How Strong Towns Principles Relate to Sioux Falls — Asset or Liability: The Billion Dollar Question
based on “Strong Towns — A Bottom-Up Revolution To Rebuild American Prosperity” by Charles L. Marohn, Jr.
“The community’s asset isn’t the street in front of your home; the asset is your home. Or at least the future tax revenue related to the that property. The value of your home represents wealth within the community, wealth that can be tapped to meet the promises the community makes, like maintaining roads and pipes. That cash flow can be — and frequently is — pledged as collateral by local government when they issue bonds.
It almost feels silly to have to explain something so obvious. Yet, obvious or not, every state and local government in the United States tracks its infrastructure liabilities as if they were assets, while few bother to account for, let alone track, their real wealth. If our municipalities used accurate accounting, most of them would be insolvent” — Chuck Marohn
The City of Sioux Falls recently posted a statement on it’s website that said our 800 miles of street are a $1.03 billion “asset”. A number of people in the Strong Towns group begged to differ with that claim. The Strong Towns philosophy is that infrastructure like streets is a liability that cities take on when new neighborhoods are incorporated into the city. The city agrees to maintain those streets in perpetuity (forever). To be considered an asset, the street infrastructure should generate enough property tax to cover maintenance and the eventual cost of replacement of those streets. So, lets dive into the data and see if we can determine if our streets are an asset or a liability.
From what I can tell, the $1.03 billion value is based on the cost to build those 800 miles of street. That comes to $1,287,500 per mile or $243 per linear foot. The statement also said that the streets have an average condition score of 70 out of 100. According to Wikipedia, the only maintenance streets with a score of 70 need is crack sealing and minor patching. That is pretty good. People I talk to think Sioux Falls streets are in pretty good condition compared to other cities they have visited. However, the report also said the city has 4% or 32 miles of street that are in poor to very poor condition. Those streets would need major repair work or complete reconstruction. The 4% figure is the same as it was in 2015, so we haven’t gained ground in this area but we haven’t lost ground — yet.
Using the $1,287,500 per mile figure as a replacement cost, it would cost $41,200,000 to rebuild those 32 miles of streets. That is about half of the 2020 estimated revenue from property tax, frontage tax and storm drainage fees of $83,300,000. Obviously, we are willing to live with 32 miles of bad road — as long as it isn’t in front of my house. But there it is — a $41,200,000 liability that the city is obligated to pay at some point. That is definitely not an asset. And, obviously, all 800 miles of street will have to be replaced someday so our actual obligation for street replacement is $1.03 billion!
Presumably, the ongoing maintenance activities fix problems before streets fall into the poor category and need replacement. Apparently, when a street’s condition falls below a certain point it deteriorates quickly and would need to be rebuilt rather than resurfaced. So keeping up with maintenance is crucial to keeping the number of miles of streets needing to be rebuilt low. So what are our prospects of doing that? Lets look at the data again.
The pavement condition score is 70 out of 100 for 800 miles of streets. So we know that to have an average score of 70, some streets will have a score above 70 and some will have a score below 70. We know that 4% have a score of 40 or below according to the data provided; new streets will have a rating of 100. In a previous article I wrote about how the city annexes about 400 acres per year into the city (the Municipal Ponzi Scheme). Presumably, the streets in those annexed developments are in good condition and would raise the overall street condition score. Meanwhile, streets that were annexed into the city 30–40 years ago are reaching the replacement stage and will lower the score. I didn’t see data on the city website about how many miles of road fall under each condition category but that data is probably available. This would show what is coming in terms of future maintenance liabilities. For instance, if the percent of streets in poor condition increased to 8% it would require the entire $83,300,000 revenue from the 2020 budget every year to replace the streets that fell into the poor condition category. Now that is a big liability that may not be that far in the future.
