Thursday, September 17th, 2009

Imperial Columbus and the Principles of Regional Finance

Columbus, Ohio is a very successful city that has benefited from a lot of great policy over the years. But I’m seeing some ominous signs that the city of Columbus is setting itself up for trouble down the road by pursuing revenue from outside its borders at the expense of internal and especially core development. There are lessons here for any city struggling with regional finance, so let’s take a look.

Columbus is by far the strongest big city in Ohio. One reason for this is that city leaders long ago had the foresight to require that anyplace that wanted to get water from the city had to agree to be annexed. Ohio law is very favorable to annexation when a city is supplying utility service. So while geographically small Cleveland and Cincinnati became encircled by suburbs, Columbus was able to keep expanding. Columbus does not have a city-county merger in effect, but has annexed the majority of Franklin County and even parts of several other counties, taking any number of major “suburban” malls and office developments inside its borders.

Now, however, annexation has slowed to a crawl. According to an article in the Columbus Dispatch, the city has only annexed 14 acres this year. As recently as 2002, it annexed 2,123 acres. Suburban development hasn’t stopped. The city has just stopped annexing. Instead, it is pursuing a strategy of allowing surrounding suburbs to annex land, but using the lever of its water utility to get tax sharing and compensation if jobs move to the new development from the city.

In effect, Columbus has decided it is no longer worth directly developing and administering new territory. Instead, it is adopting the strategy of empire. That is, it will allow “colonies” to develop land and manage their own affairs, as long as they agree to send “tribute” back to the imperial capital in the form of tax sharing. Instead of legions of troops, the city is using its water utility as a hammer to secure these deals.

And that’s not all. The city derives significant revenue from an income tax. An incredible 53% of all income taxes collected by Columbus come from non-residents. This shows the extent of the imperial analogy. Columbus is sustained by revenue from outside its borders. It should come as no surprise then that the city turned to an income tax increase – which non-residents who pay it couldn’t vote for or against in the referendum – to bridge a deficit caused by the recession.

To be direct, Columbus appears to have become dangerously dependent on income from non-residents and businesses outside the city limits. While there appear to be good regional relations today, the edifice of regional revenue collection is being built on feet of clay. Eventually people in surrounding cities will get around to questioning these arrangements. They will start asking why they are exporting all this revenue from their residents. The leaders who negotiated revenue sharing agreements in good faith will leave office to be replaced by others who may think their town is getting played as a chump. One of these days the colonies are going to rebel.

When that happens, it could get ugly. Eventually the whole affair could become quite poisonous, as it is in Cleveland. It should be noted that in this approach to revenue sharing, Columbus is actually imitating Cleveland. Cleveland used control of the Metropolitan Planning Organization to deny permission to built an interstate interchange in Avon (which was to be paid for by a developer) until Avon agreed to a tax sharing deal. If the Columbus agreements have been less acrimonious, it likely because generally good relations exist today, the disputes are over contiguous territory, and the weapon at Columbus’ disposal is different. The results, however, are the same.

This also creates not just the seeds of regional discord, but also generates big financial incentives for people to figure out how to beat the system. If you are a surrounding town or county, you are likely highly motivated to lure regional jobs to your community, not just because that’s good in its own right, but because you can capture the income taxes that come with them and stop exporting all that revenue to Columbus. It could also promote leapfrog development to discontiguous suburbs who have their own water utilities and aren’t beholden to Columbus.

Indeed, we see a foretaste of things to come in one of these revenue share agreements. Dublin agreed to a revenue share agreement with Columbus in exchange for water service to strengthen its had in connection with an annexation battle over disputed territory with Marysville. Marysville sees Dublin getting all this development, sees Columbus using extra-territorial water service as a lever of power and says, “Why not us?” Marysville has its own water utility and is now extending it outside its borders in order to establish its claim to territory. I expect this is only the beginning of these types of disputes.

While it is busy negotiating these agreements with suburbs, Columbus’ core is weakening. The Toledo Blade did a series on the downtowns of Ohio last years. Their findings on Columbus showed that downtown employment declined by 16% between 2000 and 2005. This decline is true of all major Ohio city downtowns, but is troubling nevertheless. Columbus’ fiscal health may look ok because of all the outside revenue it is managing to capture, but ultimately a city can’t be strong if it doesn’t maintain core vitality.

