Friday, December 19th, 2014

Why the Rent Is Too High, Reason #239

It’s no secret housing costs are high and going higher in major US cities like NYC, San Francisco, etc. I was just tweeting with someone this week who moved back from Park Slope, Brooklyn to Indianapolis because her rent was being raised by over 50% (possibly that’s a cumulative increase over time – not sure).

Most of the urbanist discussion tends to focus around zoning as the reason prices are high. That’s certainly an important factor. But there are also other things driving up costs and rents. The NYT highlighted one of them last Sunday, namely the permit expediter tax:

When Mark Brotter dies, the inscription on his tombstone will read simply: “Thank God — no more plumbing Schedule B.”

Mr. Brotter, 55, is an expediter, an imprecise term that is used to describe the men and women whose workdays are spent queuing up at the Manhattan branch of the New York City Department of Buildings to file the documents and pull the permits that allow construction projects — your kitchen renovation and the high-rise next door — to go forward. “I’m basically a middleman,” he said. For its part, the Buildings Department insists on the title “filing representative.”

Others are employed by large firms that do nothing but expediting, or are on the staffs of architectural or engineering firms. In the early 1990s, expediters numbered 300 to 400; today there are more than 8,300. (Filing representatives must register with the Buildings Department and pay a $50 annual fee for the right to stand on lines at department offices.)

The expediter’s fee varies depending on the outlay of time and the complexity of a job. The charge for securing a permit for a contractor ranges from $200 to $400; for filing a project, $1,500 to $3,500. Plans that must go before the Landmarks Commission are a more costly proposition, as are projects that involve the conversion of a commercial space to a residence.

Now these prices aren’t ridiculous in the grand scheme of things for New York City real estate. But the idea that there are 8,300 people making a living standing in line to file permits for people points to the entire structure of how development gets done in big cities (NYC is hardly alone in this particular industry) in ways that continually raise costs. This is beyond the cost of delays that a baroque permitting process introduces.

Particularly when you are trying to build lower rent buildings, all of the fixed costs you have to incur to built anything (land, permits, expediters, etc.) have to be recovered and amortized across the units. When you have a hyper-complex development environment, these fixed costs raise the minimum viable rent threshold and thus push the cost of construction towards the higher end of the market that is already being served.

To bring the cost of housing down, cities should be working on all fronts, not just zoning to make it happen.

This particular case is instructive regarding barriers to reform, however. If the city made it easy enough to file plans and get permits in ways that didn’t require an expediter industry, 8,300 people would be out of work. Presumably they would squawk about it. I’m sure I would if I were in their shoes As with many regulatory reforms, the benefits are diffuse and hard to see, whereas the costs are concentrated and obvious.

Also, just one reform in and of itself is unlikely to produce immediate substantive change. Broad based reform in many areas is needed, then there will be a lag as investors adjust to and take advantage of the new environment. This may involve shorter term pain for longer term gain, much like disruptive technical innovation.

That’s not a formula politicians like. It’s one reason Japanese Prime Minister Abe’s “third arrow” of structural reform remains mostly in its quiver. Too many interest groups face immediate pain from reform, but the payoff is raising the economic potential of Japan and creating conditions in which future growth can occur, the exact nature of which can’t be predicted. That’s a hard sell to make, which is one reason politicians tend to focus on things that have immediate benefits to at least some people, such as tax cuts or spending programs.

Regardless, beyond just changes in zoning or this or that process or regulation, there needs to be a mindset shift in how these cities approach development to bring about a broad based change in housing affordability.

Thursday, December 18th, 2014

The Urban vs. Rural Wars Within States

The well-known fault line between urban and rural portions of our states got a lengthy treatment (and one that not surprisingly tilts pro-urban) in the Kansas City Star:

It’s a formula played out in one state after the next. Rural areas hold political clout well beyond their numbers, winning regularly on the issues and in the division of tax dollars.

They triumph primarily by better holding their coalitions together — driven partly by the stubborn myth that they get the short stick from their big-city cousins — and because the drawing of legislative districts works in their favor.

The result leaves people in urban areas regularly outplayed at lawmaking. “We simply cannot count on the state government to help us,” said Kansas City Mayor Sly James, voicing a frustration felt by urban mayors across the country.

The piece is worth a read.

I’ve written on this topic before myself. As a guy who is the Urbanophile today, but who came from a rural area in Southern Indiana, I feel like I’ve got a foot on both camps.

