center for local innovation city & county issue guide 2008

8/14/2019 Center for Local Innovation City & County Issue Guide 2008

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City and County

Issue Guide2008

P O L I C Y R E P O R T


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North Carolina local government policymakers face many important challenges. This issue guide offers solutions to problems faced by the citizens of the state. The common thread in theserecommendations is freedom. By increasing individual freedom, local governments can foster the

prosperity of all North Carolinians.The John Locke Foundation Research Staff and the Center for Local Innovation offer the fol-

lowing policy analyses and recommendations. Please feel free to contact the policy expert associ-ated with each recommendation for further information, or visit www.JohnLocke.org and click onSpotlights and Policy Reports for more detailed research on these and other issues that facelocal governments in North Caorlina.

The John Locke Foundation Research Staff would like to thank the following interns for their contributions to this guide: Abby Alger, Katie Bethune, and Michael Moore.

CIty and CountyIssue GuIde2008


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table of

Contents

Finances

Services

Property Rights

New Transfer and Sales Taxes

Retiree Health Bene ts

Tax Increment Financing

Economic Development PolicyCompetitive Sourcing

2

4

6

810

Education

Fresh Water and Wastewater Services

Parks and Recreation

Land Use and Zoning

Smart Growth

Affordable HousingAir Service

Public Transit

Convention Centers, Stadiums, Water Parks,and Restaurants

12

14

16

18

20

2224

26

28

Eminent Domain

Forced Annexation

30

32


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2 CITY AND COUNTY ISSUE GUIDE 2008 |

CENTER FOR LOCAL INNOVATION

New Transfer and Sales Taxes

RecommendationCounties and municipalities should prove their

case for new taxes.

Background Few people object to paying taxes if the taxes

are fairly assessed and the money is properly used. Lo-cal governments in North Carolina all have two waysto tax their citizens the property tax and the salestax. Some have additional taxes on rental cars, hotelrooms, meals, home sales, or the privilege of openinga business there. Cities and counties also often chargeseparate fees for water and sewer, solid waste removal,recycling, or electric power.

As part of the legislative deal that swaps salestax revenue for Medicaid payment obligations, coun-ties also received the right to seek approval from their citizens to impose a new tax. The tax could be either a0.25-cent increase on the 2.0-cent local sales tax (6.75cents total) or a 0.04-percent increase on the 0.02 per-cent land-transfer tax most counties already have.

Twenty-seven counties sought one or both taxincreases in 2007. Those counties that put just onemeasure on the ballot invariably chose the tax thatraised the most revenue, even though the sales tax had

more natural allies and fewer opponents. Voters in sixcounties approved the sales tax increase, ve rejectedthe sales tax, eleven rejected a transfer tax increase,and ve rejected both.

Some local of cials argue that growth does not pay for itself and the new taxes are to make up for that fact. These same counties, however, often provideeconomic incentives to attract businesses to the area,effectively ensuring that new revenue will not keep

pace with spending demands. For example, the townof Holly Springs in 2006 offered (with help from theGolden LEAF Foundation and the state) a $20 millionincentive for Novartis to build a new plant, nearly allthe towns tax revenue for that year.

Making the question of growth paying for itself more dif cult to sustain, 137 municipalities have hadrevenues from taxes, fees, permits, and services grow5 percent faster than population and in ation on an annual basis between scal year (FY) 2001 and FY 2006.Twenty have at least doubled per capita in ation-ad

justed revenue from these sources over the same pe-riod.

Forty-six counties sought one or both tax in-creases through May 2008. Those counties that put justone measure on the ballot almost always chose the tax

NEW TRANSFER AND SALES TAXES

Real per capitarevenue growth;i.e., revenues in

excess of popula-tion growth and

in ation.


5/37INNOVATION GUID E

CITY AND COUNTY ISSUE GUIDE 2008 | 3

that raised the most revenue, even though the sales taxhad more natural allies and fewer opponents. Voters ineight counties approved the sales tax increase, twenty-six rejected the sales tax, twelve rejected a transfer taxincrease, and seven rejected both. Of the six countiesthat went back to their voters in May after being re-

jected in November, only Cumberland County suc-ceeded in getting approval the second time around.

Unfortunately, too many local governments havemisused the money they now have. In Wilmington,the city council has set aside money for a conventioncenter while the sewer system leaks. Charlotte builta convention center and a short section of light railinstead of expanding road capacity to alleviate traf ccongestion. Spending comes rst with governments; if they did not spend money, they would not need to taxtheir citizens. There are many legitimate needs facinglocal governments, but of cials need to convince their citizens that they are spending wisely before imposingnew taxes, fees, or other costs.

Why Local Governments Do Not Need New Tax Options

l c g v r m c ch p r $1,566 iscal year 2006. This was 5 percent of per capita per-

sonal income. For a family of four, the cost is $6,264.l c g v r m m r h r x-

payers. Spending on municipal golf courses, econom-ic incentive packages, convention centers, and other non-essential services have received higher priority inlocal budgets than school buildings, sewer systems,and roads.

Its not just taxes. Although property and salestaxes are the main source of revenue for most localgovernments, one county and fteen municipalitiesget less than half of their income from property andsales taxes. Eight other municipalities get no propertyor sales tax revenue. Many of these fees are for inspec-tions of new buildings, water connections, or other items that could avoid the impact fee label and theneed for legislative approval. Among the high-fee cit-ies is Holly Springs, which collects $6.9 million from

property taxes, $2.5 million from sales taxes, but $8.4million from Other Permits. Bladen County collects$21 million from Other sales and services.

NEW TRANSFER AND SALES TAXES

Analyst: Joseph ColettiFiscal and Health Care Policy Analyst

919-828-3876 [email protected]

Source: John Locke Foundation, By the Numbers - FY2006

1. Brunswick $2,177

1. Brunswick $2,280

1. Brunswick $2,323

2. Carteret$1,674

2. Carteret$1,675

2. Carteret$1,711

14. Stanly$1,190

14. Lenoir$1,189

14. Stanly$1,239

27. Sampson$892

27. Sampson$923

27. Sampson$949

1. Mecklenburg$2,491 1. Mecklenburg

$2,406

1. Mecklenburg$2,605

12. Johnston$1,414

12. Gaston$1,486 12. Catawba

$1,452

24. Randolph$932

24. Davidson$931

24. Onslow$913

Source: John Locke Foundation, By the Numbers - FY2006


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Retiree Health Benefts

RecommendationReduce the liability for future retiree health

costs with alternative insurance products and prefund-ing future obligations.

Background The Government Accounting Standards Board

(GASB) has been around for 23 years with a goal of making government nancial information more usefuland usable. In 2004 it issued a statement (GASB 45)on accounting and reporting of non-pension bene tsfor retirees.

GASB 45 offers guidance for state and localgovernments to report their liability for these other

post-employment bene ts (OPEB), the largest of

which for most governments is health care. All gov-ernments will have to report their liabilities in scalyear (FY) 2009.

The state and most local governments pay thesecosts from the General Fund each year. A few localgovernments have created reserve accounts with oth-ers considering such a move. A reserve account hasthree bene ts. First, it puts the question of health care

bene ts for retirees in the proper scal perspective.Second, it ensures money is available to meet futureneeds. Third, it reduces the amount that needs to be

reported.For most governments, retiree health bene ts are

not yet a problem. Government payrolls have grownmore in recent years than previously; those newer employees may not get counted in actuarial studiesof existing liabilities because they do not qualify for the retirement bene t, but show up in studies of futureyears. The size of the cohort of baby-boomer employ-ees who will become eligible could have a signi canteffect on government nances.

As of December 31, 2005, the state had an un-

funded liability of $23.8 billion, 115 percent of Gener-al Fund spending in FY 2008. Unchecked, this liabil -ity will grow to $44 billion in 2013. Liabilities amongthe states local governments, though nowhere near aslarge as the states liability, range up to 70 percent of

General Fund spending in Charlotte and 51 percent inGuilford County. On the other end, Cary has a liabilityequal to just 15 percent, and Buncombe Countys li-ability is 8 percent of FY2008 spending.

Planning for Retiree Health CostsInvestors want to know . Although GASB has no

authority to force governments to act on its statements, bond investors and rating agencies such as Standardand Poors may consider a government that does notfollow GASB rules a greater risk, though there is noindication yet that it would lead to a rating downgrade.Milliman, an actuarial and consulting rm, stated, If a sponsors nancial statements are used to assist in

borrowing or are otherwise subject to scrutiny, thestandard may have a signi cant impact. Ultimately,though, long-term plan costs are determined by plan

provisions, not accounting treatments.