Clearly the health of the central city and urban core is of concern to the whole region. Yes, central cities often have big legacy liabilities; troubled school districts, a disproportionate share of the region’s poor, and other urban ills; and have to provide roads, police, and other services to large numbers of people who visit or work there but don’t live in the city. Commuter taxes are often seen as a way to equalize this and help keep the central city strong.

I’ve always been a bit down on commuter taxes. Unless you have a one of a kind downtown like Manhattan – which Columbus does not – you basically set up an incentive for not just residential flight, but business flight. Is there a better way?

I’ve been thinking about principles by which cities might best engage in regional revenue raising and sharing. These represent a definite work in progress, but I thought I would share them:

  • Try to make regional taxation truly regional and uniform across the MSA
  • Avoid one way revenue transfers and bi-lateral agreements where possible
  • Use regional revenue sharing to build bridges and bind the city and suburbs together around common interests
  • Regional revenue should imply regional governance
  • Avoid ownership claims to revenue slices where possible

How might this work in practice? I would suggest that a model might be regional taxes to support regional amenities directly. There would appear to be any number of institutions that or types of services that might apply:

  • Stadiums and convention centers
  • Tourism marketing
  • Zoos, museums, or performing arts groups
  • Airports
  • Transit systems
  • Welfare or other social services

The idea would be to transfer responsibility for some of these items to a regional authority with regional tax support and governance. Most of these are heavily concentrated in the central city. So potentially there’s a net flow of tax revenue into the city. But there are clear benefits to the suburbs as well, and they have an ownership stake in the system. (Some services such as welfare, indigent health care, and other social services for the poor might be better simply funded by the state)

There are plenty of great examples of this around the country. Airports, transit agencies, and port authorities are commonly administered this way. MPO’s are by definition regional (though the governance of these is often very bad – the subject of a future blog post).

Of course there are potential downsides as well. Regional agencies are often run by appointed boards and technocrats, creating a democracy deficit and lack of accountability and transparency. Also, people fear losing influence over local affairs since a large and remote organization is in control. Legitimate concerns, but ones that can be addressed. The devil is in the details as always. We’ll never get it perfect and we’ll always have to fine tune and be vigilant.

Whatever the case, I think this model is better than simply expecting other jurisdictions and non-residents to keep shipping tribute back to the imperial capital in perpetuity. If it stays on its current path Columbus may one day find that it got more than it bargained for with these clever deals.

More Columbus

Columbus: The New Midwestern Star
Columbus: Downtown Mall to Be Demolished

8 Comments
Topics: Regionalism
Cities: Columbus (Ohio)

8 Responses to “Imperial Columbus and the Principles of Regional Finance”

  1. David says:

    Good analysis. From a 'new' local (originally Cincy), I would say that the water situation gives Columbus much more leverage than the Cincy or Cleveland at this point, because the region is so reliant on large reservoirs – thus very large capital investments – rather than a Great Lake or major river, so that helps Cbus. Also the presence of OSU and state offices contribute to a feeling of less worry – though the presence of those massive non-property tax paying institutions likely increases the likelihood of relying on income rather than property taxes – it'd be interesting to see how that might play out in other state capitals. Cbus has a interesting mix of suburbs from self-consciously planned growth communities – mostly along the northern belt to practically no-tax, no services 'burbs along the southern half of the metro. It will be interesting to see how regional tension plays out over time. Columbus certainly has much weaker townships in its metro than Cincinnati.

  2. Anonymous says:

    My understanding is that Minneapolis established the benchmark for city / suburb revenue distribution. How does Columbus compare to that model?

    If Columbus suburbs are unhappy about their arrangements, then let their residents cough up the tax dollars needed to establish leverage via infrastructure enhancements to deliver water and other essential services. Meantime, the mutual dependency seems downright healthy compared to other Midwestern urban areas such as St. Louis.

    The model for Columbus is Minneapolis, Madison and Austin, two other successful cities that share the distinction of being both state capitols and centers of major state universities. Absent a comparison to their approaches, it's hard to fault Columbus for sustaining themselves economically based on what you've described.

  3. Radarman says:

    Cincinnati annexed aggressively, taking in surrounding municipalities until the turn of the twentieth century when the rural-dominated anti-urban legislature made it much harder for cities to grow by annexation.

  4. Desmond says:

    When I first saw the 16% decrease in downtown employment, I assumed that it was a relative figure (eg, share of metro employment). But it turns out that it's absolute – over a very high growth period (2000-2005), when the economy was generally doing well, downtown Columbus lost 16% of its jobs? That is incredible and should be very, very worrying. Losing relative position to the suburbs is one thing, but actually losing that many jobs outright should be alarming in the extreme. What happened? Has this wreaked havoc on commercial real estate, retailers, restaurants, etc? Where are the jobs going? What are the factors pulling or pushing these jobs away? Are these still 'legacy' industrial/manufacturing jobs?