I completely understand and share many of the frustrations of urban areas. State policies towards urban regions are often awful, and too many states seem determined to destroy their biggest economic success stories.

But in my view urban folks have as many blind spots and prejudices towards rural areas as the other way around. Clearly urban dwellers have no intentions of leaving rural residents alone to live in the country with their guns, farms, etc., so it shouldn’t be surprising to see that rural residents are painting a target on cities too. Part of the detente we need to have here is to adopt something of a live and let live philosophy, so that, if urban and rural people don’t agree on a lot of things, they’ll at least leave each other to pursue their own definition of the good life.

I’d also remind urbanites that they tend to advocate for increasing redistribution, not reducing it. The redistribution of revenue from metro to rural areas is in my view very consistent with urban values as urban areas are more prosperous as a whole than rural ones.

But beyond redistribution there needs to be a great effort made to build bridges and understanding between these areas, something that hasn’t been on the urban agenda. Here below is a column I wrote for the January 2014 issue of Governing talking about this issue and the new bargain I think we need to find a way to strike:

Who could argue against making things better? It seems absurd. So why is it so hard to make progress? One reason is that there are often structural forces that act to suppress improvement. One force in particular is the increasing divergence in attractiveness and performance between communities.

Ball State University economist Michael Hicks, writing in Howey Politics Indiana, elaborated on the problem: “Almost all our local economic policies target business investment and masquerade as job creation efforts. We abate taxes, apply TIFs [tax increment financing] and woo businesses all over the state, but then the employees who receive middle-class wages (say $18 an hour or more) choose the nicest place to live within a 40-mile radius. So, we bring a nice factory to Muncie, and the employees all commute from Noblesville.”

This tells you everything you need to know about why Indiana’s state government has traditionally been hostile to efforts by localities to improve quality of place, whether through mass transit or through public services such as new libraries and better performing schools.

To the extent that a place like the Indianapolis suburb of Noblesville continues to improve itself, this only increases the advantages it has in luring residents and jobs away from struggling post-industrial communities like Muncie that have fewer resources to rebuild with and are further out from the urban center. This dynamic is hardly unique to Indiana.

Struggling places that surround prosperous communities may not be interested in seeing those successful towns improve any further. That’s not necessarily out of malice, nor may it even be explicitly considered. It’s simply an implicit incentive, and has a certain amount of logic. If those struggling places constitute an influential block in the state legislature, they can certainly put roadblocks in the way of community improvement efforts that would only fuel the divergence that puts their city increasingly at a disadvantage. This creates a structural barrier to change.

Removing this barrier requires a type of thinking and bridge-building that has fallen by the wayside in the contemporary economy, namely restoring connectivity between thriving cities and their broader but less-well-off hinterlands.

In the age of globalization, cities and states would rather build bridges to the world than to the town next door. Some of this is simply the way the economy works. As Richard Longworth, senior fellow at the Chicago Council on Global Affairs, wrote in his book Caught in the Middle: America’s Heartland in the Age of Globalism, “Chicago probably deals more, daily, with Frankfurt or Tokyo than it does with Indianapolis.”

He went on to identify the problem at hand, noting that “Globalization is beginning to isolate cities from their hinterlands: The hinterlands see this trend and are disinclined to do anything to speed it up. They perceive that most of these people—globalization’s winners—have never spent 30 seconds worrying about globalization’s losers.”

This is the two-tier society we see developing nationally playing out at the local level. It creates a tug of war at the state policy level, and it tears apart the whole notion that we are a commonwealth. It creates states that are, as Longworth put it, “hives of warring interests.”

There are no easy answers for many of the struggling post-industrial cities in America. Many places realistically may not recover, particularly if they are too far from a metro center or too far into decline. But we can have more successful places than we do. One obvious challenge for smaller areas is that they are cut off from global flows and economic opportunities. Building stronger links to their neighbors that are connected is critical. That’s their potential on-ramp to globalization.

What’s needed is a new bargain in our states and regions. Larger metros and thriving regions will be given the authority, tools and financing they need to improve themselves and meet the demands of today’s globalized, talent-based economy. In return, they will be expected not just to send back tax “remittances” to the rest of their state, but also to deploy some of their intellectual and policy resources toward the problems facing the left behind areas. The losers need to let the winners get on with their winning, while the winners need to remember where they came from and who brought them to the dance.