Regardless of what one thinks of GASB or itsspeci c recommendations, the costs are real. If a county or municipal government does not report its liabili-ty, it must still nd a way to convey its trustworthinessto investors.

CaryCharlotteDurhamGreensboroRaleighWinston Salem

CountiesBuncombeDurhamForsythGuilfordMecklenburgOrangeWake

$57.8$326.2$137.0

$44.8$106.0

$60.0

$19.8$150.0

$49.8$280.0$142.0

$84.5$109.0

15.2%69.9%67.3%18.5%30.8%35.9%

8.1%22.3%12.9%51.0%10.4%49.1%11.8%

Unfunded Liability % of FY2008(in $ millions) General Fund

Cities

RETIREE HEALTH BENEFITS




Positive action will be rewarded. If a govern-ment creates a reserve fund for its OPEB obligations,it would reassure investors. This in turn could shave

points from the governments cost of borrowing. Cre-ating a reserve fund also allows a government to dis-count its future obligations, making them less expen-sive today, meaning its liability shrinks overnight.

Ways to lower the burdenA government can create a r rv cc ,

like Winston-Salem has done. This has the immediate bene t of prefunding some of the future obligationsthe government will face. As the example from Caryshows, creating a trust or reserve account also reducesthe government liability by discouting it at a faster rate. This, in turn, would reduce the amount the gov-ernment must set aside in future years. The differencein total liability does not look large, but can cut theannual contribution by half.

Depending on the vesting requirements now in place, a government can lengthen the im rvicneeded to qualify for bene ts. This does not addressthe potential liability for existing employees who do

not yet qualify for retirement health bene ts, but canmake the upper limit of the liability a little easier todetermine.

A government can also offer different plan op-tions, such as high-deductible insurance policies withh h vi g cc (HSAs) that allow employ-ees to build assets and save for their own future medi-cal needs. These accounts, like de ned contribution

pensions, lower the future liability for the governmentand make the employee more aware of his prepared-ness for retirement.



RETIREE HEALTH BENEFITS

Without Trust4%

With Trust7%

Accrued Liability $57.80 $44.3

Annual Required Contribution (ARC)

Annual AmountPast ServiceTOTAL ARC

$5.30$2.00$7.30

$2.20$1.40$3.60

Town of Carys Liability as of January 1, 2006

(in millions)

Note: While it is called an Annual Required Contribution,no contribution is required. This is a technical term used byactuaries.


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Tax Increment Financing

RecommendationLocal governments should report the full costs

and consequences of development incentives throughtax-increment nancing (TIFs).

Background North Carolina voters in 2004 approved Amend-

ment One, which allowed local governments to issuedebt for capital projects paid from the new tax rev-enues collected in special districts tied to the projects.This form of debt is usually called tax increment -nancing (TIF), but Amendment One proponents oftencalled it simply Project Development Financing or,euphemistically, Self-Financing Bonds. Nearly everyother state uses TIF with mixed results.

Tax increment- nanced bonds (TIFs) have threedisadvantages for taxpayers. These disadvantages,however, are what make TIFS extremely valuable tosome government of cials.

fir , like certi cates of participation (COPs),TIFs do not require voter approval. Once the towncouncil or county commission determines how muchto borrow and what to do with the proceeds, it justneeds the approval of the Local Government Commis-sion.

s c , TIFs divert tax revenue before it reach-

es the General Fund, so the scal effect is hidden, andthe TIFs role as a subsidy is left begging.

thir , the lack of voter approval and transpar-ency, combined with the transfer of risk to lenders,make TIFs far more expensive than other forms of debt.

Tax increment nancing is the newest option for local governments. New incremental tax revenue in adistrict provides the revenue for a TIF, instead of thevalue of a speci c asset such as a stadium or of ce

building as in a certi cate of participation. For exam -

ple, incremental property tax revenue from new hotels,restaurants, retail centers, and even other theatres thatlocate in the Carolina Crossroads entertainment dis-trict near the Randy Parton Theatre in Roanoke Rap-ids will pay off the debt incurred to build and operate

the Theatre. In this case and others, the capital projectis itself a private enterprise that anchors other invest-ment to the district.

Local governments must also take care that fea-

sibility study assumptions match actual circumstanc-es. The Parton Theatre feasibility study started from

an assumption of 200,000 square feet of retail spaceand 400 new hotel rooms being operational before thetheaters construction.

Because incremental tax revenues pay the TIFdebt instead of general revenues as in a COP or gener-al obligation bond, TIFs do not affect a governmentscredit rating. This also makes repayment less certain,so lenders charge higher fees and interest, making

TIFs the most expensive way for governments to bor-row money up to $6.8 million more in present valueterms compared to other forms of debt for a $67 mil-lion project in Cabarrus County.

Even these high costs for government nancingare very low compared to what it would cost a private-sector borrower to nance the same project. So government nancing is an inherent subsidy for the developer who might otherwise take on debt himself. Thisis of particular concern when the only question is thescale of a project rather than its initial undertaking.

Advocates say TIFs do not impose a burden ontaxpayers. In reality, they have no cost in the same waythat having withholding taxes from your paycheck hasno cost. The money used to pay the debt service is notavailable for other needed services, even in the TIF

TAX INCREMENT FINANCING

TIFSynthetic TIF20-yr COP20-yr GO Bond

$6.8$3.6$1.8

-

553919

0

Present Value(millions)

All-In TIC(basis points)

Premium Over General Obligation Bond

Source: Cabarrus County estimates for $67 million capital.




district itself.For example, if the TIF district needs upgrades

to the road, water, or sewer systems, those are newcosts that would not have occurred if the land re-

mained in its prior state. Whatever new tax revenueis dedicated to debt service is not available for these

projects. Taxpayers are just as exposed to the costs,which are higher than with other forms of debt.

Citizens would be willing to take on the addi-tional debt to subsidize projects that make sense, asthey have shown in passing bonds and higher taxes for schools, roads, open space, and light rail. A local gov-ernment could offer the same subsidy at less cost byissuing a general obligation bond or certi cates of par -ticipation and dedicating the proceeds to the would-beTIF project.

For all these reasons, local governments should be honest about why they want a TIF.

Why an honest accounting of TIFs is needed Tax increment nancing (TIF) hides the di-version of funds from government servicesthat is inherent in borrowing.TIFs still put taxpayers at risk for repay-ment and are more expensive than generalobligation bonds or certi cates of participa -tion (COPs).Just as lenders and borrowers underestimat-ed some of the risks from subprime mort-gages, there is great potential for negativesurprises with TIFs.Higher tax revenues from TIF districts willgo to debt repayment, not government ser-vices.Local taxpayers could also pay directly be-cause their governments are unlikely to de-fault on the debt even if revenue falls short.Governments can borrow in other ways anduse the savings as a cash subsidy or incen-tive for target projects.

Adapted from Debt is Debt: Taxpayers on

hook for TIFs despite rhetoric, John Locke Founda-tion Spotlight #337, November 2007.



TAX INCREMENT FINANCING

Features of Debt Instruments

General Obligation Bonds (GO Bonds)Lowest cost, straightforward accounting; voter approval needed, clearly paid from GeneralFund; repayment schedule not tied to reve-nues.

Certi cates of Participation (COPs)Higher cost than GO bonds, do not require voter approval, can be structured so repayment de-pends on revenue availability; clearly paid fromGeneral Fund, assets provide collateral.

Tax Increment Financing (TIFs)Do not require voter approval, payment linkedto new tax revenues not General Fund, notcounted as debt by some; highest cost, hiddenobligation, rely on growth for repayment.


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RecommendationLocal governments should focus on making

their communities conducive to economic growth and business investment by keeping property taxes, salestaxes, and business regulations and fees low. Further-more, they should avoid implementing new taxes suchas land transfer taxes currently being considered inmany counties.

They should also focus on essential govern-ment services, making sure that these services meetthe needs of business. This would include providingreliable sources of water and transportation servicesthat accommodate the desired lifestyles of the work-force and the needs of industry. This cannot be accom-

plished by targeting businesses for special subsidieswhile burdening local businesses and citizens with thecost of those subsidies.

Background North Carolinas county governments divert

hundreds of millions of dollars to individual busi-nesses in an attempt to attract economic growth and

job creation to their communities.These subsidies come in a varietyof forms, including property taxexemptions, direct cash grants,

land conveyances, and low interestloans.

According to a study by the North Carolina Institute for Con-

stitutional Law, local governments in the state haveshelled out more than $403 million in incentive pack-ages in the period between 2004 and 2006. This rep-resents 66 of the 92 counties from which NCICL wasable to obtain data.

