Key Fiscal Concept: the Private-to-Public Investment Ratio

It’s not “density” that makes the Ballston area of Arlington County such a fiscal success but the ratio of private-to-public investment.

Charles Marohn, founder of the Strong Towns movement, is frequently queried if there is an ideal density for communities of a particular population and size. In “The Density Question,” he uses the question as a springboard to address a topic that really matters, the long-term fiscal sustainability of counties, towns and cities.

Marohn’s answer: Density is a useless metric. Forget about it. “Density is not our problem or our solution. Insolvency is our problem. Productive places are the solution.”

Say you own a $200,000 house. How much would you be willing to pay for all the communal infrastructure — the streets, sidewalks, arterials, interchanges, pipes, treatment plants, traffic signals, water towers, and so on — that adds to its value?

What if I said your total bill was $200,000? Would you pay it? I’ve been asking people this exact question for the past two weeks and have yet to have anyone who didn’t immediately say “no, there is no way.” And, of course, nobody would pay this. If the house is worth $200,000 and my additional cost of maintaining the infrastructure to allow me to live in that house is an additional $200,000, then that’s a really bad investment.

What if the total bill was $100,000? $20,000? Only when the number gets down to $10,000 and below, writes Marohn, are people unanimous in their willingness to pay for supporting infrastructure.

I think this is a reasonable thought process and it points to a powerful conclusion. At a property value to infrastructure investment ratio of 1:1, everybody walks. Nobody sensible is going to invest $200,000 in infrastructure in a property and have it end up being valued at only $200,000. What’s the point? …

If your city has $40 billion of total value when you add up all private investments, sustaining public investments of $1 billion (40:1) is a doable proposition. Public investments totaling $2 billion (20:1) starts to be risky with outside forces of inflation, interest rates and other factors beyond your control starting to impact your potential solvency. …

At the end of the day, we’re talking about building cities that make financial sense. … Let me deliver the tragic news that demonstrates why discussions of zoning, new highways, high speed rail across America, recreational trails, decorative lights and every other fetish of the modern planner/zoner is a sad distraction from our urgent problems. I’ve now done this analysis in two cities – one big and one small – and for a $200,000 house in either of these cities, the once-a-generation bill for your share of the infrastructure would be between $350,000 and $400,000. …

When private investment is exceeded in value by the public investment that supports it, wealth is not being created, it’s being destroyed. The wealth destruction is rarely evident because there are so many subsidies and cross subsidies between federal, state and local government, and so much maintenance is deferred into the indefinite future, that nothing is transparent. But the system is not sustainable.

“Our cities are going to contract in ways that are foreseeable, but not specifically predictable,” says Marohn. “Yet most are still obsessed with growth and the ‘progressive’ among us, with issues of density.”

Bacon’s bottom line: Density is relevant insofar as it shapes the private vs. private investment ratio. As a rule, higher density development requires less infrastructure per unit of housing or business than lower density development. But Marohn is quite right to say that we shouldn’t fixate on density — it’s a means to an end, which is evolving toward a more favorable ratio of private to public investment.

Until we get this basic accounting right, I don’t see how there’s much chance of achieving long-term fiscal sustainability.

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16 responses to “Key Fiscal Concept: the Private-to-Public Investment Ratio

  1. I agree with this article.

    Thank you Jim for listing above as “RELATED” your earlier 2012 fine article “The Fiscal Fix” on Katz’s work and that also includes my voluminous comments to The Fiscal Fix article.

    There, I elaborated on how in Ballston we built a highly dynamic interplay of forces. One that over the past four decades have worked to spin off endless combinations of interactions that compound, and act cumulatively, year after year, to dramatically increase the spread of benefits it generates over its costs that it works every year to reduce in relation to its benefits.

    These are key dynamics to successful development in future. Such dynamics need to be built into successful communities so as to drive ongoing and ever increasing spreads of profits over costs, all designed and built into communities that generate a myriad of daily human activities that create positive synergies.

    This is the breakthrough concept. The concept that defeats obsolesce. The one if executed properly will build communities generate long lasting success on a broad array of fronts, financial and social, by building the best mix of ingredients therein, given the unique circumstances of each real estate venture.

    Whether it be large or small city or town, maximizing its potential for synergy is key. See Fiscal Fix including my comments for details.

    Hence, these principles apply to revitalizing small towns, and small cities, and crossroads in otherwise rural Virginia, as well as places prematurely obsolete urban places such as much of Northern Virginia today.

    Ballston is stronger today than ever. Lessons learned there have universal application.

  2. re: how much you’d pay .. and density.

