It is the best of times for local government, it is the worst of times. It is the worst in the sense that local governments across America are experiencing unrelieved fiscal stress from pension obligations, mounting infrastructure backlogs and lagging revenues. Yet it is the best in the sense that rarely have local governments enjoyed so many opportunities to bolster productivity, lower costs and improve the quality of services. Indeed, American regions potentially stand on the brink of a golden age.
Of all the new strategies available to municipalities, from applying online learning to deploying smart-city technologies, none hold as much potential as the emerging discipline of fiscal analytics. In an article published this month in The Western Planner journal, I endeavor to build upon the pioneering work of Joe Minicozzi, Peter Katz and Charles Marohn, all of whose work I have highlighted on this blog, to advance the cause. My major contribution to the discussion, I think, is to identify property tax valuations as the “bottom line” for fiscal analysis.
Government investment in infrastructure and amenities creates tangible economic value that can be measured in the form of rising real estate property assessments. That’s common sense. What’s not so intuitive is the idea that not all government investment is created equal. Politicians blather about “investing” in education, infrastructure or various pet projects. But elected officials do so without the discipline of their private-sector counterparts who measure profit, calculate Return on Investment (ROI) and steer capital to investments offering the highest ROI.
Building a highway interchange or mass-transit rail station, to pick but two incontestable examples, create economic value, as measured by the increase in property values around the public improvement. Conversely, some government investment destroys economic wealth. Charles Marohn with the Strong Towns group, makes the case that “stroads” – a multi-laned street-road hybrid designed to move large volumes of traffic – are expensive to build and maintain, drive away pedestrians and bicyclists and depress adjacent property values. It seems that people don’t like living or doing business on wide, unwalkable transportation arteries. Spending local money to undermine the tax base, he argues, amounts to fiscal hari kari.
Clearly, government investments vary greatly in the degree to which they create wealth or destroy it. As a guiding principle, local governing bodies should strive to invest in infrastructure projects that create the most wealth over time. At present, however, few municipalities possess the analytical tools to make informed and rational investment decisions. Developing such tools, I submit, is the great challenge of municipal finance.
I would start the conversation this way: Private enterprises have a very clear bottom line – profit, a concept that the accounting profession has honed over the centuries. Profit is meaningless to local governments, which are expected to do no more financially than balance their books. The closest thing to a municipal bottom line is the assessed value of real estate. Virtually everything that a local government does – building roads, designing streetscapes, running schools, grooming parks, patrolling streets, putting out fires, operating utilities – has a direct or indirect effect on the desirability of living and doing business in that community. The marketplace assigns higher property values to more desirable communities and lower property values to undesirable communities.
Just as it would be unthinkable for a corporate CEO not to know how profitable his company is, and whether profits are growing or shrinking, it should be unthinkable for government leaders not to know the total assessed value of property within their jurisdictional borders, and whether it is growing or shrinking. Just as it would be a dereliction of duty for a CEO not to know the profitability of various divisions and subsidiaries, it should be deemed equally negligent for government leaders not to know the total assessed value of the different districts and neighborhoods of their county, city or town. But those figures, if reported at all, are buried deep within lengthy documents.
A CEO does not control all the factors that affect his company’s profitability, which can vary depending upon economic conditions, the actions of competitors and the rise of new technologies. But there are many factors that he (or she) can control, and shareholders hold him accountable for those. Similarly, there are many factors that influence property values, some of which a governing body can influence and some of which it cannot. Elected officials should focus on those factors that they can control, and voters should hold them accountable.
Admittedly, the benefits of adopting rigorous fiscal analytics won’t be felt right away. Adopting a disciplined approach to allocating its investment capital won’t bail a locality out of a financial crisis. It won’t pull a Detroit or similar city back from the brink. But the erosion of competitiveness into Detroit-style insolvency is a decades-long process. Over the long run, local governments that discipline their spending, emphasize wealth creation and expand their tax base will prosper far more than those that don’t.