North Carolina has 100 counties. Twenty-sixcounties provided no incentives during this period. By

far the largest incentive package during this time camefrom Caldwell County in its well-publicized deal withGoogle, which totaled $165 million.

Most grants are much smaller than this. Most of

the largesse comes in smaller amounts of less than amillion dollars.

Analysis

The problem with business subsidies is thatwhile they may bene t the targeted business and en

tice it to locate its operations within the county, theyharm existing business and other taxpayers. Such poli-

cies do not generate net bene ts for a county. Insteadthey simply hurt some and help others.

Theres no such thing as a free subsidy. When acounty decides to use tax dollars to entice a new com-

pany to set up shop in a community, that money hasto come from somewhere. Local businesses and their employees must pay more in taxes and other costs

to support the subsidized industry. This is why such

programs are referred to as corporate welfare. Since

higher taxes are an added cost of doing business, these

subsidies depress economic growth for those busi-nesses not receiving the subsidy. In reality the subsi-dies end up being a mechanism for transferring wealthfrom existing businesses to the subsidized businessesand the people who work for them.

Higher taxes for the community at large are notthe only way existing businesses must pay the cost of

these subsidies. The subsidized entrants into the mar-ket add to the demand for workers, driving up labor costs for all businesses that are employing similarlyskilled labor. This effect is particularly pronounced if the unemployment rate is already low. This means thatthe existing businesses not only have to pay for thesubsidies through higher taxes, but, adding insult toinjury, they may also face higher production costs.

The effect of these subsidies is to exempt thesubsidized businesses from bearing the costs of infra-structure needs that their presence generates. Theseinclude the costs of road construction, police and reservices, the costs of new school construction and oth-er public facilities.

It has also become clear that many communities

Economic Development Policy

The problem with busi-

ness subsidies is that

... they harm existingbusiness and other

taxpayers.

ECONOMIC DEVELOPMENT POLICY




will have to make additional investments in reservoirsand other new sources of water. Bonds will be oatedto pay for all this, which will have to be paid back with future property and sales taxes. Many corporatewelfare schemes enacted by localities will simply al-low these new, subsidized businesses to be free riders.Again, this adds to the tax burden on the rest of thecommunity.

There is an alternative. Counties should pursuea policy of sustained economic growth that makes the

possibility of investment attractive to all businesses,not just those favored by local politicians or planners.This policy would seek to keep property and salestaxes and business fees low. But beyond this, the pol-icy should also focus on keeping land-use and other regulations to a minimum. Such regulations drive uphousing and land costs, both of which make invest-ment less attractive.

The primary role of local government is to pro-vide for sound and reliable infrastructure services. This

last includes effective police and re departments, e f-cient trash collection, a road system that is kept in

good repair, a safe and instructionally effective schoolsystem, and a dependable sewer system and water sup-

ply that can accommodate economic growth.The goal should be to create an environment that

is conducive to investment and business activity, notto favor some at the expense of others.

ECONOMIC DEVELOPMENT POLICY

Analyst: Dr. Roy CordatoVice President for Research and

Resident Scholar 919-828-3876 [email protected]

PamlicoRockinghamBladenChathamNashLincolnWakeMcDowellClevelandCravenAnsonDavieLeeTransylvaniaDavidsonDurham

$49.80$45.91$45.16$42.74$42.50$40.09$38.78$38.24$36.34$31.58$30.08$29.12$27.07$24.21$22.64$22.32

BuncombePersonPender Alamance

$8.27$7.70$7.62$3.85

StokesHendersonMartinColumbusScotlandPittFranklinCarteretWilkesWarrenMooreYadkinHarnett

$3.36$3.33$3.29$3.08$2.23$1.93$1.73$1.58$1.56$1.24$1.22$0.53$0.40

CabarrusRowanGreeneWayneRandolphAsheGuilfordGranvilleMitchellCumberlandRobesonMecklenburgJonesStanlyRutherfordUnion

$21.59$17.27$15.88$14.09$13.77$13.71$13.53$13.17$13.05$12.82$12.78$10.83$9.87$9.84$8.92$8.52

CaldwellForsythLenoir New Hanover RichmondNorthamptonHokeJohnstonHalifaxIredellAlleghanyGastonBeaufort

$2095.45$140.02$124.22$95.48$87.05$86.41$73.66$70.04$65.38$63.98$60.60$57.39$55.85

SurryCatawbaWilson

$52.43$52.08$50.63

Per Capita Incentives by County, Highest to Lowest(2004-2006)

Source: Institute for Constitutional Law, The Incentives Game, 2007, and the U.S. Census Bureau.

C I c iv C I c iv C I c iv C I c iv


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Competitive Sourcing

RecommendationCities and counties should establish an aggres-

sive competitive sourcing policy that includes most, if not all, governmental services.

Background Wh i c mp i iv rci g? It is the com-

petitive process for determining the most ef cient andeffective sourceprivate or publicfor performingspeci c governmental functions or services. Competi -

tive sourcing is not the sameas privatization. Instead, acity or county de nes a ser -vice or a function and takes

bids from private and public

providers. The lowest bidwins. Whether the servicestays in-house with govern-ment employees or is con-tracted out to a private provid-

er, taxpayers are the victors. The competitive processensures that the service is provided at the lowest price.As such, it provides a powerful tool for of cials to cutcosts while providing essential governmental services.Savings of 5 to 50 percent due to competitive sourcinghave been reported, with savings in the amount of 20

to 30 percent being common.What city and county services can be com -

p i iv rc ?When the newly incorporatedtown of Sandy Springs, Georgia, reviewed its optionsfor providing city services in 2005, it compared the

price and quality of services previously provided byFulton County to a bid by the international manage-ment rm CH2M Hill OMI. There was no comparison.CH2M Hill OMI saved the city nearly 50 percent of the county costs for the same services. Sandy Springs

rst mayor, Eva Galambos, noted that all the public

works, all the community development, all the ad-ministrative stuff, the nance department, everything[except public safety] is done by CH2M Hill [OMI].Sandy Springs has decided to provide public safety bycreating its own police and re departments. Accord -

ing to Galambos, the city would have preferred to hirea private re company, but none were available in thearea.

How does competitive sourcing save scarce

x r ?The general public knows almost by in-stinct three essential and interrelated economic prin-

ciples: competition, specialization, and bulk buying allsave money. But these principles are often forgotten

when it comes to providing city services. There is amisguided belief that city services can be provided bycity agencies that dont face competition and are oftennot large enough to take advantage of specializationand buying in quantity.

ExamplesJohns Creek, Georgia , followed the model of Sandy Springs, when it became an incorporated townof 65,000 residents in December 2006. It also con-tracted with CH2M Hill OMI in the months before itsopening. CH2M Hill OMI was responsible for thedesign and implementation of all future town func-tions, except public safety. It accomplished those tasksin fewer than 90 days, which allowed Johns Creek tohave just ve public employees. The US Conferenceof Mayors recognized the success of the arrangement

with its Public/Private Partnership Award in January2008.W , f ri , has only nine public em-

ployees on its payroll for a city of more than 61,000residents. Responsibility for the rest of Westons gov-ernmental services has been contracted to private com-

panies. This includes the citys departments of policeand re, nance and administration, community ser vices (parks and recreation), and planning and zoning.Weston boasts that its competitive sourcing approachallows it to acquire and delete the amount of service

it needs at a speci c time and to avoid maintaining burdensome overhead.

Ph ix, ariz , began to accept competitive bids for government services in 1979. Since then, thecity has boasted savings of greater than $41.8 million.

COMPETITIVE SOURCING

Chicago, Illinois, led by Mayor

Richard Daley, privatized

more than 40 services. The

total savings from privatiza -tion efforts from 1995 to 2005

was $175 million.




Phoenix uses competitive sourcing to deliver a varietyof government functions, which range from billing ser-vices to emergency transportation. Of the 65 contractsthat the city government has put up for bid since 1979,

40 have been awarded to private companies. The restare performed by government employees.

I i p i , I i , under the direction of Mayor Stephen Goldsmith from 1992 to 1999, startedto accept bids from private companies to compete withexisting city agencies to perform more than 80 govern-ment services. These services included the sewer sys-tem, trash collection, meter ticketing, the IndianapolisWater Company, anduntil 2006the IndianapolisInternational Airport. These competitive sourcingmeasures resulted in signi cant savings: under Gold -smith, the total was approximately $400 million. Of that $400 million, $15 million came from privatizingtrash collection and $68 million from privatizing thesewer plant. The $68 million in savings represented a44 percent reduction in costs from when the city hadmanaged the sewer.

