How Strong Towns Principles Relate to Sioux Falls — Municipal Ponzi Scheme
based on “Strong Towns — A Bottom-Up Revolution To Rebuild American Prosperity” by Charles L. Marohn, Jr.
“New growth provides local governments an opportunity to receive additional cash in the short term in exchange for taking on unpayable, long-term liabilities. The mechanism is stunningly simple. ” — Chuck Marohn
Since 2010 the City of Sioux Falls has annexed 3996 acres of land into the city. That is almost 400 acres per year. How much tax revenue did that additional property bring in? How much did it cost to annex those areas? How much will it cost to replace all the associated infrastructure when it needs replacement? The answers to those questions are hard to piece together (maybe a good use of tax dollars would be to hire a company specializing in this kind of data to pull it together for us). In the meantime, we have some anecdotal data to look at.
In 2017, 1117 acres were annexed into the city which was the highest total in the last ten years. In that same year, the city entered into a pre-annexation agreement for land near 85th St and I-29. Sioux Falls agreed to spend $30,202,000 for extending roads and for other infrastructure. Lincoln County, Tea and the State of South Dakota also kicked in millions of dollars. When this development starts producing property and sales tax revenue the city will have money rolling in. However, some of the organizations involved in the 85th St development are non-profits so they won’t be paying property taxes. What happens in a generation when all that infrastructure starts to deteriorate? Will the businesses that benefited from the city’s investment still be there generating tax revenue or will they have moved to the next hot spot? We don’t know the answers to these questions. What is clear is that Sioux Falls has been adding property to the city for many years now — sometimes with high infrastructure costs. Just like nearly every city in North America we are promoting expansive growth on the edges over profitable growth in the core.
Marohn refers to this pattern of constantly taking on new liabilities in exchange for short term revenues as a municipal Ponzi scheme. When everything is shiny and new it looks like a great strategy — what could go wrong? Well, the mall with the big box stores could close and sit empty. Then the property would produce no sales tax revenue and little property tax revenue. But, the streets would still have to be replaced when needed to serve the remaining land owners. Where is that money coming from? Now multiply that scenario by the number of developments a city takes on year after year after year and you have — Detroit or Lafayette or all the other insolvent cities in North America.
All development is not necessarily bad but there can be bad development. Development that creates massive infrastructure that a city has to maintain in perpetuity is probably bad especially if the property cannot evolve to become more intense and produce more revenue. Incremental development taking advantage of existing infrastructure and existing neighborhoods is productive development and will be profitable for the city. Unproductive development with high infrastructure costs makes cities insolvent in the long run. So lets talk about the poster child for insolvent cities -Detroit.
In his book, Marohn tells of many conversations he has had with people about Detroit. People on either side of the political divide have their view of what went wrong in Detroit. These views are internally consistent but differ substantially from one another. The only thing people agree on is that their town is not Detroit. What happened in Detroit could not happen where they live. But, as Marohn points out, Detroit is not a special case — it is just a couple of decades ahead of everyone else. Detroit was the first city to create automobile suburbs where people commute to the city by day and return to the suburbs at night. They tore down buildings in the city to build parking lots. They routed highways through residential neighborhoods. They were the model for city development in the post WWII years. They were also the first casualty in a failed national experiment in city building.
So Detroit is a cautionary tale for cities caught up in a municipal Ponzi scheme. Here in River City things look pretty good . Sales tax revenue is floating our boat right now. We have money in the budget. Marohn refers to this as the illusion of wealth. It looks like we have money but the residential developments on the edge of town — which don’t generate sales tax directly — are new and don’t require replacement. When that infrastructure requires replacement the property tax revenue collected in those areas probably isn’t going to be enough to pay for it. Other areas of the city that are generating revenue will have to subsidize those areas — until they can’t. It happens slowly then all at once. Welcome to Detroit.
Want to check out the book? Buy it here.