Creating those connections won’t be easy. But it starts with a conversation, with getting to know each other, building trust and creating commitment. That’s not as sexy as an overseas trade trip. But if the winners want to get the losers on board with state policies that promote civic improvement instead of fighting every step of the way or trying to steer the course toward a race to the bottom, this is something they very much need to do.

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Topics: Public Policy, Urban Culture
Cities: Kansas City

Sunday, December 14th, 2014

The Inevitability of Tradeoffs, or Understanding New England’s Sky High Energy Costs

People advance two main sorts of arguments in favor of things for which they advocate: the moral argument (it’s the right thing to do) and the utilitarian one (it will make us better off). As it happens, in practice most people tend to implicitly suggest there’s a 100% overlap between the two categories. That is, if we do what’s right, it will always make us better off too with no down sides at all.

But is that true?

For most of us, our life experience suggests that there are always tradeoffs and there’s no such thing as a free lunch. Urbanists tend to argue in way that suggests this isn’t the case. The types of policies advocated by urbanists tend to be presented not only as right in a certain moral sense, but also ones that make society better off in every way. When things go awry in some respect, as they always seem to do, this is always seen as an avoidable defect in policy implementation, not as a problem inherent to the policy itself. Urbanists aren’t alone in this of course. It affects most of the world. But since I cover the urban beat, I’ll focus on us for a minute.

Today the New York Times opens a window into the type of trade-offs that are studiously avoided in most writings on the subject of climate change. Called “Even Before Long Winter Begins, Energy Bills Send Shivers in New England,” it talks about how a lack of natural gas pipeline capacity is sending electricity and gas costs through the roof as the temperature turns cold.

John York, who owns a small printing business here, nearly fell out of his chair the other day when he opened his electric bill. For October, he had paid $376. For November, with virtually no change in his volume of work and without having turned up the thermostat in his two-room shop, his bill came to $788, a staggering increase of 110 percent. “This is insane,” he said, shaking his head. “We can’t go on like this.”

For months, utility companies across New England have been warning customers to expect sharp price increases, for which the companies blame the continuing shortage of pipeline capacity to bring natural gas to the region. Now that the higher bills are starting to arrive, many stunned customers are finding the sticker shock much worse than they imagined.

I’ve written about this before re:Rhode Island, which is among the most expensive states in America for electricity (most of which is generated by gas). But all of New England is high, with Connecticut ranked as having the country’s most expensive electricity. Gas prices spike every winter to levels far above the rest of the country, as the graph below that I found via City Lab shows:

This would appear to be a simple problem to solve: just build more pipelines. I included on my list of starter ideas for improving economic competitiveness in the state.

Unfortunately, planned pipelines haven’t been built due to environmental opposition:

The region has five pipeline systems now. Seven new projects have been proposed. But several of them — including a major gas pipeline through western Massachusetts and southern New Hampshire, and a transmission line in New Hampshire carrying hydropower from Quebec — have stalled because of ferocious opposition.

The concerns go beyond fears about blighting the countryside and losing property to eminent domain. Environmentalists say it makes no sense to perpetuate the region’s dependence on fossil fuels while it is trying to mitigate the effects of climate change, and many do not want to support the gas-extraction process known as hydraulic fracturing, or fracking, that has made the cheap gas from Pennsylvania available.
….
A year ago, the governors of the six New England states agreed to pursue a coordinated regional strategy, including more pipelines and at least one major transmission line for hydropower. The plan called for electricity customers in all six states to subsidize the projects, on the theory that they would make up that money in lower utility bills.

But in August, the Massachusetts Legislature rejected the plan, saying in part that cheap energy would flood the market and thwart attempts to advance wind and solar projects. That halted the whole effort.

Here we see the clear tradeoff in action. Reducing carbon emissions has a clear human and economic cost. High electricity costs wallop household budgets in a region with many communities that are struggling or even outright impoverished (as recently as last year, for example, a third of the residents of Woonsocket, RI were on food stamps). This particularly harms poor and minority residents. What’s more, it helps contribute to the region’s low ranking as a place to do business and its anemic job creation.

Given that gas itself is dirt cheap and will be for the foreseeable future thanks to fracking, hurting residents through high electricity prices designed to drive energy transition is clearly a deliberate policy choice.

Fair enough if you believe reducing carbon requires subordinating other public goals like more money in poor people’s pockets. But how often is this forthrightly stated by advocates? Almost never.

