Thursday, September 30th, 2010

A Civic Going Out of Business Sale

State and local governments from coast to coast are making major budget cuts as they grapple with plunging revenues and years of deferred investment and maintenance. One refrain of some has been that just like with household budgets, government simply cannot spend more than it takes in. Thus painful cuts are the only option.

There’s no doubt this is true in the short term. Clearly, we have to make adult decisions about priorities and can’t spend money on everything, no matter how much shrieking about the end of the world every single special interest group on the planet makes when they are asked to step up to the plate and do their fair share to balance the budget.

But let’s take this household analogy further. Let’s say a family is forced to make major cuts, to the point where they have to start cutting back on maintaining their car. They can’t afford oil changes, tires, brakes, etc. when the old ones wear out. All they have money for is food and shelter. In a sense it would be true to say that they don’t have money to spend on oil changes. But if you can’t afford to pay to maintain your car, what you’re really saying is that you can’t afford the car, period.

Similarly for cities, if they can’t afford to maintain their infrastructure, run decent schools, or provide any services other than basic public safety (and often even having to make cuts in that), what they are really saying is that they can’t afford to be a city.

That’s the situation too many places find themselves in. They can’t afford to be cities, and so are really in the process of an extended civic going out of business sale. As with a company that has been issued a going concern warning by its auditor and is about to be delisted from the stock exchange, people smell the whiff of death about it, so it doesn’t attract many customers or investors. Which is to say that people aren’t moving there – they are moving out if anything – and businesses are staying away. Who wants to stake their personal or financial future on a place that might not have a future of its own?

This is something merely balancing this year’s budget isn’t going to fix. What’s really needed is to restore investor confidence. That’s going to take more than balanced budgets. Just as most companies don’t fail because their costs are too high, but rather because of the forces of creative destruction, excess leverage, poor product positioning, quality and customer service issues, a bad strategic concept, etc., most cities don’t fail because their budget’s too big, but because they are no longer relevant to the marketplace. They are selling an inferior version of a product that customers no longer want to buy.

For too many struggling cities, especially former industrial towns, even if their current service levels could be delivered for a budget of zero that wouldn’t save them.

The real issue with many cities is that their leaders spend too much time grappling with short term issues, particularly budgets in the present day, and not nearly enough time thinking about where the trend line is taking them and what they need to do to drive a materially better outcome in the future.

That’s the challenge – and a hard one. Cities with long standing enlightened leadership and populations – like Columbus, Indiana, for example – have been able to stay strong by staying ahead of the curve. For those where the rot has already taken hold, it’s a far greater struggle. This applies not just to regions, but also struggling suburbs and inner city neighborhoods even within thriving metro areas.

By all means budgets have to be balanced and spending bloat can kill you. Fiscal and operational matters must be attended to. But until these places take a hard, spare no illusions look in the mirror and develop a compelling reason for a person or business to hitch their fortunes to these places instead of thriving ones elsewhere, too many older cities will continue on the slow road to oblivion.

23 Comments
Topics: Economic Development, Public Policy, Strategic Planning

23 Responses to “A Civic Going Out of Business Sale”

  1. This is one of your best posts. The presentation is simple but the idea is complex. I’ll be thinking about it all day.

  2. Damn. Sam beat me to it. Truly an insightful way to describe the problem many Midwest cities are trying to solve.

  3. Danny says:

    Maybe the reason why they can’t afford those services is because 1) The cost of government is rising dramatically, and 2) the income of its residents is falling dramatically.

    Unions, poor procurement, overstaffing, inefficient operations, special interest expenditures, useless advertising, etc. They all tear down cities, and the destruction comes faster for cities that were already on their way down.

    Are there any examples of cities that have branded themselves as having a low-cost high-productivity government? I haven’t heard of any. And that is a shame.

  4. BrianTH says:

    But there is also the issue of time. Say a city experiences a shock of some sort–maybe a key industry collapses, or a key resource becomes more scarce, or so on. Adjusting to the new situation may take time–it may take a lot of time, in fact, on the scale of decades. But we don’t have good mechanisms in place for giving cities the time they need to make those adjustments in an optimal matter. Indeed, we instead punish cities with all sort of mechanisms that tend to create negative feedback cycles.

    And good leadership at the city level can’t fix all these problems–the necessary reforms are often at the county, state, or federal level. Which is not to discount the importance of good leadership at the city level, but I think we need to be realistic about how much distressed cities can do even with ideal leadership if at the same time various higher levels of government are working against them.

  5. Chris Barnett says:

    [insert tongue firmly in cheek]

    Democrat solution: shovel money at today’s problems and ignore the long-term implications. Renovate and winterize decaying houses. Rebuild streets and sidewalks and schools and sewers and urban interstates. Hire more police with short-term grants. Guarantee low-down-payment mortgages.

