Bonds & municipal insolvency due to unsustainable public investment

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RusticBohemian
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Bonds & municipal insolvency due to unsustainable public investment

Post by RusticBohemian » Mon Oct 08, 2018 5:20 pm

I consider myself something of an urbanist, and wish we had better urban policy in the US.

One of my favorite blogs covering a lot of the issues is Strong Towns, which goes into a lot of detail about how most US municipalities have strayed from a sustainable model, and have made infrastructure and other investments (suburban sprawl) that are huge liabilities.

There's a great article talking about sustainable levels of public to private investment here: https://www.strongtowns.org/journal/201 ... y-question

It makes me wonder about what the impact on our economy will be when those bills come due over the next 20 years or so. I have to imagine there will be a spike in defaults on municipal bonds, and I can't see how that wouldn't cause some economic turmoil as well.

Have you guys thought about how the poor decision making at the city/state level will impact investments and our economy? How do you think this will all play out?

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Riggerjack
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Re: Bonds & municipal insolvency due to unsustainable public investment

Post by Riggerjack » Mon Oct 08, 2018 7:28 pm

Nice link. I was expecting another "suburbs are doomed, cities will rule in their ashes!" post. But that was actually nuanced. I didn't expect that from an urban planning site. And the comments were worth reading. I will dig around there a bit more.

As for Muni bond failures, we are currently adding enormous urban population. So I think short term, they are fine.

But I also expect this trend to reverse. And Detroit to be a fine model for what that looks like, near and long term. My understanding is that parts of Detroit are emerging as wonderful, enriching urban centers, surrounded by the ashes of the city they destroyed, the infrastructure that shouldn't have been built, and the bonds they used to start the fire.

But I am not an urbanist. :-)
Last edited by Riggerjack on Tue Oct 09, 2018 7:20 am, edited 1 time in total.

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unemployable
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Re: Bonds & municipal insolvency due to unsustainable public investment

Post by unemployable » Mon Oct 08, 2018 7:37 pm

I'm not sure we'll see a mass wave of defaults. Maybe in places with HUGE liabilities that are easy to move away from, so Illinois rather than California. This was widely predicted in the 2009-11 period, in fact, after real estate collapsed and we were only crawling out of the recession, and it never came to pass. All we really got was Vallejo.

The whole point of issuing bonds is so governments can pass off default risk. Who holds muni bonds... not really pension plans anymore, as it turns out, as the plans aren't taxable in the first place and most of the public ones need more yield than that. Mostly high-tax investors (the rich).

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Re: Bonds & municipal insolvency due to unsustainable public investment

Post by RusticBohemian » Mon Oct 08, 2018 7:58 pm

Detroit's bankruptcy cleared a lot of their bad debt, but there's still plenty of issues. The city center is a very small part of the city, with the rest sprawl. If you look at how much it costs to pave a street, provide it with water and sewage, etc, you'll see that outside the dense part of the city, the city is mostly a money pit. Only the dense city center actually contributes more in tax revenue than it takes up.

A lot of other cities are in similar situations.

Check out this one with an interesting map on parts of a city in Louisiana with positive and negative cash flow: https://www.strongtowns.org/journal/201 ... s-no-money
Riggerjack wrote:
Mon Oct 08, 2018 7:28 pm
Nice link. I was expecting another "suburbs are doomed, cities will rule in their ashes!" post. But that was actually nuanced. I didn't expect that from an urban planning site. And the comments were worth reading. I will dig around there a bit more.

As for Muni bond failures, we are currently adding enormous urban population. So I think short term, they are fine.

But I also expect this trend to reverse. And Detroit to be a fine model for what that looks like, near and long term. My understanding is that parts of Detroit are emerging as wonderful, enriching urban centers, surrounded by the ashes of the city they destroyed, the infrastructure that shouldn't have been built, and the bonds they used to start the fire.

But I am not an urban. :-)

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Riggerjack
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Re: Bonds & municipal insolvency due to unsustainable public investment

Post by Riggerjack » Tue Oct 09, 2018 8:52 am

And... It took all of one click before I was dealing with that granola shotgun douchebag again. But the linked article was pretty good.