But, if our streets are actually an asset, they should generate enough wealth to pay for their construction and maintenance. Do they? Property tax is the revenue stream associated directly with infrastructure like streets. If a property doesn’t have a street in front of it, the value will be lower than property with a street. Street infrastructure also contributes to sales tax revenue by connecting places together but it is localized to commercial streets. A cul de sac serving 10–12 homes is not generating sales tax and isn’t doing a good job of connecting large numbers of customers to stores. So if sales tax revenue is insufficient, property tax revenue should be enough to maintain the streets and other infrastructure.
Finding data on infrastructure costs and tax revenue is not easy but it can be done. Using data from the city GIS site and the Minnehaha County Department of Equalization I calculated street cost and estimated tax revenue for 72 properties scattered around the city. The land assessed value plus building assessed value for a parcel multiplied times the city mill rate (.004402) gives the estimated tax due for the parcel. The data also contains the front feet of each parcel. This is the width of the lot as it touches the street. Multiplying the frontage times the cost of a linear foot of street gives the cost of the street in front of the property. Properties on opposite sides of the street share the same frontage so the $243 per linear foot mentioned above was divided by two to get each properties share of the street cost ($121.50 per linear foot).
With the approximate cost to build/replace the street in front of a property and the tax revenue generated by the property we can see if taxes pay for streets. Here are the totals for the 72 properties:
Total street build/replacement cost $566,433
Total annual property tax revenue $51,343
For the next part of this analysis I assumed two things: that the city got the full tax revenue amount (it actually gets around 20% or so) and that the revenue was put into an account to pay for street replacement (it isn’t). With that, I calculated how many years it would take to save up enough money to pay for a full replacement of the street.
If all the tax revenue ($51,343) was set aside each year it would take 11 years to save up the replacement cost of the streets ($566,433). If only 50% is put aside it will take 22 years. If the amount drops to 30% it will take 36.8 years to save up the replacement cost which is about the life expectancy of the street. If only 10% is set aside it will take 110 years to save up the replacement cost which is two or three life cycles for the street. This analysis is based on limited data but I think it will hold up with more data. In any case, it seems to be a moot point because, correct me if I am wrong, but I don’t think we are saving anything up to replace streets. And, we haven’t even looked at costs for water, sewer, storm drainage, etc.
Since actual property tax revenues are only a fraction of the values I used here, it is clear that $1.03 billion in street infrastructure is not generating enough wealth fast enough to pay for itself. It is actually a $1.03 billion LIABILITY. This liability grows with each new development we annex into the city. At some point there will not be enough revenue to maintain the infrastructure, especially if sales tax revenues drop off because of the pandemic and/or a recession. If maintenance is deferred then some streets will start to deteriorate rapidly. At that point we will have the same problem as cities that are a few years ahead of us on the constant growth path have — not enough money to maintain all the liabilities we took on over the years. We will have to make hard choices about what to fix and what to abandon. It happens slowly then all at once.
So what should we do? Well, the problem is that most of the parcels in the city do not have enough building value on them to pay for the street in front of them — or the water lines, sewer lines, etc. So we need to increase taxable value without increasing infrastructure costs by making the usage of the property more intense — like adding rental apartments to existing homes.
How do we do that? We could follow Minneapolis’s lead and eliminate single-family dwelling only requirements. This would allow residents in any neighborhood to add a rental unit or accessory dwelling unit to their property. This would raise the taxable value without incurring any additional infrastructure costs. Besides adding much needed housing, it would also help balance the books in terms of being able to replace infrastructure.
Secondly, we could eliminate parking minimum requirements and some setback requirements to make it feasible to develop lots in existing neighborhoods. This could encourage building of the so called “missing middle” housing like duplexes and fourplexes or allow more small commercial uses. Again, this would raise property tax revenues without increasing infrastructure costs.
But the most important thing we can do is call a moratorium on annexing new developments into the city. We have enough land paved over, now we need to fill it with productive developments in existing neighborhoods that increases the housing supply, actually pays for the infrastructure and generates wealth for all residents.