    Republican solution: shovel money at infrastructure repair and improvement and hope that people get excited enough to invest their own money.

    Tea party solution: taxes are too high. Cut spending.

    Libertarian solution: …and this is a problem? Picking winners is bad public policy. Let the market decide which cities wither and die.

    Community development solution: focus on Main Streets and neighborhood commercial districts. Be “the little engine that could”. Persevere against all adversity. Stitch together hybrid funding from grants, loans, and tax credits.

    High-tech/creative class solution: make the city a cool place with the best connectivity physically, through high-speed rail and electronically, through enhanced broadband. Add good coffee shops and arts venues, and “they” will come.

    Comprehensive planning solution: bulldoze broad swaths of decay, install streetcars and light rail, and convert the reclaimed space to architecturally-modern, mid-rise, transit-oriented, live-work-play environments that look like computer monitors on the outside. (Brutalist plazas optional.)

    [remove tongue from cheek]

    Recognizing that the foundation of humor is a small bit of truth (or truthiness), how do we get people who are elected on a two or four year cycle to think beyond the snow-plowing and garbage-pickup budgets for next year?

    At the turn of the last century, George Kessler and Daniel Burnham (among others) did visionary planning for non-governmental civic groups in some of the Midwest cities that Aaron often cites, though it was heavily infrastructure based. Can we once again get city strategic planning into the hands of those who have a long-term investment in any city’s future? Should we? How? (Or is this a fool’s errand?)

  6. BrianTH says:

    “Are there any examples of cities that have branded themselves as having a low-cost high-productivity government? I haven’t heard of any. And that is a shame.”

    Many have tried, but they tend actually to provide less effective government to go along with their lower costs.

    The problem, it seems, is that eliminating inefficiencies on a massive scale isn’t quite as easy as it sounds.

  7. Vin says:

    While I agree with this post’s basic point, I think the city-company analogy can be taken too far. Why? Because people LIVE in a city. That’s the very definition of it. It’s true that if a city provides an inferior product, people will, over time, leave. But the time frame is decades, even generations. In the interim, the city can’t just close up shop, the way a company can. It has to do something for the people who live there – or, better yet, do something to turn itself around (as Aaron points out).

    Another problem with analogizing the public and private sector is that, for the private sector, efficiency is often enough to be an end in itself. Efficiency leads to greater profit and the entire point of a company to deliver that profit it its owners and/or shareholders. That’s pretty much it.

    The purpose of the public sector, despite what some on the right like to think, is not to make money. It is provide services of the public good. Efficiency is tremendously helpful here, too – but only in that it can provide a better service. Public money should be put to good use, but the “return” on public investment should not be measured in dollars, but in public usefulness. Public entities should spend money on things that are costly and unprofitable, but beneficial to the public and probably to the overall economy – infrastructure and education, for example.

    OK, a little bit of a tangent there, and I really do agree with Aaron’s overall point. I just think that private sector-public sector analogies can only be taken so far.

  8. BrianTH says:

    “Republican solution: shovel money at infrastructure repair and improvement and hope that people get excited enough to invest their own money.”

    Correction:

    Republican solution: loot the city for wealth to transfer to the suburban and rural areas where their voters actually live.

    There is some pushback in certain Republican circles against the anti-urbanism that dominates the party these days, but they are a small minority.

  9. Curt says:

    Good humor there Chris, but it highlights the differetn approaches perfectly. And provides a way out if you will, but who will take up the banner and carry it? Politicians seem far too afraid of not winning their next term rather than doing something about the problem. Isn’t that what happened to Peterson here in Indy? He tried to fix some things, and got shuffled out.

  10. samizdat says:

    What a surprise. Someone blamed the unions. So, the increasing income disparity between the Super-rich and the middle class has nothing to do with it? The Wall St. Ponzi system had/has nothing to do with it? The manipulation and bribery of political actors has nothing to do with it? As someone else mentioned, the incredible subsidies of, to, and for suburban and exurban development has nothing to do with it? The wages of union members are a drop in the bucket compared to the Billions involved in the various scenarios noted above. Older, so-called Rust Belt cities built nearly ALL of their infrastructure–roads, bridges, sewers, water systems, public health systems, etc.–with the money generated by the men and women who worked in the factories and offices. The taxes on those men and women, and the businesses who employed them, paid for it. Now, businesses get tax breaks for moving work offshore. Many of the very largest, and not so coincidentally, politically connected corps. pay no taxes at all. Sub- and exurban munis go to the Feds for most of the money for the aforementioned infrastructure because the retail and commercial businesses, and the bedroom community taxes don’t even come close to paying for the lifestyles to which they have been subsidized. What a sick joke. Yeah, let’s privatize everything we purchased with our tax dollars because the cities don’t know how to do these things efficiently. Except they HAVE been doing it for a century or more. Cities have a fire sale and who benefits? The Corporation, which,among other things, fires the workforce and hires them back at lower wages. And because the only thing the Corp cares about is the bottom line, the various systems and services are often neglected and poorly maintained, and services suffer because the only mandate is profit. I mean really, privatization of mission has gone well for the military, right? Oh, well. It’s fun watching the circular firing squad in action.