We have covered aspects of this before under granola shotgun:
viewtopic.php?f=13&t=9251&hilit=City+living

And City Living, WTF:
viewtopic.php?f=14&t=4413&hilit=City+living

The fact of the matter is that there are better ways to do infrastructure, but they are of no interest to planners, who seem to be about taking the failures of our past, and doubling down on more failure. There is no reasoning with these people. So my solution was to move away from them.

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Riggerjack
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Re: Bonds & municipal insolvency due to unsustainable public investment

Post by Riggerjack » Sun Oct 14, 2018 4:26 pm

If you look at how much it costs to pave a street, provide it with water and sewage, etc, you'll see that outside the dense part of the city, the city is mostly a money pit. Only the dense city center actually contributes more in tax revenue than it takes up.

A lot of other cities are in similar situations.

Check out this one with an interesting map on parts of a city in Louisiana with positive and negative cash flow: https://www.strongtowns.org/journal/201 ... s-no-money
Ok, this is where I am going to be kind of dick, please forgive me. This is a lie. Not your lie, and I don't blame you for believing it, but it is a lie. Let me try to explain.

I went back, read the article, and the one he wrote previously on the same subject, and then all the comments where the data gets questioned. I figured out how they made this map, and why it looks the way it does. After I break it down, please let me know if I haven't convinced you that it's a work of manipulative fiction.

They combined the GIS parcel data, with the tax records. So far, so good. Then they worked out the unit rate for infrastructure maintenance, and here is where the manipulation began.

Sewers get built, extended as far as gravity will feed it. When that border is reached, a pump station is built, and the sewer is extended. Pumping and pump maintenance are not cheap, but neither is another sewage processing station, and really, who wants to live in a city with lots of open sewage processing stations all over? So public works and planning work together to make sure that the sewers extend in the direction that growth is planned. They do this, so when property gets developed, they can get hooked directly into the sewer system, rather than converted at high cost later. Strong towns broke this cost out, and charged the outer parcels for each set of pumps, and complete system replacement every generation. Not openly dishonest, but if one is replacing a complete sewer system every 30 years, lots and lots of people need to be fired. Pumps fail and need replacement. But it takes a long, long time for concrete pipes to fail and need replacement. Replacing a pump is cheap fast and easy on this scale, but new sewer pipes? If that happens once in a lifetime, it's too much.

So sewer isn't deeply manipulated. Merely exaggerated by 3-5 times reasonable expected costs.

From the comments:
johnv2 • 2 years ago

OK, tax revenue is straightforward, but how do you calculate the city's expenses per lot?

Charles Marohn Mod johnv2 • 2 years ago

That took a year to figure out and might take me almost that long to explain. It was very complicated and, needless to say, included some assumptions that we could debate to no end.

For example, someone living close to the core of town has their sewer flow by gravity to the treatment facility. We allocated the cost of the pipe and other gravity infrastructure proportionately to them. Someone living out on the edge would have their sewer flow by gravity to a lift pump and then pumped (electricity + pump replacement + maintenance) to another gravity line. We found some properties where their sewage was pumped 20+ times before treatment. We would proportionately allocate the pipe cost and the pumping cost to those properties. Note: you pay the same price for residential sewer whether you pump 20 times or just use gravity.

You can see how this gets to be a complicated algo to apply geographically, and that's just the sewer. We also had water, drainage, streets, sidewalks, transit service, police/fire, etc...

Revenue was actually not that straight forward either. Sales tax, which is a huge part of their budget, cannot rightly be allocated solely to the store. Some of it would go with the family -- we thought of this as non-discretionary, stuff that a family purchases whether there is a shiny new big box store or an old corner store -- and some would go with the store (non-discretionary spending as well as spending pulling from people outside the city, such as tourists, commuters and people who simply drive to Lafayette to shop).

We did an entire webinar on it last year for our members. I'm not suggesting it's not arguable at the margins, but I am comfortable with the basic distribution.

johnv2 Charles Marohn • 2 years ago

Interesting. Did you wind up allocating part of the cost of roads from homes to the stores, at least partially, using the same sort of discretionary/non-discretionary split? How did fuel taxes wind up being allocated? What about... I can see how this gets complex fast. Thanks for a brief overview.

Charles Marohn Mod johnv2 • 2 years ago

I'm pretty sure the city doesn't get any fuel taxes.