Baltimore, Maryland, began competitivesourcing when the city faced a major budget crisisin 2001. In response to its nancial woes, Baltimoreclosed its public libraries and re stations, but it need -ed to reduce its costs even further. Since it began com-

petitive sourcing, Baltimore has posted annual savingsthat exceed $8 millionand these savings came from

just eight programs being put up for bid to the privatesector.

Chic g , I i i , led by Mayor Richard Da-ley, privatized more than 40 services. Savings from

privatization efforts from 1995 to 2005 totaled $175million. That does not include the citys lease of theChicago Skyway for $1.83 billion in 2005 and its saleof municipal parking lots to Morgan Stanley for $563million in 2006. (Morgan Stanley will also rebuild theaging garage infrastructurea $65 million deal.) Chi-cago continues to be a leader in competitive sourcing.Currently, it plans to lease its Midway Airport.

Phi phi , P v i , under former mayor Ed Rendell in the 1990s, privatized 49 govern-ment services. By fall 1993, this and other cost-cuttingmeasures enabled him to eliminate a major structuralde cit from when he entered of ce in 1992with -out raising taxes. Outsourced services ran from golf courses to prison services to cleaning City Hall. Somereductions were drastic: priva-tizing one nursing home cutcost by 54 percent ($27 mil-lion). Rendell saved $275 mil-lion for Philadelphia.

New York City, NewYork , using similar tactics,saved $6.2 billion duringMayor Rudy Giulianis ten-ure. The city entered performance-based contractswith private companies to provide services includinghomeless shelters, water-meter readings, and placingwelfare applicants into jobs. It also found private orga-nizations willing to take on city services that sufferedmediocre performance. For example, management of the famous Central Park was turned over to the CentralPark Conservancy, a group of private citizens, whoseefforts produced four times the fundraising and much

better upkeep for the park.

COMPETITIVE SOURCING

Analyst: Dr. Michael SaneraResearch Director and

Local Government Analyst919-828-3876 [email protected]

The principles of com -

petition, specialization,

and bulk buying are often

forgotten when it comes to

providing city services.


14/37



Education

RecommendationLocal government appropriations to school dis-

tricts should be tied to performance-based measuresand innovative practices that ensure sound expendi-ture of local tax dollars.

Background According to state law, local governments

have two primary responsibilities related to the pub-lic school districts within their jurisdiction. First, lo-cal of cials must examine all information bearing onthe nancial operation of the local school district to

determine how much localtax revenue to appropriate tothe district. Approximately

24 percent of total spendingon public education in NorthCarolina comes from localsources.

Second, county com-missions have the right to ac-quire property lawfully on be-half of a board of education,

as well as construct, equip, expand, improve, or reno-vate property for use by a local school system. Theyalso have the power to allow school systems to build

schools on property owned in fee simple by the countyor to purchase or lease property from the board of edu-cation. Local government of cials typically empower the school district to manage the school facilities pro-gram, while school districts rely on county commis-sioners to approve debt in the form of certi cates of

participation (do not require voter approval) or generalobligation bonds (require voter approval).

The state also permits local governments to impose local optional sales taxes, land transfer taxes, andother supplementary taxes to pay for school facilities.

In addition to taxing authority, the state provides lot-tery and corporate income tax revenue to counties for their school capital needs. North Carolinas local gov-ernments spend an average of $900 million every year on school facilities, which represents nearly 80 percent

of all public school capital expenditures in the state.

General principlesWhile school boards control much of the edu-

cational, organizational, and nancial operations of school districts, local governments can guide districtstoward maintaining an ef cient, responsive, and high-

performing public school system.Principle No. 1. Local governments should

closely monitor county appropriations to school dis-tricts and measure the effectiveness of the funding.For the 20062007 school year, local governments in

North Carolina allocated nearly $2.7 billion, or an av-erage of $1,934 per pupil, in county appropriations,supplemental taxes, and other revenue sources for

public schools. Given the amount of money involved,local government of cials have the responsibility tomonitor and hold school boards accountable for theuse or misuse of local tax dollars allocated to schooldistricts.

Principle No. 2. Local governments should payspecial attention to spending on school district per-sonnel. Salary and bene ts for school personnel represent the largest single category of expenditure bylocal government in North Carolina. Last year, localgovernments spent $1.67 billion on salary and bene ts

for school personnel, accounting for approximately 62 percent of their total expenditures on public education.The use of local funds for the salary and bene ts of teachers, administrators, and other personnel should

be closely tied to various performance measures, aswell as adjusted to re ect yearly enrollment changes.Speci cally, school systems should use outcome-

based measures, including test scores, to reward theefforts of successful teachers and administrators. Lo-cal funds should also be used to attract highly quali edscience, mathematics, and special education teachers

to low-performing schools.Principle No. 3. Local governments should

minimize the amount of debt incurred for school capi-tal expenses by offering incentives to school districtsto use proven, cost-ef cient solutions that do not bur

EDUCATION

North Carolinas local gov -

ernments spend an average

of $900 million every year

on school facilities, which

represents nearly 80 percent

of all public school capital

expenditures in the state.




den county taxpayers and enhance educational oppor-tunities for students. Last year, local government debtservice for school facilities reached $588 million, theresult of debt nanced to maintain costly school con -struction programs. Charter schools, public-private

partnerships, adaptive reuse buildings, ninth-gradecenters, satellite campuses, and virtual schools allowschool districts to increase school building capacityfaster and cheaper than conventional school construc-tion and renovation methods permit.

Taking the Guesswork out of the Budget Process

Local governments should revise the budget process to include a host of quanti able or measur -able goals and speci c strategies used to achieve thosegoals. The state and federal government provide sev-eral measures of student achievement, but they do not

provide enough information to anyone attemptingto determine whether a school district uses its localfunding to increase student performance.

Thus, local governments should require schooldistricts to supplement state and federal data with an-nual studies, audits, and surveys, providing a com-

prehensive assessment of school district performance.This data would provide measurable goals that formthe basis of a sound budget process that ultimatelydetermines whether school districts spend local taxdollars wisely.

Analyst: Terry StoopsEducation Policy Analyst


EDUCATION

Source: North Carolina Department of Public Instruction, Financial and Business Services,2006-07 Selected Financial Data, November 2007, www.ncpublicschools.org/fbs/re-sources/data/


16/37



Fresh Water and Wastewater Services

Recommendation North Carolina city and county water and waste-

water services should be contracted to private rms or converted into privately owned, government-regulatedservices.

Background Privatizing water and wastewater services is not

a radical idea. More than 40 percent of the nationsdrinking water systems are privately owned withgovernment regulation controlling quality and price.Between 1998 and 2001, cities that chose to contractfresh water and wastewater services to private rmsdecided to keep their water systems in the private sec-tor 91 percent of the time (see chart).

North Carolina faces many problems with freshwater and wastewater services that could be solved by

privatization. The 2007 drought caused several com-munities to place strictcontrols, enforced with$1,000 nes, on howcitizens used water.This exclusive focuson reducing demanddiverted the publicsattention away fromgovernment failuresto price water prop-erly and plan for ad-equate supply. But lo-

cal governments often respond to political incentivesand set prices well below the market rate. This inevi-tably leads to shortages. Private ownership creates in-centives to price water based on market forces and toincrease the water supply and avoid shortages.

Citizens also have experienced serious con-tamination of fresh water due to government ownedwastewater systems. Wilmington was forced to closeswimming and shing areas when 4 million gallonsof untreated sewage went into Hewletts Creek. Cary

had similar problems when millions of gallons in rawsewage contaminated Swift Creek, causing the closureof Lake Wheeler and Lake Benson. However, with

privatization these problems are less frequent. Private

companies that face competition for government con-tracts have incentives to act responsibly and preventcontamination.

Additional advantages of water privatizationThe U.S. Clean Water Act requires cities and

counties to install costly equipment to prevent water pollution. To meet this federal mandate, the Envi-ronmental Protection Agency suggests privatization

because of the increased ef ciency of private sector rms. In many cases, areas that have chosen this path

have even seen private rms surpass EPA standards.Privatization contracts often include cost, qual-

ity, and customer service criteria that private serversmust adhere to in order to maintain their contracts.With public water operations, citizens have fewer guarantees. If a citys public water system is inefcient, there are few consequences. However, if a pri-vate supplier is inef cient or endangers water quality,they risk losing their contract to a competitor. For thisreason, citizens bene t greatly from the privatizationof water.