  11. John says:

    If you can’t afford the infrastructure, then you need to downsize the infrastructure. Sounds like the shrinking cities concept.

  12. Danny says:

    Humor – mentioning the circular firing squad while running in circles arguing about things that weren’t even said.

  13. Thanks for the comments.

    Danny, I’m curious to know if you are saying that cost problems are the issue? I somehow doubt that runaway costs are the problem in Flint, Youngstown, or Marion, IN. Income declines are an issue to be sure, but that’s like saying a business suffers from “declining sales” Why?

    I’m all in favor of downsizing where feasible, and yes, that takes a while and cities don’t have the tools to do it (nor do they have the political or civic will in most cases). But even if you reduced infrastructure and service costs to zero in many of these places to zero I’m not convinced it would turn them around. Also, it’s not just about physical plant, it’s about quality of services.

  14. Danny says:

    I’m not saying that cost problems cause cities to fail. But they certainly don’t help, and in many cases they seem to speed up the process.

    I know it is unfashionable around here to compare civic matters to business operation, but the principles of competition make the comparison real. Think in terms of the product life cycle.

    Cost escalation isn’t a problem in the growth stages. In fact it is expected. But in decline, cost escalation kills you. It has been generally accepted business practice that cost reductions are the only sustaining strategy in decline.

    Of course there is disruptive innovation which can reignite falling demand in some cases (we have seen it in Pittsburg in a sense), but disruptive innovation is never a result of massive investment. In fact, massive strategic investment tends to kill disruptive innovations.

    Even in decline there is still “market share” to control and “profits” to be made. It is the stubborn, those unwilling to change to the times, that lose everything.

  15. Joseph E says:

    “It has been generally accepted business practice that cost reductions are the only sustaining strategy in decline.”

    Really? I’m not in business, but I can think of two bike-related contrary examples off the top of my head.

    Brooks used to be the world’s largest manufacturer of bike saddles (seats) in the world, in the early 1900’s. They made moderately-high quality leather saddles in huge volumes, for Raleigh and other major bike brands. However, declining bike sales due to cars, and new plastic-based cheaper saddles lead to huge declines in market share. Instead of going low-market, Brooks focused on making durable, high-quality saddles. They are still the most respected brand of leather saddles available, and I believe they are profitable and seeing increased sales with the current trend towards “vintage” and retro bikes.

    Schwinn was by far the largest manufacturer of adult bicycles in the United States for decades, until the 1970’s. For years they focused on durability, quality and maintained networks of exclusive dealers. However, during the bike boom of the 1970’s they had few high-end, sport-oriented bikes, and could not compete against Japanese and European imports. They eventually gave up and went low-end in the 1980’s, but the company eventually was sold for little more than the name. Current Schwinn bikes and products are low-quality Chinese stuff, sold at Wal-mart.

    Some cities may decline to a lower-cost place to do live or do business, but most of us call those places “slums” or “blighted neighborhoods.” On a city-wide scale, giving up on quality and focusing on lowering costs could get ugly. If people want no services and low costs in an area with few jobs, why not live in a rural area? If business want to locate somewhere with few regulations or taxes, why not develop a greenfield sight in a new exurb or out in the country, instead of in your declining urban core?

  16. Danny says:

    The example of Brooks is not entirely applicable. Saddles are a complimentary product, not the product itself. When commoditization occurs, complimentary products as well as those one step above or below the supply chain can often benefit from growth markets. In fact, the strategy of Microsoft in the 1980s was to commoditize the computer by any means possible, so they could sell the operating system. It worked out well.

    While some companies choose to change markets when they see theirs decline, cities cannot stop being cities.

    “Some cities may decline to a lower-cost place to do live or do business, but most of us call those places “slums” or “blighted neighborhoods.” On a city-wide scale, giving up on quality and focusing on lowering costs could get ugly. If people want no services and low costs in an area with few jobs, why not live in a rural area? If business want to locate somewhere with few regulations or taxes, why not develop a greenfield sight in a new exurb or out in the country, instead of in your declining urban core?”