Roads were the most fascinating and took the most intellectual effort. We finally ground out a network node analysis kind of in the same way one would analyze a computer network. We ran an analysis of all the possible routes one could travel to get from one intersection to another and then used those relationships to distribute costs. This had the effect of making dead end cul-de-sacs distributed mostly to the people who lived along them (nobody else really has need to use them) and the cost of the collector roads tended to be distributed over more of the population.

That part of the analysis was utterly fascinating. Josh McCarty is a certifiable genius.

Michael Henderson Charles Marohn • 2 years ago

Is there anyway you can share the technicals of the network node analysis? I need a way to demonstrate this during rezoning hearings.

Charles Marohn Mod Michael Henderson • 2 years ago

I wish. I helped in the theoretical discussion but I was not the technical guy that ran the model. Sorry.

Michael Andersen Charles Marohn • 2 years ago

Do you know if the infographic includes non-infrastructure expenses such as policing?



johnv2 Charles Marohn • 2 years ago

So you are charging infrastructure costs, like roads, against the city finances only? I'm not sure how it works elsewhere, but my city gets most of the infrastructure funding from the county (via sales tax), State (various taxes), and Federal (more taxes). In fact, IIRC, something like 80% of a recent road maintenance project nearby came from government funding other than the local city funds. I'd think one should account for this in understanding how infrastructure is maintained.

Federal, State, and County governments all want a hand in allocating funds because that's where political power originates. Local/city government can't afford infrastructure solely on the local/city budget because capital improvements and maintenance isn't funded solely from local/city taxes. If residents weren't sending all that money to the State capitol and to DC, then the increased local tax to fully fund infrastructure might be feasible.

In any case, understanding how we pay for all the things we have is indeed both fascinating and complex.

Charles Marohn Mod johnv2 • 2 years ago

We counted the sales tax because that is allocated back by a formula. Not sure how your state funding works, but as for federal, there is no ongoing and consistent funding stream. Federal dollars are given primarily to states or are used for specific projects that don't recur on an annual basis. The feds build it and then the local government maintains it, a problem I wrote about last week: http://www.strongtowns.org/...

I suspect your state works the same way, although there are often state programs to pay for major roadways. These programs often have the same effect: spend more to oversize streets that would otherwise be less expensive and actually nicer to live on.

The other reality is that, if your city is counting on federal and state money to do basic maintenance of your critical systems, that's more than a little risk. State and federal governments underfund maintenance on their own systems and, when budgets get tight, have a long track record of cutting funds that would go to local governments. If you've overbuilt beyond what your own local wealth supports -- and we all have -- then you are dependent on the good graces of state/federal decisionmakers for your critical systems. That seems like a tenuous position to be in.

Plus, just the sheer math of it suggests that there is no way state and federal spending can bridge this gap either. It's just too big.



johnv2 Charles Marohn • 2 years ago

"These programs often have the same effect: spend more to oversize streets that would otherwise be less expensive and actually nicer to live on." This is going to disappoint the Complete Streets crowd, including me, who would like to see bicycle-friendly infrastructure.

I completely agree about the worrisome aspect of Federal/State funding, but the reality is the Feds and the State are going to keep control of every dollar of tax revenue they possibly can instead of letting cities make their own decisions. Even if cities (read, local politicians) could make their own choices, it isn't clear to me that we'd see better results. Politicians don't care about anything beyond the next election in all but the most extraordinary circumstances.
But let's look at streets. They ignored traffic planning, and charged each parcel for all the possible routes from it to city center. This means all city center roads get charged to everyone, but the farther out one is, the higher the rate for the roads, until one gets to the roads in an outer nieghborhoods. Those roads are charged exclusively to the outer parcels.

You see the pattern here? Break out all the costs, figure out how to shuffle them to the suburbs, and call this the fair rate. Again, not exactly honest, but justifiable. Certainly, if the suburbs weren't there, niether would the costs, but then they wouldn't also be paying for ALL of the other streets, lowering the rates for downtown, either.

But once they had these rates, they then applied them by length of right of way along lot lines. So if your house sits on a parcel 40 feet wide, you were charged half of what your neighbor with the 80 foot wide parcel was charged. Again, wider lot, more infrastructure, still justifiable.