Instead we’re treated to article after article in various urbanist publications talking about some awesome green project that’s being implemented somewhere, and how other places ought to do the same thing. There’s lots of doom and gloom about the increased potential for future disasters if the policies aren’t followed. But there’s seldom much about the immediate negative consequences that almost certainly will follow if they are.

I like energy efficiency. I’m glad we have more fuel efficient cars. I’m very glad I don’t own a car anymore. I’m not so excited about light bulb mandates and other “feel bad” policies that don’t materially affect emissions. But there’s definitely a lot we can do on the energy front.

But I also care about things like poor people’s electricity bills and economic growth. And I’m not willing to make unlimited sacrifices (including imposing sacrifices on other people) in the name of conservation. I can appreciate that others might make different tradeoffs and want more conservation than I do. But at least they ought to be honest about the costs and harm they are imposing on people in the name of their preferred policy matrix.

Instead there’s disingenuous talk about the “green economy” powering local economies when there’s no such thing as green industry. Or claiming, as many did in response to my article earlier this year, that Rhode Island’s government is actually conservative, so its problems can’t be laid at the foot of excessively progressive policies imported from places with vastly more economic leverage than most of New England. I guess I did not know that killing gas pipelines in the name of promoting renewable energy via high prices was a Tea Party idea.

Actually, not even the places that do have huge economic leverage are behaving like this. New York City has more economic leverage than just about anybody. But it also, as the chart above shows, has cheaper gas. One reason is that, as City Lab reported, NYC recently just opened a new gas pipeline into the city:

A really important thing happened last month to New York City and the rest of the mid-Atlantic. This event will change the daily lives of millions of people, especially during the coldest months of winter. And, despite some protesters, it all went down with less fanfare than Jay Z and Beyonce going vegan for a month.

An $856-million pipeline expansion began ramping up service, allowing more natural gas to get to New York City consumers. The New York-New Jersey expansion project moves more gas the last few miles from Jersey, which is the terminus for much of the Marcellus Shale gas flowing out of Pennsylvania, into Manhattan. The Energy Information Administration called it “one of the biggest… expansions in the Northeast during the past two decades.” It will bring an additional 800 billion British thermal units (BTU) of gas to the area per day.

Maybe New England wants to out do New York City when it comes to driving a green energy transition. (NYC seems to be focusing more on climate change adaptation, aka “resiliency,” these days). That’s a valid policy choice to make. But it’s one with consequences.

Unfortunately, the consequences of these policy choices are seldom presented by their advocates. People only discover them when the costs show up in a way that can be tangible traced back to those policies. Maybe in the case of New England and energy costs, people are starting to wake up to the matter, possibly in a way similar to how sky high housing costs in so many cities woke people up to the actual trade-offs being made in housing policy.

Advocates are there to advocate of course. So perhaps it’s unrealistic to expect advocates of any stripe to give you the full story. But that’s why we should always pay attention to what the critics of particularly policies have to say. That will give us a more complete picture of the tradeoffs any particular policy set will require.

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Topics: Economic Development, Public Policy
Cities: Providence

Friday, December 12th, 2014

Talking Tuition With Mitch Daniels

This summer I sat down with Purdue University President Mitch Daniels to talk about his tuition freeze initative there for my City Journal article on the subject. Here’s the podcast of that conversation:

Here are some excerpted highlights. Daniels on what’s driving costs up:

Government has imposed a whole lot of this administrative cost on the colleges. Not all of it, but a lot of it. You know, administrative costs have soared in banks, too. And so there’s some validity in the response that many of the tasks being done on campuses now are simply trying to keep up with the avalanche of regulations and compliance that goes with it.

But when you shear all that away, it was just too easy for universities and colleges generally to decide what they wanted to do and what they wanted to spend – all the additional enthusiasms they might have had at a given time – and there was no elasticity in tuition payments, especially not when so much of it was being borrowed from third parties. And so they raised it. Purdue was hardly the worst offender. It’s more or less in the pack of what happened here, in fact, better than most. But when you roll it all together, it finally reached the place where I think the machine is going “Tilt,” and it should.

On whether the tuition freeze will be permanent:

We’re not promising to do it indefinitely, but I have said it wasn’t a one-time or even a three-time gesture. We do want to make a statement that Purdue cares about this subject. We’re a land grant school, remember. We were placed here in large part to open the doors of higher education beyond the elites, who were almost the only ones with access back when. And that’s still important. But this is not just a gesture. This will be a permanent policy, that is to say, affordability will be a permanent policy, and we’ll see how far we can press it.

