McGilchrist Still Isn’t an Improvement, but Here’s the Math

McGilchrist Street in Salem, OR. (Source: Google Maps.)

I received a little bit of pushback from official circles on the article I wrote last month about McGilchrist Street in Salem, Oregon (“That’s Not an Improvement”). It is rarely my intention to attack or embarrass individuals; mine is generally a critique of the system. In this instance, the system from top to bottom—from Transportation Secretary Buttigieg to the local traffic engineer—is prioritizing a ridiculous project, and they are using the standard trope of calling it an “improvement,” despite it not being anything of the sort.

The main technical objection was to my assertion that it will take the city at least 39 years to recoup the money they are spending on the project. I have been asked to provide some better proof for this argument, which is kind of funny because the math is so easy. 

The real objection is not about my math but to the question itself. “How long will this take to pay back” is not a line of inquiry transportation officials and advocates ever ask or ponder. They assume a nearly instant and positive payback window on their “improvements,” and so assertions to the contrary seem de-facto ludicrous. This is how far out of touch with reality transportation professions are.

The city of Salem is projected to spend $15.2 million on the McGilchrist Street “Improvement” Project (the remaining $13.2 million is coming from Sustainability and Equity funding from the federal government).

In their benefit-cost document for the project—which is a combination of propaganda, fraud, and professional malpractice—they assert that property values will increase by the precise amount of $19,349,783 as a result of these “improvements.” (Pro Tip: Whenever someone projects something within a complex system and comes up with such a precise number, it is a tell that they don’t know what they are doing—they’re merely going through the calculations without any critical thinking. A more credible answer here is $19 million.)

That sounds good; Salem spends $15.2 million and gets $19 million in new tax base. Seems like a win.

Let’s pretend the $19 million number isn’t fiction (it is fiction, and I’ll explain why later). And let’s pretend that the $19 million in increased valuation magically appears overnight once the McGilchrist Street “Improvement” Project is complete (again, a fictional assumption). The question then becomes: How much of that $19 million does the city of Salem capture?

In the original article, I assumed that the city’s annual tax rate was 2%, acknowledging it’s probably less but trying to make the project look better, in the absence of detailed knowledge. I’ve now been told it is less. It’s 1.34%. 

At 1.34%, a tax base increase of $19,349,783 will create an annual amount of tax revenue of $259,287. (How’s that for precision?) That’s basic multiplication.

At this point, just take the project cost ($15.2 million) and divide it by the annual tax revenue ($260,000) and you come up with 58 years (19 years more than my original rough estimate). That’s almost two lifetimes to recoup what is being spent by the city here, completely ignoring the federal government’s contribution. Is any additional analysis necessary to show this is a ridiculous project? I don’t think so.

Let’s get a little more complicated, just to satisfy the technical people. That $260,000 won’t entirely go toward paying off this investment, will it? Don’t we assume that a project like this is going to pay for other things, like police and fire protection, parks, housing, and other economic development initiatives? In other words, isn’t Salem “improving” McGilchrist so everyone’s lives also improve? One would assume so. Salem isn’t just investing in McGilchrist so that people can drive around more.

If half the money from this new tax base expansion went to paying for the project and the other half went to other government functions, well now the payback window expands to 108 years. Again, what are we talking about? These numbers are crazy.

What if we recognize that Salem, along with the rest of us, now live in an environment that suddenly has a real cost of capital. Salem is spending money today ($15.2 million) and then projecting, as a return, annual payments of $260,000 from the increased tax base. If we have to discount that future capital by some amount—let’s not be crazy, we can just say 4%—then how many years will it take to recoup the investment? Would you believe me if I said “infinity”?

What is 4% of $15.2 million? It’s $608,000. That’s the annual interest on a $15.2-million bond. It’s 2.3 times the revenue the city is expecting from property value increases. The valuation they expect doesn’t even cover the interest on a $15.2-million bond. Even if Salem taxes people and pays cash instead of taking on debt, they never recoup that investment. With even modest discounting and rosy projections of the future economy, the payback window is infinity. 

So, the conclusion I took away in the first article, and is even more true now with better data, is that nobody in Salem is doing even basic math here. Nothing I’ve done so far is difficult or mentally taxing. The math is not being done, not because it is difficult, but rather because nobody is interested in the answer. The obsession is building more capacity, getting a federal grant, and making an “improvement” and everything else is ignored, even the obvious.

That’s actually how human nature works. This only proves that engineers, transportation officials, and project advocates are human.

We overcome the shortfalls of human reasoning by recognizing our own shortcomings and then imposing some rigor on ourselves and the way we go about doing things. Most people outside of the transportation professions assume that is what a benefit-cost analysis is supposed to do: remove the human element and perform a dry and technical analysis looking at just the numbers. 

I called the McGilchrist Street benefit-cost document “a combination of propaganda, fraud, and professional malpractice.” I’ve written extensively about how this is standard industry practice (see: Shreveport I-49, or the Staples Overpass), but let me just focus on the $19,349,783 in property valuation this particular report suggests will occur.

The way they came up with this ridiculously precise number is to identify all the properties that were vacant (Map of Group 1) and then all the properties that were developed (Map of Group 2) and assume that the former would quickly develop to the intensity and per-acre valuation of the latter once McGilchrist is “improved.”

In other words, those large lots are going to become as valuable as those small lots on a per acre basis once the project is completed. Anyone who has been here at Strong Towns for any appreciable period knows why that’s absurd. Can we look at Taco John’s? Walmart? Any number of analyses that Urban3 has done?

If this is going to happen, then some other things must be true that nobody is talking about. For example, once the McGilchrist Street project is completed, Woodard RV Repair is expected to redevelop into something more fine-grained and financially productive. The same with RPD Services, a truck repair company. They will either need to relocate or find a way (and a reason) to take their expansive storage and convert it to something with a higher and better use. Why does anyone expect that to occur?

The report suggests that the same thing will need to happen to the properties where P3 Health Partners, Salem Health, and Salem Dental now sit. All of these buildings are apparently assumed to be quickly demolished or reworked to make way for something more financially productive in order for the city to realize the additional tax revenue they are counting on as the benefit of the project. That’s not going to happen, no matter how magical the “improvements” to McGilchrist Street are.

On these last three properties, I don’t think anyone actually expects them to be torn down or redeveloped. I suspect what happened is that the buildings were recently built but that wasn’t yet reflected on the tax rolls when the city pulled the data and did the propaganda analysis for the benefit-cost report. And, since nobody in the process is interested in the actual answer to the math question—they just want to get federal money to build more stuff— they didn’t realize that the redevelopment they were banking on had already happened, even without the “improvements” they covet.

Salem Dental, “Now Accepting New Patients.” (Source: Google Maps.)

If the obsession here was the financial health and prosperity of the community, Salem would be asking a different set of questions. How do we grow the tax base without substantially increasing our costs? What is our actual return on investment? What are the most profitable public investments we can make?

For that last question, the very last answer in the queue is “spending $15.2 million on McGilchrist Street.” That project is a financial loser for the city, and all the fake reports and federal grants won’t change that reality. Salem grows poorer following this approach, as do all cities that obsessively chase transportation funding without doing basic math on their projects.

McGilchrist Street is not an “improvement” project. It’s a sad diversion from the great walking, biking, and incremental, neighborhood-focused projects Salem has been working on, and leading on, for years. Whatever process produced this project as a priority is a festering problem that needs to be addressed.

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