Should we trust the private sector?Through government regulation, water safety is

achieved in both publicly funded and privately ownedwater services. The pro ts of private water companies are contingent on their maintenance of high levelsof safety. Many other important goods, such as foodand medicine, come from the private sector. Peopletrust that with close government inspection and pri-vate companies incentive to maintain a positive im-age, these goods will be safe. Privatized water is nodifferent. With privatized water that must adhere tostrict quality regulations, water safety is preserved andcan even be improved.

If a citys public water system

is inef cient, there are no

consequences. However, if a

private supplier is inef cient or

endangers water quality, they

risk losing their contract ....For this reason, citizens ben -

e t greatly from privatization.

FRESH WATER AND WASTEWATER




How do local of cials maintain control and accountability of private providers?

Many water and wastewater contracts have suc-cessfully been written. Contracts can specify measur-able performance standards to monitor private rms.By only providing compensation when these goals aremet, local governments are able to maintain a highlevel of control over the water supply. These contractscan include both safety and quality terms, as well as be

exible to a communitys particular needs.When local governments opt to convert their

water operations to a privatized service, they can re-tain some power through regulation. If the private

rm does not adhere to these regulations, it risks be -ing ned or shut down, as well as the potential loss of

customers. For these reasons, private water systems

have an incentive to follow the regulations and deliver a high-quality service at a low price.



FRESH WATER AND WASTEWATER


18/37



Parks and Recreation

RecommendationCities and counties should restructure their

parks and recreation departments so they do not in-clude services already offered by the private sector or those that serve only a small minority of residents.Local governments should also implement user fees torecover the costs of services that bene t only special -ized groups.

Background The role of the city and county parks and rec-

reation (P&R) departments is to provide citizens withsports, exercise, and outdoor activities. However,many P&R departments have stretched outside thesetraditional boundaries by providing uncommon ser-

vices that bene t only a minority of citizens. P&R departments also provide many services and facilitiesalready offered in the private sector. Not only is gov-ernment sponsorship of these services unnecessary,

but it threatens the for-pro t and non-pro t organizations that provide them with government competition.With the wide variety of activities and services nowoffered by many North Carolina cities and counties,

local P&R departments have also lost focus.In order to ensure the best use of taxpayer dol-

lars, local P&R departments should invest in proj-ects that bene t the greatest number of people. Theyshould also avoid services that can be found in the pri-vate sector, as well. Finally, local P&R departmentsshould charge service fees for those facilities that areused by a minority of the community members to en-sure that those who bene t from these facilities arealso the ones who nance them.

General PrinciplesIn order to better serve the recreational inter-

ests of the general public, local government of cialsshould follow three guiding principles to keep P&R

City City Recreation Dept.Fitness Center AverageMonthly Adult Fee

Non-proft or For-proft Fitness Center Average Monthly Adult Fee

Charlotte $28 YMCA: $73.33; Planet Fitness: $17.41

Wilmington $4.16 ($50 Annually) YMCA: $33.16; Planet Fitness $17.41

Greenville $28.03 Champions Health and Fitness $35.33

City vs Non-Pro t and For-Pro t Fitness Centers

City City Recreation Dept.Martial Arts FeePrivate For-proft Average Monthly Fee

Mooresville $50 Monthly ATA Karate: $125.00

High Point $7.00 Registration/$7.00 Per classTriad Martial Arts Training Center:$40.00 (Two classes, uniform, and oneprivate session)

Goldsboro $6.00 Registration/$6.00 per classGoldsboro Elite Martial Arts: $79.00Adults, $55.00 Kids

City vs For-Pro t Martial Arts Centers

PARKS AND RECREATION




departments within proper boundaries.Principle No. 1: P&R departments should not

compete with services already provided by the privatesector (for-pro t and non-pro t).

Across North Carolina, many private recre-ational centers provide swimming pools, golf courses,gyms, and other athletic services. These facilities arethe source of income for many North Carolinians.When P&R departments operate similar facilities,they threaten the business of these citizens. P&R de-

partments have an unfair advantage over private sector services because they have access to tax dollars. Theyalso do not have to pay taxes on their facilities andland as private sector businesses do.

Public facilities also compete with privatenon-pro t rms, such as the YMCA. These organiza -tions rely on user fees and private charitable donationsto stay open and pay employees. Competition fromtaxpayer-funded P&R departments is harmful and un-fair.

Principle No. 2 : Where services are providedfor speci c activities, user charges should capture thetotal costs of the activity.

Community members who do not bene t fromspecialized P&R department services should not have

to bear the cost of them. User fees should be chargedthat would cover capital costs, administration costs,maintenance costs, and the taxes that would have

been charged had the service been provided by the private sector. For example, softball league user feesshould cover the costs associated with a public soft-

ball complex. Local governments should implementaccounting systems to ensure that these costs are fullyrecovered. P&R departments should use their limitedfunds to offer services that are bene cial to the entirecommunity.

Principle No. 3 : Cities and counties should di-vest themselves of services that are used by a smallminority of the population or the upper economic seg-ment of the community.

When local governments use taxpayer funds tosubsidize highly specialized recreational activities,they are bene ting a tiny segment of the community atthe expense of the whole community. This problem has

manifested itself in North Carolina most noticeably incity-owned golf courses. In general, higher- incomeindividuals tend to use these more than lower- andm i d d l e - i n -come people.Ta x p a y e r sshould nothave to fundthese proj-ects becausethey do not

bene t most people.

C i t y -owned and-o p e r a t e dgolf coursesalso unfairlycompete with private courses that pay taxes. Thesetaxes are subsidizing their competition. In addition,many of these private courses are open to the publicand charge green fees comparable to the subsidizedrates at the city courses. P&R departments should getthe most out of taxpayer funds by investing in recre-ational facilities and services that bene t a majority of community members.



PARKS AND RECREATION

City Averageloss per year Average taxpayer subsidy per round

Sanford $210,918 $8.43Mooresville $87,918 $1.75

Thomasville $608,286 $20.27Lexington $188,383 $6.27

Wilson $201,454 $4.67

Burlington $179,854 $5.03

Recent Annual Losses By City-OwnedGolf Courses

See John Locke Foundation Spotlight reports on city-run golf courses.


20/37



Land Use and Zoning

RecommendationCity and county elected of cials should reform

current land-use and zoning regulations to minimizedetailed regulatory control and maximize markettrends.

Background Zoning to control land use originated in Ger-

many in the late 1800s and was adopted by many parts of the U.S. in the 1920s.Unfortunately, U.S. plannersquickly distorted the Germanmodel and created a planningfad. Many of the complaintsabout current land-use pat-

terns, such as sprawl, can betraced to existing zoning regu-lations that strictly separateresidential, commercial, andindustrial uses. Thus, the in-creased use of zoning to solve

problems will likely back re,making problems worse. Therefore, it is time to con-sider comprehensive reform of city and county landuse regulations.

Zoning Myth and RealitySupporters tout zoning as an objective, profes-

sional, and ef cient process that controls land uses inways that bene t the entire community. But as anyonewho has experienced it rsthand knows, the zoning

process is in reality a highly politicized process wherethose with power in the community often gain advan-tages at the expense of those who lack it.

The result of many of these zoning regulations isto enrich existing property and homeowners by reduc-ing the supply of buildable land. Zoning is a way toincrease an individuals wealth by voting for restric-tive policies that result in higher home values.

Back to BasicsPrinciple No. 1 : Modern land use must be

based on simpli ed and exible rules.For example, one residential, one commercial,

and one industrial zone could be established. Any broadly de ned use would be permitted in those zones.Mixed use within these zones would be permitted byallowing residential in commercial zones and com-mercial in industrial zones.

By simplifying its land-use regulations, Ana-heim, California, was able to redevelop successfullya rundown light industrial zone. The city added anoverlay zone that allowed residential and commercialuses. The city also streamlined its permit and environ-mental processes to attract developers. This spurredeconomic development of the area.

Cities and counties should also remove zoninglimitations to land-use innovations such as coving and

bay home developments. When developers use cov-ing, they build homes in an inconsistent pattern sep-arate from the pattern of the streets. Coving allowsfor larger lot sizes without using more land. Other

bene ts of coving include reduced road lengths, lesserosion from runoff, as well as greater privacy for ho-meowners.

Bay homes are another way to reduce infrastruc-ture costs and create more open space. Bay homesare arranged so that families share the spaces outsidethe homes with other members of a homeowners as-

sociation. Government hurdles such as speci ed minimum distances between home and streets often keepdevelopers from building bay homes, however, despitetheir bene ts. Local governments that present developers with these limitations make it hard for them touse these and other innovative techniques. Remov-ing these zoning barriers would be bene cial to manycommunities.