    I think there IS a connection because it does take some number of people sharing the costs of the infrastructure to make it affordable.

    For instance, a water/sewer system costs a LOT of money and there IS a “sweet spot” on how many are needed to make it “sustainable”.

    The private sector knows this when they decide if they can afford to extend cable… density IS important.

    I agree that the key metric is fiscal sustainability – and that means that the folks who run the place can’t be stupid about how much to pay for infrastructure and/or how much to buy which has to be based on some metric about how many will be sharing the costs.

    Then you have the examples like Petersburg where the value of property has dropped and that, in turn, requires cutting infrastructure and services if it is to be sustainable.

    All jurisdictions are not created equal when it comes to this. In all of Virginia there are, what, 10 jurisdictions with AAA ratings?

  3. While density means the costs of public facilities and infrastructure can be divided over many people, often the underlying costs are more expensive due to the high cost of land in urban areas, the high cost of labor, and the need for special features needed in urban areas. For example, urban areas need transit, which normally has high cap-ex and op-ex costs, not needed in less dense areas.

  4. how about “cost of living”? is that an important metric?
    how about “affordability”?

    does what govt do about infrastructure and services affect “cost of living” or are their other drivers?

    bonus question – Can a city be sustainable if the cost of living is outrageous?

    I say yes…. but why?

  5. “If the house is worth $200,000 and my additional cost of maintaining the infrastructure to allow me to live in that house is an additional $200,000, then that’s a really bad investment.”

    ??? Sorry, I don’t get it. There is no intuitively obvious reason why it matters to the consumer whether it’s public or private investment that created the value he is purchasing/renting, or whether the capital investment dwarfs the O&M or vice versa. I have some friends who bought a retirement condo recently in a nice building and they ended up with a homeowners fee that’s larger than their monthly mortgage — and I’m sure a lot of that goes to pay for government services and taxes. Was that a deal breaker? Heck no, the total monthly cost was part of their up front calculation whether to buy.

    Now, the long term fiscal sustainability of the government itself — the city, or whatever — that’s a different question. To the government, yes, absolutely, you can’t keep on spending more on supporting services and infrastructure than you get back in tax revenue even if you are the local government — but the consumer, the property buyer, doesn’t care. The government can create value (just inefficiently), and I don’t think the private/public ratio of the source of that value matters to the buyer (in the short run anyway).

    • Not sure I agree.

      Condo equity values typically hold flat or are severely depressed if not decline in most cases where condo management fee increases typically become heavily recurrent, including too often for unnecessarily deferred costs or for bloated non-competitive maintenance costs after an unsuccessful fight to maintain a competitive and efficient management cost regime to ward off what to typically becomes predator management companies or premature obsolesce.

      This creates, in some cases, too often a stagnate old people’s home, where retirement nest eggs are eaten by predator professional condo managers who game the system against their own clients. This is reverse of healthy. It doe not always happen. But too often it does.

      What we should shoot for is 2+2 = 6 or even 8 in all development. And that is for starters. Or at least that is the way it use to be far more often than now likely. A condo only one of likely many examples. Things typically go to hell across the board.

  6. I would point out that “density” has become a buzzword. There is the literal meaning of “density”, but it has become shorthand for areas like Ballston.

    I’d simply posit that so many of these concepts are really technicians employing a vernacular instead of being blunt. Density, New Urbanism, Private-Public, etc.

    The truth is that people desperately want to live in an area like Ballston. They want to live in the Fan. They want to live in downtown Charlottesville near the Downtown Mall. Yes, these areas are “dense.” And I’m sure their private-public ratio is better than most. And I’m sure that New Urbanists like them. But those terms are verbiage. Young professionals (the folks with money who will spend it) want to live in those places. That’s what makes them. Why they prefer them is an open question. I believe New Urbanism does make a difference. But I’d be hesitant to give it full credit. I think a place also has to have a buzz and welcoming environment. I’d also posit that a large institution of higher learning is key. In the 21st century, young professionals realize they have to constantly retool and learn. It’s nice to have a GMU, VCU, or U.Va. close by to get a new certificate or take a graduate level class.

  7. We do have to use language to help us communicate. And language by its inherent nature is a blunt instrument. And buzzwords make the blunt also fuzzier. This includes a fixation by some on youth and higher education. Both of which today are in very serious trouble, and highly unstable.

    Here, right now, we’ve got an extreme case of youth believing that its very presence in this world earns it the title of Frederick Nietzsche’s Superman.

    The reasons for this unfortunate state are many, and are largely outside youth itself, a group that has neither the wisdom nor experience to evaluate its own merits, due in part by the fault of our higher education system that today works hard far too often to corrupt our young people, treating them as a commodities to milk, instead of demanding that they grow up. And shaming them until they do.

