Should we do this project? A Strong Towns answer.
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One of the most frequent questions I receive is asking my advice on a specific project. Should my community go ahead with this development? Should we put in this parking structure? Should we do this annexation, add this new park, or assume responsibility for this new road?
Except for the parking—which you should almost certainly not do—these are always difficult questions to answer. Not all projects that make a community money are good, and not all that cost more than they produce in wealth are bad. If you think it’s worth a bunch of debt and a future tax increase on everyone to land a Walmart on the edge of town, who am I to say you’re wrong (although don’t plan on me moving there because that’s not my kind of place).
What is most important is having an approval process that is not just transparent, but reflective of reality. It does not do any good to pretend that Walmart is going to make you all kinds of money when it’s not. A big part of our push for GASB reform is to make accounting reflect reality, not in some obscure fine-print kind of way, but in a process that helps communities make good decisions.
As part of the Local-Motive Tour, I sat down with Kevin Shepherd of Verdunity and did a session called “Go or No Go: Doing the Math on New Projects” where we talked about this challenge. Kevin has some great insights on this (sorry, but you’ll need to grab a round trip ticket for that), but I’m going to share the handout I put together and go through my thoughts.
My answer to the “go or no go” question is a pair of filters. The first filter looks at the project math. For projects that don’t pass that filter, there is a secondary decision-making filter. If you can’t pass these filters, it’s a bad project.
Primary Filter: Does the project improve the community’s balance sheet?
Most projects will create some costs for the community, including costs for infrastructure maintenance, police and fire protection, and added strains on facilities like parks and libraries. For a Strong Towns evaluation, a community must ask: Does the project create greater community wealth than the long-term costs and obligations it imposes?
To answer the question, choose one of two approaches: Mimic or Do the Math (Note: In other places I’ve called this the Italy and the Singapore approaches but, despite my deep reverence for each, I’ve started to drop that description because I’m sure it will offend someone, if not now then in the future).
The Mimic Approach requires the city to have an understanding of what is already working. This may be a community-specific productivity analysis or it may be a reliance on data from similar communities. Either way, if you choose the Mimic Approach, you are being asked to make a finding that the proposed development pattern mimics another successful approach:
Does the proposed project mimic a pattern of development shown to be financially productive?
Does the project represent the next increment of development intensity for the site?
Does the project limit downside risk for the community?
If you can answer yes to those three questions, why wait! Get going! When we talk about streamlining approval processes for small developers and others doing incremental work, this is what it looks like. Let’s not get in the way of people ready to build wealth within the community.
If the project is more complicated than mimicking productive patterns, that’s okay. It might just take a touch more work to pass the filter. That is when we switch to a Do the Math Approach.
The Do the Math Approach has two different ways to get to “yes” that give a degree of flexibility to the project while also ensuring the community is taking care of its financial health. The first is a simple ratio based on some research I’ve participated in and an article I wrote back in 2015 called ”The Density Question”:
Does the project create $30 in private wealth for every $1 in new public infrastructure liability?
I like that question because, as a math problem, it is relatively easy to come to an answer. Build a sufficient buffer and the proper feedback loops are in place to keep things going.
Instead of answering that question, there is an option to do some deeper math. I’ve arranged this in a three-part sequence:
(a) Perform an analysis to determine the ongoing annual revenue from the project. Multiply this by the percentage of the budget spent on infrastructure maintenance.
(b) Perform an analysis to determine the average annual cost of a full replacement of new infrastructure.
Is (a) greater than (b)?
Whatever approach you choose to use, if you can answer “yes” then you’ve met the financial threshold and can find that the project improves the community’s balance sheet. Note that I’m not suggesting this is the only criteria, that you should not be looking at how the project impacts other properties, the environmental impacts, or anything else the community has prioritized. I’m focusing on the financial impacts and, if you can meet any of these three approaches, then the project should have a positive impact.
If not, that’s okay, just go to the secondary filter.
Secondary Filter: Does the project justify raising taxes on the entire community?
Image via Unsplash.
If a project costs more over the long-term than it creates in wealth for the community, that does not necessarily make it a bad project. There are projects and improvements that the community values so much they will support them through increased taxation. For a Strong Towns evaluation, a community must make that determination and then seek ways to improve the financial value of the project.
Start the secondary filter with a question: Is the project critical, important, or so unique that it justifies raising taxes on the entire community to support it?
That question—even without specific numbers—is important to ask. It’s even better with specific numbers, but most bad projects aren’t worth any tax increase and so this will be an easy question to answer.
If the answer to the question is “no” then deny the project. If the community is going to lose money and the project is not worth raising taxes on everyone, then why would you ever do it? Go ahead and clearly state that “The project creates a negative financial impact on the community” and ask the proposer to try again.
If the answer is “yes,” that’s great too. You have a worthy project, one that the people of the community support. Before you move from this second filter, take a moment to evaluate the project and see if you can improve or mitigate the financial impact to the community by answering these questions:
Are there ways to design the project to make it more adaptable, so that it has multiple future uses beyond the use currently being considered?
What can be done as part of the project to increase the measured value of properties directly adjacent to the project?
What can be done as part of the project to increase the measured value of properties within 2,500 feet of the boundaries of the project?
Are there ways to design the project to reduce or eliminate the community’s long term financial commitment to the project?
If you want to go deeper into this topic ( as well as nine others we cover on this year’s Local-Motive Tour) get yourself a round trip ticket. And if the “Go or No-Go?” checklist is helpful for you, make sure to check out our growing list of Local-Motive Action Guides. We’re adding one per week to the Action Lab through the end of the tour.
Let’s get some good projects approved in 2021!
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