But the basis of the whole model is to charge by right of way length, and completely ignore the costs of usage. So that single house on an acre at the periphery is charged far more then the high rise apartments that show green on the map. Because of course the 300 unit apartment is cheaper to service than the single family home, right?

The way this works in practice, is that the very expensive to maintain infrastructure (that which is downtown) looks cheaper, because they shuffled the costs to the edge, and the cheaper to maintain infrastructure is charged extra. When you look at the map, and try to synch it up with a physical map, you find that those big red towers representative of huge losses, are things like a patch of forest around a stream. Because those damned frogs won't pay taxes to support all that infrastructure they are freeloading on. And parks. What with their long borders and massive infrastructure investment, and nobody is thinking about how much more tax revenue a high rise would generate.

Now you may think my numbers are off, or I'm exaggerating the manipulation. Here's a city councilman from a suburb of Vancouver BC trying to figure out how this is possible:
Mathew Bond • 2 years ago

I'm a member of the City Council in the District of North Vancouver, BC, Canada. Our population is 85,000 and we carry around $2B in assets (replacement value). We are primarily a suburban, single family, 1950s auto dependent community without a real "downtown" and yet we have comprehensive asset management plans to cover 13 asset classes that are based on AUS/NZ best practices (NAMS nams.org.nz and ISO55000). Full life-cycle cost is funded through property taxes (the primary/only source of revenue for Canadian municipalities). And yes Charles, I'm still working at pulling together the details for a blog post based on our discussion on Twitter.

It seems insane that a city with 1.5x the population as mine can have 16x the assets. We do have a regional government that is responsible for drinking water and sewage treatment, but if you summed up of those assets (dams, treatment plans, primary water & sewer mains, pump and lift stations) and divided it by our portion of the regional population it would only add a few $100M of assets. Am I missing something?
The soils in Vancouver will be Glacial till. All excavation costs will be high. But apparently not so high that any of Strong Town's numbers can make any kind of sense.

The thing is, I like the idea of walkable cities, and flexible, local use. The improvements that Strong Towns is endorsing seem like good ideas and practical improvements to make cities better for city dwellers. But Strong Towns is dishonest. Dishonest in the way they manipulated the data. Dishonest in that they blame developers for developing in the ways planners required them to develop. The cities they currently detest are the same ones they required to be built as they are. Planners created this problem, and now lie about the results to make for a new and better plan, subsidized by the same people they want to abandon.

But they sure make it sound good, don't they?

RusticBohemian
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Re: Bonds & municipal insolvency due to unsustainable public investment

Post by RusticBohemian » Sun Oct 14, 2018 6:40 pm

Interesting. That does seem like a pretty big flaw in their reasoning. Thanks for digging into it.
Riggerjack wrote:
Sun Oct 14, 2018 4:26 pm
Dishonest in that they blame developers for developing in the ways planners required them to develop. The cities they currently detest are the same ones they required to be built as they are. Planners created this problem, and now lie about the results to make for a new and better plan, subsidized by the same people they want to abandon.
However, I'm not sure this is a completely fair summation of Strong Town's views. They talk about zoning/regulations and how it's responsible for creating sprawl and the other issues they decry all the time.

But I see where you're coming from.

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Riggerjack
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Re: Bonds & municipal insolvency due to unsustainable public investment

Post by Riggerjack » Mon Oct 15, 2018 9:49 am

They do. But they also dodge the responsibility for those regulations by blaming developers. I am niether a developer nor a planner, I just work in Telecom engineering, and am peripherally affected by each.

City Planning created the sprawl. Required that anyone building, contribute to the spawl in very specific ways. If they decide to require all buildings to be gold plated, (with political cover from all those irate landowners who can't build), building would stop until someone figured out how to make a gold plated building make economic sense.

We have the cities we have, because city planning wanted them that way. Now, some city planners say the have a better plan. It sounds like a better plan. It seems like a collection of better ideas. But their agenda driven data manipulation makes me distrust them. When they lie about such easily confirmed data, it makes me wonder what else they are lying about.

But the link to Serembe, Geogia is interesting. All the urban advantage, and none of the disadvantage, at fully urban pricing. If one wants this life, this seems like a better way to get it, than rely on anyone's revised Plan.

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