    See also:

    http://baconsrebellion./?s=Deciphering+Higher+Ed+Statistics

  8. Well.. folks with “terrible commutes” are actually also buying something they want – ergo – someone – public and private are providing it – at a price that is acceptable.. right?

    I look at the tax rates of exurban counties compared to urban places …

    and I’m not sure the folks that live in exurbia would “die” to live in Ballston or the Fan! 😉

    Down my way – the folks (with those terrible commutes) will brag that behind their house is “woods” or a “field”… sometimes with corn or cows in it! Of course the same folks think the well cap in their yard is an access to their city water/sewer!

  9. I disagree with belief that density doesn’t matter. That sounds like the kind of theory that gets developed by people who spend most of their time in windowless basement “man caves” writing blog posts. Out here in the real world density is, by far, the most distinguishing characteristic that separates one human settlement pattern from another.

    Density affects everything …

    The size of the talent pool.
    The attractiveness of an area to employers.
    The cost of land and real estate.
    Walkability.
    Mass transit possibilities.

    People talk about “walkability” without thinking about employment. Buffy and J. Winstoe Williker VI may be able to walk around spending Daddy’s trust fund but the rest of us have to work. If the density is too low to have walkable employment and too low to have effective mass transit, guess what? You have to drive to and from work. Voila! The suburbs.

    Jim, next time you take one of your vacations maybe try Singapore. 5.6m people living in a country about half the size of Fairfax County with the seventh highest GDP per capita in the world (nominal measurement method, 3rd highest using the PPP measurement approach).

    As for Ballston, I lived there in the early 1980s. It was a run down dump of a place anchored by a failed Woodward & Lothrop’s department store. The much maligned Washington Metro transformed the area. The Orange line to Ballston was completed on Dec 1, 1979. You can map the start of the transformation of the Wilson Blvd corridor back to that very day. The metro allowed people to commute to their jobs in DC without having to deal with the almost hopeless traffic jams of the early 1980s. This made the area far more desirable and increased its …. wait for it …. density. The increased density made the area walkable since high density creates an economic incentive for street level stores, restaurants, etc in mixed use environments.

  10. Also, for the record …

    My son plays for an AAU basketball team. This means I am at an unending series of basketball tournaments all through Virginia. The tournaments run for Saturday and Sunday on at least two weekends a month. Since there is considerable time between games I get to reconnoiter various Virginia localities. So far, the team has played in Richmond, Norfolk, Fredricksburg and Manassas. Guess what? They’re all the same! Endless suburban strip malls as far as they eye can see. And yes, Jim, I was within the city limits of Richmond as well as in Chesterfield County. Fredricksburg was the worst of the bunch when it comes to standard issue suburbia. How many car title loan shops can a small city possibly need? And the traffic! Absolute traffic jam on a Saturday afternoon. This wasn’t caused by people commuting to NoVa for work. This was just a failed attempt at urban planning.

    After reading the tripe written about Northern Virginia by people living in the Fredricksburg and Richmond areas on this blog I thought Richmond and Fredricksburg must be beautiful oases of multi-use walkability. Ha! Drive down 234 (Business) in Fredricksburg or anywhere in the Midlothian area around Richmond …. wall to wall strip malls.

    At least Northern Virginia has been trying to transform itself with transit oriented development around Metro. It worked in much of Arlington and Alexandria. Now it’s spreading out to the more distant suburbs. My guess is that it will work there too. What are the plans for ending suburban blight in Richmond and Fredrisksburg? Let me guess … nothing?

    • Don, if you paid attention to what I write instead of filtering it through your unshakable-but-wrong conviction of what you think I think, you’d see that I have been a frequent and vocal critic of human settlement patterns in the Richmond region. Indeed, few Richmond-area pundits have been more critical.

      True, I have been critical of Northern Virginia as well. For some reason, you take this as some kind of anti-Northern Virginia bias and, by extension, an apology for sprawl in the Richmond region. That’s just plain wrong.

      Also, you seem to overlook the positive things I have said over the years about Northern Virginia, particularly Arlington, which I have frequently held up as a smart-growth role model for the state.

      Other than that, I’m in total agreement with your comment. Suburban Richmond is “endless suburban strip malls as far as the eye can see.” It’s a huge problem, and the inability to adopt walkable urbanism hurts the region’s competitiveness.