Principle No. 2 : Depoliticize decisions.

Elected leaders must move to depoliticize thezoning process by allowing only those parties di-rectly affected by the land-use decisions to comment

on them. Of cials should restructure the process tore ect its original goal of preventing one landowner

from using his land to directly harm anothers. Only

LAND USE AND ZONING

Supporters tout zoning as

an objective, professional,

and ef cient process

that controls land uses in

ways that bene t the en -

tire community. In reality

... it is a highly politicized

process.




those landowners who can show a direct and identi -able harm should be granted standing to commenton land-use decisions. This reform would go a longway toward taking the politics out of zoning and land-use decisions.

Principle No. 3 : Moratoriums, impact fees, andadequate public facilities ordinances (APFOs) dont

solve growth-related problems; they create them.

Moratoriums can be devastating to the liveli-hoods of people whose employment is related to con-struction. These hurt developers, construction work-ers, bankers, lawyers, and people looking to sell their land. The negative consequences outweigh the pro-

posed bene ts.Impact fees and APFOs are designed to com-

pensate for the costs associated with increased growth.However, they are often unfairly applied, driving upthe cost of housing. These fees should represent thedifference between the cost of providing public ser-vices for the new development, and the income gener-ated through the property and sales tax revenue thatcomes from new home development. APFOs forcedevelopers to pay voluntary fees to cover public ser-vice costs. These fees are later passed on to homebuy-

ers. Through this process, housing costs are further increased. The result of impact fees and APFOs is thathomebuyers are forced to pay their local governmentstwice for the costs the city incurs from growth. Buyers

pay in the form of higher housing costs and propertyand sales taxes.

Instead of forcing developers to pay impact feesand APFOs, counties and cities should use marginal-cost pricing for public services. Developers shouldcover only the direct costs of extending infrastruc-ture to new housing. For example, if a new housing

development is located far away from the citys wa-ter and sewage lines, the developer should cover the

costs associated with connecting the development tothe system. This will save homebuyers from increasedhousing prices that are a result of impact fees and AP-FOs. It will also help prevent sprawl by making itmore bene cial for developers to build closer to thecitys existing facilities.

Principle No. 4 : Re-establish the rule of law .Too many land-use regulations allow too much

discretion on the part of the planning staff, planning boards, and elected bod-ies. Housing costs aredriven up by a time-con-suming process and public

input. Cities and countiesmust establish a clear setof simple, exible writtenrules. Once a developmentmeets these requirements,the approval should be au-tomatic. By simplifyingland-use and zoning regulations, local governmentscan avoid many of the costly negative effects of exces-sive government regulation, as well as allow greater freedom for developers and property owners.

LAND USE AND ZONING



Impact fees and APFOs are

designed to compensate for

the costs associated with

increased growth. However,

they are often unfairly ap-

plied, driving up the cost of

housing.


22/37



Smart Growth

Recommendation North Carolina leaders should embrace a mar-

ket-friendly alternative to Smart Growth in whichconsumer choices and prices are given deference over

bureaucratic planning and guesswork. Flex Growthtools such as marginal-cost pricing, voluntary open-space protection, and more exible zoning codes thatallow mixed-use developments are available withoutadditional state legislation.

Background North Carolinas rapid population growth has

created challenges and oppor-tunities for the states cities andcounties. Many local policy-

makers see only the problemsand are reacting with counter-

productive land-use controlscalled Smart Growth whichadvocate greater governmentcontrol over development,housing, transportation, and

consumer choice. Smart Growth typically focuses onfour activities:

Creating urban growth boundaries that driveup housing prices beyond the reach of low-and middle-income families.Using zoning to restrict housing optionsto crowded multi-family townhouses andhigh-rise condos.Discouraging driving by limiting spendingon road improvements, thus purposely cre-ating more traf c congestion.Allocating gasoline taxes paid by auto us-ers for roads to increase funding for masstransit.

The results of Smart Growth have been highhousing costs, traf c congestion, and expensive plan -ning penalties for many homebuyers.

North Carolina cities that have implementedSmart Growth techniques have experienced far morehousing problems than those who have not. Housing

prices in Asheville and Wilmington, cities that have

experimented with growth planning, have risen dra-matically. However, in Fayetteville and Hickory, twocities that have stayed away from Smart Growth plan-ning, housing prices have grown at a much slower rate. High housing prices make it harder for peopleto buy their own home or upgrade to a larger home astheir family grows. North Carolina cities should avoidSmart Growth policies in order to keep housing pricedat fair values and promote home ownership.

The high-density housing projects supported by Smart Growth advocates also contribute to traf-

c congestion by adding more drivers to the streets.Rather than building more roads to accommodate theincrease in demand, Smart Growth proposes increasedspending on mass transit. These projects cost millionsof dollars to construct and maintain. However, fewcitizens use them.

The high expense associated with mass tran-sit projects does not pay off in the long run. Masstransit also takes away funds from much-needed roadconstruction and improvement projects that actuallyalleviate congestion (See Public Transit, p. 26). Alarge portion of transportation funds come from gaso-line taxes. These taxes are meant to go toward roadconstruction, but many times are used for mass tran-sit. This is unfair to the drivers who are forced to paythese taxes. Local governments need to meet the cur-rent needs of their community by investing in roadway

projects before they attempt to force people from carsto mass transit.

Many Smart Growth advocates attack urbansprawl by saying that it is costly for taxpayers. In fact,the effects of sprawl are often positive. A 1999 JLFstudy on growth and taxes in North Carolina disprovedmany Smart Growth theories. The study found thatcities with newer homes have, on average, lower taxesthan those with older homes. The study challenged

SMART GROWTH

North Carolina cities that

have implemented Smart

Growth techniques have

experienced far more

housing problems than

those who have not.




the idea popular among Smart Growth advocatesthat growth raises taxes through increased demandfor public services. The study also found that the tax

burden decreased as the percentage of single-family

homes increased, disproving the theory that it is moreexpensive to provide services to single-family homes.Finally, the study refuted the idea that higher densi-ties and greater reliance on transit reduces commutingtimes and improves transportation access by showingshorter commutes and less-congested highways incommunities experiencing sprawl.

The results of this study show that there is littlefactual support for many of the Smart Growth argu-ments. While many proponents suggest that SmartGrowth is needed to combat the negative effects of sprawl, sprawl can actually be bene cial to a commu -nity. In many cases, Smart Growth policies only addnew problems.

The Flex Growth AlternativeRather than continuing the trend toward Smart

Growth, policymakers should move toward a moremarket-oriented approach. JLF analysts have pro-

posed Flex Growth as a way for leaders to face theissues involved with rapid growth while still protect-ing property rights and individual choice.

The following elements of Flex Growth will al-low communities to experience healthy growth with-out excessive government interference.

Pursuing neutrality by avoiding subsi -i . Local policymakers should not subsi-

dize some businesses and not others. Rather than forcing the growth of certain industries,they should allow consumer demand to de-termine how their community will grow.With this approach, only the businesses that

can pro t in a city, without government aid,will remain in business.Imp m i g m rgi -c prici g igrowing areas. Infrastructure costs shouldaccurately re ect the full cost of providing

services to a new development. This planwill help cities avoid double taxation of homebuyers as well as prevent sprawl bymaking it more cost effective to build closer

to the city.Changing zoning laws to allow for de -velopment based on consumer demand. Mixed-use zoning should be implementedto allow developers greater freedom for their projects. With this move, consumerswill have the ability to control how their community develops. Growth will comefrom public demand rather than govern-ment planning.Protecting open space with voluntaryprograms rather than costly regulations. Programs such as tax credits and land trustsmake it more bene cial for developers toleave room for open space without penal-izing them if they choose not to do so. Thisapproach provides an incentive for develop-ers to have open space while avoiding ex-cessive government regulations.Providing suf cient roads and highwaysfor growing areas. Rather than investingin mass transit options such as light rail,which have often proved to be costly andineffective at relieving traf c congestion,local governments should improve roadwaysystems.Strengthen private property rights. Bygiving property owners greater freedom,

prices can re ect the most valuable use of land in a local market.

SMART GROWTH




24/37



Affordable Housing

RecommendationCities and counties should abandon burdensome

and counterproductive affordable housing and inclu-sionary zoning policies. Instead, they should adoptless stringent land-use management ordinances tolower construction costs and increase housing stock.