On the potential impact of Massively Open Online Courses (MOOCs):

My sense is that there will be some sort of shake-out, you’re already seeing it. I think you’ll see some institutions that just can’t justify what they’re doing and what they’re charging. I think there will be others who adapt to it. And we are certainly using online education blended often with classroom instruction more and more aggressively here. We think we are ahead of every other university in the number of Purdue courses that have already been changed, such that, typically, the lecture is not in a hall with 300 other people. It’s on your handheld or it’s on your laptop. You watch it on your time, in your space. You watch it as many times as you need to to absorb it. When you go to class, you’re going to be either working on a project to see if you did learn it. In the best of cases, there will have been some interactivity, and the professor will know what Aaron got that Mitch didn’t, and vice versa. This is probably the right direction. So long answer, I’m sorry, but it is such a central question. But thank goodness for disruptive technologies. And whether they utterly rewrite the terms of trade in this sector, or simply force big changes, either way is positive. I’m betting it’s the latter.

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Topics: Education, Public Policy

Thursday, December 11th, 2014

Belt Tightening 101 at Purdue

My latest piece is online at City Journal. It’s called “Belt Tightening 101” and is about Purdue’s recent tuition freeze. Here’s an excerpt:

Erica Smith, a recent communications graduate from Michigan City, says that the tuition freeze was long overdue. She financed her education with loans she’ll be repaying for at least 25 years. “I feel hopeless almost,” she says. “But most of my friends have as much debt as I do. We joke about paying it till we die.” Smith says that cost hikes while she was a student added between $4,000 and $6,000 to her overall debt. “If tuition continues to rise, Purdue will be out of reach for middle-class people, like my niece,” whom she hopes will one day follow her to West Lafayette.

Daniels wants to reassure those who worry that controlling tuition will drive high-quality faculty away from Purdue. “Nobody ever cut their way to success,” he concedes. “The top line matters a lot.” And he agrees that fund-raising remains as vital to his job as cost-cutting. “I want to grow this university, at least at the margins. We’re teaching things the nation really needs.” But Daniels understands what many of his fellow university presidents seem more reluctant to grasp: the status quo is not sustainable. That may not fit on a billboard, but it’s the truth.

Click through to read the whole thing.

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Topics: Education, Public Policy

Thursday, December 4th, 2014

Urbanists Need to Face the Full Implications of Peak Car

My latest post is online over at New Geography and is called “Urbanists Need to Face the Full Implications of Peak Car.” Here’s the opening:

As traffic levels decline nationally in defiance of the usual state DOT forecasts projecting major increases, a number of commentators have claimed that we’ve reached “peak car” – the point at which the seemingly inexorable rise in vehicle miles traveled in America finally comes to an end. But while this has been celebrated, with some justification in the urbanist world as vitiating plans for more roads, the implications for public policy haven’t been fully faced up to.

Indeed, the “peak car” is antithetical to the reigning urbanist paradigm of highways known as “induced demand.” Induced demand is Say’s Law for roads: supply of lanes creates its own demand by drivers to fill them. Hence building more roads to reduce congestion is pointless. But if we’ve really reached peak car, maybe we really can build our way out of congestion after all.

Read the whole thing.

Sunday, November 30th, 2014

Overselling America’s Infrastructure Crisis

60 Minutes ran a segment last week called “Falling Apart” that was another alarmist take on the state of American infrastructure. I’ll embed here but if it doesn’t display for you, click to CBS News to watch (autoplay link).

We’ve seen this story before. America’s infrastructure is falling apart and we need to spend many billions on upgrades, but politicians won’t agree because they are too craven.

There’s some truth to this point of view. The problem is that it’s oversold using the worst examples. It also gives short shrift to the many infrastructure upgrades that we have been making. And it ignores how people and businesses make capital purchase decisions in the real world.

First, I’m not surprised to see that 60 Minutes spent a lot of time in Pennsylvania. In my experience, Pennsylvania is in a class by itself when it comes to infrastructure. Drive something like I-70 from Washington to the Ohio state line and prepare to be appalled. Pittsburgh legitimately has a massive infrastructure maintenance overhang. Philly too. And much of the infrastructure there was under built to begin with. The Schuylkill Expressway goes down to two lanes each way, for example. Similarly, 60 Minutes is right about some of the obsolete bridges on Amtrak’s Northeast Corridor. They may have easily included other high profile embarrassments like LaGuardia Airport or Penn Station. Or they might have taken a look at state of decay of Rhode Island’s bridges.