      • The bigger question is what Richmond and Fredricksburg are doing about the situation. NoVa has rehabilitated most of Alexandria and all of Arlington. Reston is continuing to improve. The mixing bowl has been fixed. The Wilson Bridge fiasco has been fixed. Tysons seems to be on the right track. There are problems. DC doesn’t need 2 airports (3 if you count BWI). Metrorail has some fundamental engineering issues. Redskins Stadium is a circus. However, the trend is positive regarding human settlement patterns in DC / NoVa. Fredricksburg seems to be getting worse and Richmond seems to be standing still.

        And here’s where we really disagree … none of the improvements in DC / NoVa would have happened without active government intervention. DC’s renaissance has been breathtaking. It started with one guy – Mayor Anthony Williams. He had his long term plans – New York Avenue, for example. Arlington’s revitalization revolved around the Metrorail. Charlottesville is a whole lot more vibrant than it was when I was in college. My bet is that the whole downtown mall effort was pushed by the city.

        You guys in Richmond seem content to sit on your butts and hope for a miracle. You resist every step forward. Mass transit can’t be built (or even improved in the Richmond bus system apparently), stadiums are falling apart, Henrico and Chesterfield seem completely out of control from a transportation perspective. The schools in Henrico (a very wealthy county) seem to be slipping fast. You elect congressmen like Dave Brat who can’t see any role for government except warfighting I guess.

        Richmond has a lot of potential. People who visit generally like it. People who live there seem proud of Ole RVA. There just doesn’t seem to be any leadership or imagination. It’s like DC under Marion Barry. Lots of theater, no progress.

        • You make a very good point about Fredericksburg. If we want to fault our state, the biggest disaster of the past 20 years has been the absolute disaster of development in the Fredericksburg region (F’burg, Spotsy, Stafford).

          It didn’t take a rocket scientist to understand that region would explode in terms of its population. And yet, state and local officials did absolutely…..nothing. So, Route 3 has become a parking lot. 95 is still awful a lot of the time even with the post hoc express lanes. Housing patterns are odd to say the least. The strip malls there create one of the ugliest and least inviting visual environments in the state. I have a friend who lives near Thornburg in Spotsy who calls the region the biggest avoidable mistake in Virginia history.

  11. re: Fredericksburg – I dont’ know what “234” DJ is talking about but no matter.

    folks need to distinguish between Fredericksburg City and the two counties Spotsylvania and Stafford.

    The city works hard at being what a city (town) should be with grid streets, transit, walkability, bike lanes, etc but the city, like many ended up with a bypass around it then another.. and yes those bypasses are stereotypical of others and not wonderful, but necessary to get around Fredericksburg.

    The counties are another story but I doubt seriously they are much different than most exurban counties around NoVa , Richmond, Hampton, etc.

    They are basically chock-a-block with single-family home subdivisions with a single entrance off a main road – which is the product that NoVa commuters want and are willing to drive to get. They would get it in NoVa if it were “affordable” but NoVa built out that kind of development a long time ago and truth be known – a lot of NoVa looks a lot like Stafford and Spotsylvania – only the homes and subdivisions are older…

    Anyone who has driven in NoVa and not seen the endless strips is blind. Yes, there are parts of NoVa that are more dense and meet the proper standard of New Urban or whatever they call it these days and yes, I agree with DJ – it’s the much maligned WMATA where that kind of development has and is now occurring …

    the Fredericksburg region is about 350,000 people and most of them do two things. On weekdays they completely overwhelm I-95 in the mega commutes to NoVa – though with the HOT lane things are changing.. lots of carpooling, bus and vans.. the most in the country, in fact.

    On weekends that same crowd of commuters throngs the shopping and over local events and goings-on and near-gridlock the area.

    Before the great migration from NoVa – the Fredericksburg Region had about 45,000 people but I-95 in 1963 completely transformed the area forever.

    Most of our imports are from NoVa and are demanding … of getting everything their awful commutes was supposed to pay for! They ARE, without question – auto-centric folks with NoVa driving manners!

    they bitch and complain about everything under the sun because apparently their awful commutes entitle them to do so!

    I’ve lived in the area since 1960.. and have watched the transformation.

    We have conservative folks running both counties now. They basically believe in Sprawl – they call it the American Dream.. and in fact, many of our boards of Sup guys are retired military working for the military establishment in NoVa and actually doing that commute!

    We DO HAVE – VRE and it too, like WMATA is spurring more compact type development near the stations.. but their parking lots tell the store – most folks drive to those lots… very few walk.

  12. re: ” I have a friend who lives near Thornburg in Spotsy who calls the region the biggest avoidable mistake in Virginia history.”

    and my bet is that your friend moved there.. and did not grow up there, right?

    and probably came from an urbanized area and moved to the “country” and uses their car to go everywhere, right?

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