    This idea would be nice if we could do it without ever addressing the tax issue, but that isn’t realistic. With declining incomes and a declining tax base, the only way to maintain the status quo is to raise taxes dramatically…which accelerates the decline.

    My point isn’t that cities should cut services, it is that they should be working to increase productivity. A cost reduction is not the same thing as an output reduction. My hometown, Stockton, did this quite well for a few years actually…they laid off police officers and began hiring at lower wages, and at the same time had the best track record in 60 years for violent crime reduction.

  17. John Morris says:

    First, I think it’s pretty clear in many cases that high costs have not resulted in great quality services. Also, the biggest cost in most of these places is contracts for already retired workers.

    The finincial situation is likely dire in most places. Personally, I’m shocked that it still hasn’t caused the kind of serious restructuring that needs to happen.

    We are allegedly a capitalist country, but full private ownership of infrastructure projects is still rarely talked of, even though government clearly has failed on so many levels.

    My guess, is that only under the most extreme stress will real change happen. But that is coming.

  18. John Morris says:

    “The only way to maintain the status quo is to raise taxes dramatically…which accelerates the decline.”

    That is what people try to do, instead of doing the hard work of really putting services and costs in line with current conditions.

  19. BrianTH says:

    There are no easy solutions. Again, it is easy to say phrases like “increase productivity,” and that is a preferred option if possible since it is a free lunch, but in the real world it is often very difficult to significantly increase productivity. So while distressed cities certainly should try to increase efficiency and productivity, people shouldn’t expect there will always be massive gains available by doing so.

    Of course the reason it would be really nice if this free lunch existed in abundance is that increasing taxes is bad, but so is cutting services: both can trigger further declines in the tax base. But supposing that free lunch is only small, now what?

    There are some more possible free lunches available to distressed cities, such as better, faster procedures for getting vacant properties into the hands of a tax-paying entity. But again, I think it is crucial to understand that in many respects, looking at the city in isolation from higher levels of government will never get you to optimal solutions.

  20. John Morris says:

    “but in the real world it is often very difficult to significantly increase productivity.”

    I’m not sure that is the case at all. A big factor is that, government is not an entity with any incentive to use resources wisely or increase productivity.

    Also, as I said, what we have in many cases, is governments and agencies increasing spending to pay for unsustainable benefits and legacy infrastructure badly adapted to current needs.

    I think a look at most urban school systems shows huge increases in spending per child. Pittsburgh’s bus and transit system still refuses to radically downsize it’s route structure and runs a huge deficit operating almost empty busses, while at the same time providing poor and infrequent service in the core. The worst of both worlds is the most common situation.

  21. I think this depends on the city. Pittsburgh clearly needs to right-size. If it could shrink to fit its current population and economy, it would be very helpful since there as a smaller but fundamentally healthy city still there.

    But while fiscal right sizing is key in places like Muncie, Indiana or many of the towns in the Mon Valley, that alone won’t save them.

  22. Ron Kilcoyne says:

    In the 70’s the Federal government had a revenue sharing program with cities. With municipal budgets squeezed some pundits are suggesting that revenue sharing be revived. Now while Republicans will oppose this because it is a new expenditure – therefore it will never pass the Senate even if the Dems keep control of Congress; here is an idea that could help cities think long term and possibly develop more efficient governance models while improving service delivery. I call it “Quality of Life Revenue Sharing”. Like the revenue sharing of the 70’s cities and counties would receive revenue from the Feds and they could spend it as they choose. But to receive it they would have to meet or show measurable progress toward meeting quality of life metrics. For each metric they meet they would receive a certain amount of dollars per person residing in the community. And communities that earn revenue for at least 90% of the metrics would also be eligible for additional revenue if they meet certain efficiency metrics.

    Metrics could include such things a crime rate, library books per capita, transit service hours per capita, park space per capita, amount of new development that meets LEED-ND location efficiency standards, amount of land shaded by trees, air quality, etc. Some of this metrics are not under the direct control of a city or county which will force them to form partnerships or develop new governance models to address these issues.

    Some will argue that this is a top down approach. Maybe, but not only would municipalities have full latitude to spend the money as they see fit, they would have full latitude to figure out how outcomes will be achieved and since this would be new money freely choose to not pursue a metric if they disagreed with it.

  23. Nathanael says:

    Missed point in the bicycle seat analogy: when shrinking, there are different ways to reduce costs, ranging from the stupid to the smart: you don’t want to lower service quality (ever), you want to lower service *volume*.

    Hence the Youngstown 2000 plan and similar plans in Flint, to simply reduce the square mileage to which city services (paved roads, water, sewer) are provided, while retaining high-quality services in “what’s left”.

    The added space for agriculture and parks can be used as an extra selling point.

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