing many empty buildings rehabbed to house new businesses like restaurants, artisan shops—all local people.  Keeping the wealth in our local area.  There is a great deal of remodeling and upgrading of buildings happening by the private sector. 

Does Every Amenity Need to Generate Revenue Directly?

A couple of participants expressed the concern that a simplistic focus on profit, or return on investment, could result in some unintended consequences:

A big part of ensuring solvency is to think clearly about investment costs.  Not just startup, but long term operation and maintenance.  However, as Chuck pointed out, cities are not like Walmart in every way.  The services they provide are important for many reasons and do not necessarily generate revenue directly.  We might want to have a senior center, for example, for the well being of our older citizens even if it does not charge fees to its users.  The calculus, then, is going to have to be different than some other business investment decisions, e.g. building a shopping center where expected rent can be easily calculated and used to justify expenses.  

Municipal finances need to be looked at on a city-wide basis, with some activities generating revenue directly, some generating revenue indirectly through growing the tax base, and some arguably not generating revenue at all and yet still being desirable. This is the kind of calculus I'm hoping we'll get into in this course.  How do we project the effect that an investment will have on the tax base?  How do you value environmental quality or reducing inequality?  How about education? Too often, a myopic focus on the numbers will mean that some people oppose quality of life improvements like parks or bike lanes as being a waste of taxpayer money. We need ways to think through these decisions clearly.

(We would love to see more discussion of what this looks like in practice, as it can vary dramatically from place to place and context to context. Strong Towns has addressed this topic in past articles such as this one about the importance of lovability to our places, and these about the financial return on investing in walkable streets and urban street trees.)

When the State is a City's Worst Enemy

State laws that restrict the ability of local governments to raise revenue in reliable ways end up forcing our local governments to orient up the food chain—dependent on the handouts (and priorities) of higher levels of government instead of serving their residents first and foremost. This destructive dynamic is in play in the home state of one reader:

In Washington State, when property value increases, the city doesn't actually receive any more revenue in property tax. The only ways that a city can increase its property tax is through (a) a vote of the people or (b) new construction. Other than those exceptions, a city's property tax revenue can only grow by 1% of the prior year's revenue; this is usually less than the rate of inflation, so cities are perpetually in a losing position, and any profitable position today is likely to be lost in the future.

The other main source of revenue for cities is sales tax... but the strategy for cities to increase sales tax revenue is to compete with other cities to attract businesses that generate sales tax. Generally, larger businesses--big boxes, shopping centers, and car dealers--are the focus of these efforts, and they're all built in ways that encourage driving, as the intent is to attract people from outside their own city.

Beyond this, both sales tax and property tax are shared with other layers of government (state, county, etc), further reducing the local benefit of any investments.

All of these policies fail to align the financial incentives of the city with the public interest. Changing this would likely require significant changes to our state constitution, as well as a number of state laws. The effect of this is that our state policies perpetuate weak cities. 

Juanita Village in Kirkland, Washington. Image Source: Flickr

Find Like-Minded Advocates in Your Community or Region

We are building a movement of Americans of every stripe and area of expertise who can challenge the kinds of bad policies and incentives described in the previous comment. Rodney Rutherford, a Strong Towns member in Washington, is walking his talk. He posted the following:

BTW, I registered StrongWA.org earlier this week, dreaming big about organizing a statewide movement to fix rules like this. I started writing some article outlines about this a couple months ago, but need to get back to shaping that up. With the "all of a sudden" part of our bankruptcy seemingly on the horizon, I think that a time is coming soon where people will start questioning "the way we've always done things" realizing that it will no longer work, and giving us an opportunity to fill this void with a more resilient vision for the future. 

 Now that’s the power of the Strong Towns conversation in action.

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