Background What is affordable housing? Affordable hous-

ing includes initiatives to bring affordable homesinto a municipality. Afford-ability is de ned by the gov -ernment. It divides householdsinto different strata based onincome relative to the area

median income (AMI), as de-ned by the U.S. Department

of Housing and Urban Devel-opment. For example, moderate-income households aremost often de ned as those

between 80 percent and 100 percent of the AMI.Affordable housing initiatives are voluntary in

theory. Governments try to entice builders to con-struct affordable units, so in exchange, they will offer

builders rewards like increased building density or

oor-area ratios. But governments may overstep their bounds and rig the system. Carrboro, for example, re-quires builders who do not offer 15 percent affordablehousing to meet with the Board of Aldermen for anAffordable Housing Review Meeting.

Wh i i c i r z i g? Inclusionary zon-ing mandates affordable housing. Local governmentsrequire that a percentage of new home construction

be designated as affordable. These homes are sold ata government-set price which does not consider con-struction cost or market value. Not only must builders

sell affordable units at this price, they must also guar-antee the homes affordability for a time period thatcan range from 10 years to perpetuity.

Wh i h c i c i r z i g? Inclusionary zoning results in fewer new homes and

higher prices for all homes. It is counterproductive for getting low- and middle-income families into homes.

Inclusionary zoning functions as a tax on homebuilders. Constructing new homes becomes more ex-

pensive. Builders take on administrative costs whenthey must guarantee the homes affordability for a setnumber of years. Additionally, affordable homes aremost often sold at a below-market price; therefore,each sale of an affordable home represents a signicant opportunity cost. As a result, builders will producefewer homes. Some may even choose to do business inneighboring municipalities without inclusionary zon-ing ordinances.

Moreover, housing markets automatically pro-

duce affordable housing. As the incomes in an arearise, people buy larger, higher-priced homes, leaving

behind homes that sell at affordable prices. (Just likeaffordable automobiles are often found in the usedcar market, affordable housing is typically found inthe used home market.) Inclusionary zoning, espe-cially when coupled with restrictive land-use policies,

breaks down this process. These regulations increasethe cost of all homes, not just new homes. As a result,middle-class families are priced out of the market.They can neither qualify to purchase government-

mandated affordable homes nor afford to purchase amarket-rate home.

What are the concerns with inclusionary zoni g? Inclusionary zoning is ineffective, inef cient, inequitable, and probably illegal in North Carolina.

I g North Carolina law has a strict ban on rent control. Rental units are notincluded in inclusionary zoning for thatreason. Even so, the ordinances could still

be illegal. Chapel Hill, formulating its own

ordinance, fears becoming a test case tochallenge the laws validity.I c iv Inclusionary zoning producesthe opposite of its intended effect: it pro-duces less affordable housing, not more. A

Inclusionary zoning forces

homebuilders and market-

rate homebuyers to subsi-

dize the affordable home

purchases. It amounts to a

hidden social welfare tax.

AFFORDABLE HOUSING




2004 Reason Foundation study documentedthis in California. After the adoption of in-clusionary zoning ordinances, housing pro-duction fell. Prices skyrocketed by $22,000to $44,000 in median cities and by morethan $100,000 in hot markets. Inclusionaryzoning results in fewer homes sold at higher

prices.Inef cient Inclusionary zoning is costly.It functions as a social welfare tax, reduc-ing the supply of housing while increasingthe cost. Both homebuilders and new home-

buyers must pay. Reducing burdensomeland-use regulations would lower home

prices more effectively and cheaply. Thisdecrease would lower construction costs,and therefore, house prices.Inequitable Local governments haveembraced inclusionary zoning because it

provides affordable homes without govern-ment cost. But it forces homebuilders andmarket-rate homebuyers to subsidize the af-fordable home purchases. It amounts a hid-den social welfare tax.

How can local governments provide afford -able homes? Local governments should change

burdensome land-use regulations. These regulations(Smart Growth) include everything from speci croad setbacks to open space requirements to architec-tural design standards. They signi cantly affect home

prices: buyers pay a planning penalty, an arti cialin ation of the homes price as a response to these reg -ulations. A 2006 John Locke Foundation policy reportfound Asheville buyers planning penalty was $13,901and Wilmington buyers penalty was $21,675.

Overhauling land-use management ordinances and, in particular, smart growth measureswould di-rectly lower the cost of homes. That means the marketwould be able to provide more homes at lower prices,without targeting homebuilders and homebuyers.

ExamplesTwo North Carolina cities have adopted inclu-

sionary zoning: Davidson and Manteo.d vi was the rst, adopting the ordinance

in 2001. Its inclusionary zoning ordinance mandatesthat 12.5 percent of homes be affordable (although

builders of less than eight units may make a payment-in-lieu). Davidson requires these homes be affordablefor 30 years.

Manteo adopted inclusionary zoning in 2003.It requires that 20 percent of homes in developmentsof ve units or more must be affordable. Householdswith pre-approved loansapply for ownership of anaffordable unit. The sys-tem ranks potential own-ers: residents and townemployees of one year are

preferred to four other cat-egories, the last of whichincludes general public.

Ch p Hi is aboutto be the rst Triangle city with inclusionary zoning.The Town Councils task force delivered its nal reportin November 2006. The Council authorized $25,000in January 2007 to pay a legal consultant, hired in thatspring. The consultant delivered his rst draft to theChapel Hill Planning Department in June 2007. Sincethen, the Planning Department, Task Force, and con-sultant have been revising the ordinance.



AFFORDABLE HOUSING

They [land use regulations]

signi cantly affect home

prices: buyers pay a planning

penalty, an arti cial in ation

of the homes price as a re -

sponse to these regulations.


26/37



Air Service

RecommendationCommunities should recognize the changing

economics of air travel, and not expend resources pursuing questionable attempts to attract or keep air service.

Background Airline economics: The economics of the air-

line industry has changed dramat-ically in recent years, with the bar

being raised for communities toretain scheduled air service. Thisis a trend that will continue in thefuture, with more communitieslikely to lose scheduled airline

service over time. In addition, itwill be dif cult for communities

outside of Charlotte, Raleigh, and Greensboro to at-tract additional air service.

Why aviation is a questionable expenditure for city and county governments

Diffuse demand. While there is demand for air travel from many communities, it is diffuse as itinvolves people going to a multitude of different -nal destinations. Only the states top markets gener-ate enough travelers to ll even a single daily ight toa single destination. To address this problem, airlinesoperate connecting points hubs which allowsthem to bring passengers going to different locations(spokes) to a single location and change planes to their

nal destinations.Hubbing airlines. There was a time that com-

munities like Charlotte (CLT) had their hub paid for through higher fares. The hubbing airline dominatedthe market, and there was limited competition as low-cost carriers usually only nibbled at the edges. Those

days are largely over. Most travelers want to go tomajor destinations, and low-cost carriers like South-west, Airtran, and jetBlue have increasingly focusedon major markets. Charlotte has become much morecompetitive in past few years. U.S. Department of

Transportation data show Charlotte yers paying anaverage of a 15 percent fare premium in the third quar-ter of 2007 still on the high side, but nowhere near as bad as the 38 percent higher prices at CLT of veyears earlier.

Higher cost per average mile. The aircraftsused to serve smaller communities have a higher cost

per average seat mile (CASM) as compared to thelarger jets commonly own out of Charlotte and Raleigh-Durham. To compensate for the higher CASM,airlines must charge a higher price to serve smaller communities. Unsurprisingly, many travelers bypasstheir local airport and drive to Charlotte or Raleigh totake advantage of the lower fares and greater variety

of ights.Greenvilles airport manager recently estimated

that 75 percent of the citys air passengers drive toRDU rather than using Greenvilles ve ights a dayto US Airways Charlotte hub. Were selling conve-nience, he said. But at the higher prices, most cos-tumers are not buying.

Some passenger planes are no longer being

produced. The aircraft traditionally used to servesmaller communities, the 19-seat turboprop, is nolonger cost-effective in most applications and is outof production. Only three of US Airways 570 ightsa day out of its Charlotte hub are now on 19-seaters,and those are federally subsidized Essential Air Ser-vice ights. Communities such as Hickory, Kinston,Moore County (Southern Pines), Rocky Mount, andWinston-Salem that cant generate enough passengersto support 37- to 50-seat aircraft have simply lost allservice. Likewise, nonstop service between cities suchas Raleigh-Asheville, Raleigh-Norfolk, and Raleigh-Charleston, S.C., that had relied upon 19-seat turbo-

props has also disappeared.Larger planes are taking their place. In the

medium term, the bar for air service will rise again.The smallest airliners now in common usage, thoseseating 50 or fewer passengers, have largely gone out

Only the states top

markets generate enough

travelers to ll even a

single daily ight to a

single destination.