    And Dayton, with 25% fewer jobs. 25%!!! In only five years, a quarter of downtown employment, gone! I had no idea that the decline of midwestern downtowns was this precipitous, particularly in recent years. The spin-off effects of this (negative multipliers) must be devastating. It's amazing to imagine all the investment in infrastructure and community/economy building in older centres (over a 100+ year timeframe) just being left behind in such a dramatic way.

  5. thundermutt says:

    Indianapolis is another logical benchmark for Columbus. Possibly more logical than Minneapolis (which is not the state capital), Madison (which is far smaller), or Austin (which is not Midwestern).

    Also, "benchmarks" established in Minneapolis, Austin, and Madison wouldn't translate well for Columbus and Indy, as the first three have considerably more homogeneous home-county populations than their Ohio and Indiana cousins.

    The notion of separate regional authorities for each different kind of improvement is a bit cumbersome and duplicative. Airport, transit, stadium, convention center, etc., each with its own board?

    If, instead, all such regional improvements were financed by taxes levied through a "regional finance authority" with a directly-elected board, it would set up a healthy debate about regional spending on amenities, and more specifically, "this" vs. "that". It might engender some horse-trading that would spread out the regional amenities: you can have the museum, but we keep the stadium.

    But the still-open question is some kind of property-tax replacement for state-related facilities in a capital city. In both Columbus and Indianapolis state government, state fair, university facilities, and regional health centers require a great deal of infrastructure support. Absent a PILOT (payment in lieu of taxes) from those facilities, city taxpayers end up subsidizing services to all a region's other residents. (Thus it will always be cheaper to plow a green field for a new office park, contributing to sprawl and job dispersion away from the core.)

    A local income tax is an obvious way to capture a portion of the economic activity generated by the presence of the capitol, the university, and all their non-profit spinoffs (as David points out in his comment). Equalization of taxes across the region doesn't handle that unless it's levied where the jobs are, as in Columbus, instead of where people live, as in Indiana.

    I think Columbus has it exactly right. Until they raise taxes too high.

  6. Ben says:

    As you mention, Marysville is indeed trying to build up their own empire in Union County by extending and winning the water service battle.

    However, one thing that is not obvious is the fact that water rates in Marysville are more than double those in Columbus. Not only that, they haven't even begun to start the debt payoff from their new wastewater treatment plant which was just completed in the last year or so. While water costs are just one facet of a cost analysis for a business, things are strongly in Columbus' favor in this regard.

    With respect to downtown employment, the period of 2000-2005 provides an interesting snapsnot. However, it may not be as relevant as it seems. City Center Mall employed a large number of people and that's exactly the time period of its decline. It's important to note that all the "suburban" shopping malls (Easton, Polaris, and Tuttle) and their suburban office park spinoff development are actually in the city of Columbus proper, and thus the overall employment numbers for the city haven't changed that much. Also after mentioning the 16% decline downtown, the cited article goes on to state "…the number of businesses has dropped only 2 percent to 2,700. That could mean that the work force losses were caused by personnel cuts more than by company flight." There are still ~100,000 workers in downtown Columbus, which certainly isn't bad.

    With regard to regional taxation, I think there isn't much more that can be done. The city budget is primarily focused on providing safety services to Columbus. Property and/or sales taxes are already being collected at the county level for the Metro Parks, Zoo, Transit Authority, Mental Health, and Senior Services. We're fortunate not to have to pay a stadium tax. Short of an Indy-like city-county merger, I doubt we're going to see police/fire forces shared amongst different large municipalities.

    So I suppose in summary, the city of Columbus does indeed need to be concerned about development happening outside city borders. It needs to be addressed in one way or another for the city to remain strong, but at this point there doesn't seem to be a better way short of a major state or national policy change which would favor gray/brownfield development over greenfield projects.

  7. Walker Evans says:

    I just sat down with Greg Davies, the Deputy Chief of Staff for the City of Columbus to discuss the current growth policies and strategies. The interview is quite interesting and can be found here:

    http://www.columbusunderground.com/columbus-sprawl-slows-down-and-gets-smarter

  8. The Urbanophile says:

    Thanks for sharing the link

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