There are clearly some high profile legacy items that need to be addressed. But that neglects the other side of the coin, namely that there’s a ton of major infrastructure that has been upgraded.

60 Minutes includes some footage of Chicago. Clearly there’s a need for bigtime investment there. But in the last 20 years or so IDOT reconstructed completely many of the major freeways in the area like the Kennedy and Dan Ryan. The Tollway Authority widened virtually the entire system and implemented open road tolling, vastly reducing congestion. Similarly the CTA opened the brand new Orange Line, did major work to renovate the Green and Pink Lines, just did major infrastructure upgrades on the south branch of the Red Line, and expanded capacity on the Ravenswood. They’ve also gone from tokens and cash to electronic fare collection. At least one new commuter rail line was opened (the North Central line). The O’Hare Modernization program is underway with new runways already online and a significant reduction in congestion there. A new terminal was also built and the existing terminals given some refreshes.

Is there a lot to do in Chicago? Undoubtedly. But let’s give credit for what has already been done.

It’s the same elsewhere. Nicole Gelinas notes that New York has invested $123 billion in the transit system in the last 30 years. That’s not chump change. The third water tunnel is now online there as well. Indianapolis built an ultra-modern airport terminal complex that’s up to international standards. Many other airports like DTW, SJC, SFO, etc. have built major new terminals or seriously upgraded their acts. There have actually been a lot of investments in port infrastructure to get ready for post-Panamax ships.

I’m told even Pennsylvania has done a good job of starting to address its infrastructure problems. The Philadelphia airport is actually quite nice these days, for example.

So we’ve actually done a lot already that 60 Minutes doesn’t give us credit for.

But what’s more, the presence of infrastructure that’s at or near the end of its useful life isn’t necessarily a bad thing anyway. Would it make sense for every single car on the road to be brand new? Of course not. Most cars ultimately end up getting driven till the wheels fall off. And that makes perfect sense. Why would you junk an asset that still has lots of service life left? We reallocate ownership of a lot of those cars during their lifespan, but we try to get the max out of their useful life.

It’s similar in our homes. How many of us replace a furnace at the first sign of rust? Yes, sometimes we do a complete upgrade or refresh of a kitchen or bathroom, but most of the time we don’t replace major household systems like furnaces or roofs until they appear to be at a point where paying for repairs when they break appears to be futile in light of the asset age. It makes sense to pay $400 to replace a starter that fails when the car has 125,000 miles. It’s more questionable when the transmission goes out at 175.

The fact that some issues or incidents with infrastructure can cause temporary closure or disruption is exactly how most personal capital assets work. A part goes out on our car. It needs to be towed and fixed. And it’s out of commission during that period. That’s annoying, disruptive, and costly. But does it mean that we should all go out and buy a brand new car? I don’t think so. And that’s certainly not how people behave in the real world. Obviously you have to build in a margin of safety on items like bridges where a failure would be catastrophic, but the same general principle applies. We shouldn’t wait for them to fail before replacement, but we do and should get the full useful life out of them.

Why would we expect our government to spend our money on its capital assets in a manner differently from how we spend our money on our own personal possessions? This explains why the public is much more skeptical of spending on infrastructure than the infrastructure lobby would like. It’s to be expected that some percentage of our infrastructure will perpetually be at or near end of life, as that’s the nature of the capital asset life cycle.

What’s more, when we replace a furnace or car, most of us don’t go out and buy Cadillacs. We buy something that fits the budget. Unfortunately, this mindset doesn’t seem to penetrate the public sector, where a significant amount of infrastructure is gold plated and priced at a level far out of line with international comparisons. The big problem in New York isn’t a lack of investment in transit. It’s the fact that the region has just about the highest transit capital costs in the world. Wonder why Madrid and Calgary have nice train systems? Among other reasons, they were very cost-efficient in their design and construction. Rather than more money, maybe we should first try some reform in our broken system of building stuff that results in lengthy project timelines and out of control costs.

So there are some things that need to be taken care of and we need to do that. But scaremongering about dangerous bridges isn’t the right answer. And where I see the biggest infrastructure needs are on local streets and bridges, where federal and state dollars are least likely to be applicable. It’s no surprise to me that most of the pothole ridden, bombed out streets we drive on are local city streets, where they are the maintenance responsibility of an entity that lacks the large, dedicated infrastructure revenue streams available to the state and federal governments. But that’s a topic I’ll have to explore in a future post.

Thursday, November 20th, 2014

Lessons On Spending Responsibly

My latest column is now available in the November issue of Governing magazine. It’s called “Lessons from Kokomo on How to Spend Responsibly” and takes another look, obviously, at Kokomo. But my focus here is the intersection of fiscal responsibility and investment. I highlight not just Kokomo, where getting a handle on the budget enabled investment, but also Los Angeles, where losing control of it has resulted in serious infrastructure problems. Here’s an excerpt:

Kokomo can spend money on these items because it took care of fiscal business. Not all debt is bad, but in this case, by mostly resisting the urge to borrow, Kokomo will retain the ability to invest well into the future by not encumbering future cash flow. As a small industrial city, Kokomo still has challenges to be sure, but it appears to be on the right track.

Other cities are in different stages of this process. Consider Los Angeles, which is also making national news, this time for its crumbling infrastructure. The New York Times reported that it faces more than $8 billion in needed repairs just to bring its worst roads, sidewalks and water lines up to par.

Why can’t Los Angeles afford to invest in infrastructure? Because it allowed its budget to get out of control. Some blame this on the city’s fear of raising taxes, but L.A. is hardly a low-tax haven. Instead, as a report issued earlier by City Administrative Officer Miguel Santana notes, while revenues are anticipated to grow 4.4 percent — faster than national GDP — expenditures have been growing at an even faster rate.

Read the whole thing.

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Topics: Public Policy, Sustainability
Cities: Kokomo (Indiana), Los Angeles

Sunday, November 16th, 2014

The Ideology Driven Privatization Backlash

A couple of incidents recently highlight how many communities have taken a sharply negative turn when it comes to privatization. A look at the cases in question however, shows that the objections to it appear to be as much ideological as performance based.

In Indiana, a group of seven counties through which the Indiana Toll Road passes want to buy it themselves from the bankrupt operator and its bankers.

The Indiana Toll Road lease was an unambiguous win for the state of Indiana. Was it perfect? Of course not. But those seeking to portray it as a bad decision always have to cite some peripheral defect. They can’t talk about core matters like the roadway condition, which is in better shape than ever and now with electronic toll collection, nor its operations, which are solid. Nor have I ever seen a critical financial analysis that was remotely credible. (One study in an academic journal that got a lot of airplay used ridiculous discount rates in their analysis, including literally 0% in one of their primary scenarios. This is what they are reduced to in trying to undermine the deal’s logic).

The bid by these counties seems motivated more hostility than logic. La Porte County Commissioner David Decker says, “The nonprofit would not be beholden to shareholders who siphon all the money off. We want to put money back into the road.”

Let’s analyze this a bit. The road is bankrupt, so the shareholders aren’t “siphoning” anything off at this point. I suspect that Cintra and Macquarie (the original lessees) protected themselves well in this deal, however. I’m not crying for them. But the concessionaire did go belly up.

Then there’s the idea of putting the money back into the road. Where were these counties when the state was running the road and letting it deteriorate so badly? There were some truly decrepit stretches of highway, especially in Lake County. Where were all these counties back then? If the public sector is so much more responsive and attentive to public needs, why didn’t the state ever fix this when it owned it? Why didn’t the state ever install electronic toll collection? I started telling INDOT they should install this as far back as the O’Bannon administration, but nothing ever happened. It wasn’t until the privatization deal that money did indeed start getting invested back into improving the road.

Then there’s the counties’ proposed financial structure. The private company paid $3.9 billion and went broke. These counties think that they can pay $3.7-4.1 billion for it, and make a profit of $38-50 million per year even after they – get this – pay a private company to operate the road anyway. How is that supposed to work? Yes, they can issue tax exempt bonds at a lower interest rate. But they want to limit repayment only to the toll road revenues, so that will limit their rate savings. Also, they won’t be able to take advantage of the huge tax write-offs from depreciation and such that the private company had available. I’d have to see the details on this, but it’s quite a financial claim they are making. They are basically saying that they can buy the road back from the bankers and run it at a profit of $50M higher than the bankers could. (Remember, any profits the banks might actually make would surely factor into their sale price). That seems a bit dubious. If it’s really true, every county in American ought to think about turning themselves into a private equity fund to invest in infrastructure assets.

Then there was an article in the Guardian talking about Hamburg voters approving a measure to buy back their electric and gas utilities that were privatized a few years back, or reclaim them when the contracts end.

Again, let’s ask what the problem is. Has the private operator breached its covenants? Have they provided poor service? Have the prices been at issue? No, no, and no. The article talks about pricing as a factor in some “remunicipalizations” of utility service, but not here. Instead what we see is that the real driver is political:

In Hamburg, activists launched the Unser Hamburg, Unser Netz (Our Hamburg, Our Networks) campaign in 2010 after noticing that the city’s existing contracts with Vattenfall and E.On were set to expire. The campaign brought out a wide range of supporters: environmental groups said buying back the grids would give Hamburg more control over its energy systems, and make it possible to really drive the city’s Energiewende transition away from coal and nuclear power and towards renewable energy.
….
The motorways running in and out of Hamburg are lined with giant windmills, slowly churning the air, constant reminders of the country’s ambitious green goals. Shifting the city’s energy transition into higher gear was one of the key promises of remunicipalisation.

The referendum ballot proposed not only to take back the city’s energy grids, but to institute as a binding target “a socially just, democratically controlled and climate-friendly energy supply from renewable sources”.

It seems pretty obvious that the drive to buy back the utility was driven by greens, who hope to use political control to implement their preferred energy generation schemes. In short, it’s about ideology. The article quotes a professor saying that privatization itself is promoted for ideological reasons, but here we see de-privatization happening in the same way. A touch of the increasingly anti-infrastructure bias of the German electorate comes through as another ideological factor.

Lest you say “it’s about climate change, not ideology,” the policy response to climate change very much falls within the political and ideological sphere. The German greens are, as the article notes, anti-nuclear. The Green Party driven, legally mandated decommissioning of Germany’s zero emissions nuclear infrastructure is a big reason why the country is still constructing coal plants in the first place. That doesn’t seem very green to me.

I’ve not hesitated to rake bad privatization deals like the various parking meter leases over the coals as bad public policy. But in these cases we see moves to cancel privatization deals coming from a root of ideological bias, not the public interest.

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Topics: Public Policy, Transportation

Thursday, November 6th, 2014

Building the Responsive City

The Responsive City: Engaging Communities Through Data Smart Governance
by Stephen Goldsmith and Susan Crawford

Technology, and especially the use of data and analytics, has been transforming the way cities manage service delivery. Former Indianapolis mayor New York City deputy mayor Steve Goldsmith, and his colleague at Harvard Susan Crawford, recently wrote a book called “The Responsive City” looking at this technology revolution. I recently read the book and posted some thoughts in a review posted at City Journal. Here’s an excerpt:

The book chronicles more than just technology’s potential; it also highlights what some local governments have already achieved with innovative approaches. After several fires resulted in the deaths of five people, New York City built a system to identify buildings at high fire risk, using predictive models and integrating data from multiple sources. City inspectors are now aggressively targeting those buildings for upgrades. To fight its rat problem, Chicago is using data analytics to predict where rats will gather, instead of waiting for resident complaints. Boston has developed a civic customer-relationship management system, with mobile-device apps, to link residents more easily with city services. Mimicking the way that Yelp collects restaurant reviews, Washington, D.C. uses a website to solicit ratings of city services. Cities around the country are adopting open-data portals.

Goldsmith and Crawford are candid about the challenges facing their responsive-city vision. Progressive-era reforms designed to eliminate corruption also curtailed government employees’ discretion, leaving them with narrowly defined roles and limited ability to respond effectively to real-world problems. Rigid job descriptions, such as “temporary full-time permanent intermittent police officer,” are common in cities like New York, which has more than 2,000 such classifications. Procurement rules require that detailed specifications be prepared in advance, unlike in the private sector, where technology and other solutions are often developed iteratively. Government’s rigid contracting processes make it tough to respond to findings during development.

You can click over to read the entire thing

I also sat down with Steve Goldsmith recently to talk about the book, and some of the challenges and pitfalls of this technology-drive approach. If the audio embed doesn’t display for you, click over to listen on Soundcloud.

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Topics: Public Policy, Technology

The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. Included are 28 carefully curated essays out of nearly 1,200 posts in the first seven years of the Urbanophile, plus 9 original pieces. It's great for anyone who cares about our cities.

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