AIR SERVICE




of production in the last few years. Airlines are begin-ning to replace their existing eets of 37- to 50-seat -ers with planes that carry 70 or more passengers. Highfuel prices will accelerate this trend.

Limited time and place ights are not an eco -nomic development tool. An exception to the tradi-tional hub-and-spoke model is provided by airlineslike Allegiant Air, which offers ights a few days aweek and sometimes only seasonally at that to

popular vacation destinations like Orlando and TampaBay from secondary markets including Greensboroand Wilmington. While such ights are a welcome de -velopment for leisure travelers going to high-demandspots, they offer essentially no opportunity for connec-tions to other cities. As such, these ights offer noth -ing for business travelers and cannot be considered aneconomic development tool.

New entrants have a tough time. The airlineindustry has traditionally not been kind to new en-trants, and offering government incentives to startupsdoesnt change that equation. Among the latest start-ups to fail was Skybus Airlines. Despite having beenin business for all of ve months and operating ve

planes at the time, Piedmont Triad International Air- port (PTI), regional economic development groups,and the state still offered Skybus up to $57 million inOctober 2007 to establish its second focus city at PTI.The airlines PTI operations ramped up in January, hit18 ights a day in March and the carrier shut downin early April, even after millions in taxpayer moneywas spent on advertising.

Air-taxi service is questionable. The next bigthing in air service for smaller communities is air-taxiservice. In 2007, the N.C. Department of Transporta-tion in a consortium with 11 smaller communities wasawarded a federal grant to market this solution. Thehighly respected aviation-consulting rm The BoydGroup had this to say about air-taxi service last year:Then we have the air-taxi solution, where suppos-edly some entity will get a eet of Cirrus or Eclipseor Adam aircraft, and take advantage of all that pent-

up demand in underserved small communities. Its thelatest mantra. Its the solution to the future. Its alsocomplete hogwash. (emphasis added) To underscorethe point, Adam Aircraft led for Chapter 7 bankrupt -

cy (liquidation) in February 2008.Fewer private pilots. Despite increases in

population and income, the number of private pilotsnationally continues to decrease . In 1980, there were827,000 active pilots.Today its just under 600,000. High fuel costsare all but certain to re-duce the number of stu-dent pilots who obtaintheir pilots license in thefuture and the amount of

ying that existing pri -vate pilots do. Thougheach airports situationis different and must beevaluated individually, the continuing decline in gen-eral aviation makes government attempts to cater to

private pilots a problematic strategy going forward,especially given the high fue prices and the potentiallyhigh cost and large land area required for infrastruc-ture improvements.

Analyst: Michael LowreyEconomic Policy Analystmlowrey@in online.net

AIR SERVICE

Despite increases in popula -

tion and income, the number

of private pilots nation-

ally continues to decrease

. . . mak[ing] government

attempts to cater to private

pilots a problematic strategy.


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Public Transit

RecommendationThe transportation needs of citizens should dic-

tate what modes of transportation are used in a publictransit system. This seemingly obvious recommenda-tion frequently gets lost in discussions about publictransit.

Background North Carolina transit systems have become less

about transportation and more about creating commu-nities that t the vision of planners. Transportation

policy is too important for much-needed resources to be expended in a manner that has nothing to do withtransportation.

Developing an Effective Public Transit System Transit is a mobility provider. The proper role of transit is to provide mobility for customers.As transportation expert and University of NorthCarolina at Charlotte professor emeritus Dr. DavidHartgen argues, transit systems should not be viewedas saviors of urban problems.

Unfortunately, transit has become less aboutmobility and more about centrally planned communi-ties. Instead of transportation meeting the needs of the community, the community is changed to meet theneeds of a speci c mode of transportation, such as rail.This tail wags the dog philosophy often is referred

PUBLIC TRANSIT

MPO Region(in thousands of dollars) Transit Share

of Funds(percent)

Transit Share of Commuting

(percent)Highway Transit Other Total Funding Charlotte $4,699 $6,346 -- $11,045 57.5% 2.6%Raleigh $5,726 $2,174 -- $7,900 27.5% 1.2%

Durham $2,778 $3,104 $240 $6,122 50.7% 3.0%Greensboro $2,955 $743 $115 $3,813 19.5% 1.3%

Winston-Salem $2,362 $43* -- $2,362 1.8% 1.5%

Fayetteville $2,153 $200 e -- $2,353 e 8.4% 0.8%Hickory $1,680 $116 -- $1,796 6.5% 0.3%Concord $1,421 $50 e -- $1,471 e 2.9% 0.4%

Asheville $1,298 e $42 e $70 e $1,411 e 3.0% 0.8%Wilmington $1,193 $180 $8 $1,380 13.0% 0.9%

High Point $1,071 $9* -- $1,071 0.8% 1.3%Gastonia $934 $95 -- $1,030 9.3% 0.3%

Goldsboro $900 $34 $11 $945 3.6% 0.4%Jacksonville $682 $37 $8 $727 5.1% 0.8%

Greenville $533 N/A -- $533 N/A 0.8%

Burlington $492 N/A -- $492 N/A 0.1%Rocky Mount $322 $1 -- $323 0.4% 0.4%

Long-Range Plan Funds by Mode

e estimate* through 2010 Latest: $8.4 billion

See: Hartgen, David. T, Ph.D., Traf c Congestion in North Carolina: Status, Prospects, and Solu -tions, John Locke Foundation, March 2007. Table II.A.2: Long-Range Plan Funds by Mode: http:// www.johnlocke.org/site-docs/traf c/01IntroandRecs.pdf



CITY AND COUNTY ISSUE GUIDE 2008 | 27PUBLIC TRANSIT

to as transit-oriented development.A quote by Charlotte-Mecklenburg planning

director Debra Campbell in the June 2007 edition of Governing is illuminating and chilling:

We always saw transit as a means, not anend, says planning director Debra Campbell.The real impetus for transit was how it could help us grow in a way that was smart. This re-ally isnt even about building a transit system.

Its about place making. Its about building acommunity.

Privatize when possible. The governmentshould eliminate existing regulations that make it dif-

cult for private modes of transit to develop, such as private shuttles.

Spend a Proportional Amount of Money ontr i . One of the most striking developments inthe states transportation policy is the disproportionalshare of proposed spending on transit (p. 26). Spend-ing should be commensurate with how much individ-uals actually use transit.

Avoid the Romance of Rail . Transit improvements, such as better bus systems, are not asexciting as building shiny new trains. However,

rail is a poor way to meet the needs of transit riders.As the table to the left shows, the market share of raileven in high-density areas is remarkably low.

Analyst: Daren Bakst, J.D., LL.M.Legal and Regulatory Policy Analyst


Source: This table was developed using data provided bythe American Dream Coalition and the Thoreau Institutecompiling elds from the National Transit Database.The rail share was calculated by dividing total rail

passenger miles by total passenger miles for all travel methods, including rail and automobile.

Urbanized Area Rail ShareMotor Vehicle

Share

Atlanta 0.64% 98.93%

Baltimore 0.33% 98.55%

Boston 2.53% 96.89%

Buffalo, N.Y. 0.10% 99.41%

Chicago 2.69% 96.30%

Cleveland 0.30% 98.72%

Dallas-Ft. Worth 0.22% 99.31%

Denver 0.15% 98.63%

Los Angeles 0.48% 98.20%

Miami 0.28% 98.97%

New York 7.35% 90.34%

Philadelphia 1.58% 97.45%

Pittsburgh 0.13% 98.62%

Portland 0.85% 97.50%

Sacramento 0.29% 99.28%

Salt Lake City 0.41% 98.90%

San Diego 0.55% 98.70%

San Francisco 2.86% 95.81%

San Jose 0.30% 99.08%

Seattle 0.08% 97.47%

St. Louis 0.31% 99.24%

Washington,D.C. 2.91% 95.93%

Average 1.15% 97.83%

Rail and Motor Vehicle Share of All MotorizedPassenger Travel by Urbanized Area


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Convention Centers, Stadiums, Water Parks, and Restaurants

RecomendationCities and counties should not use taxpayer

funds to compete with private sector convention cen-ters, civic centers, sports stadiums, water parks, res-taurants, and performing arts venues. These activitiesare inherently private, not public.

Background Recently many North Carolina cities and coun-

ties have ignored the distinction between the publicand private sector by funding outright or subsidizingfunctions that belong to the private sector. As later examples will demonstrate, city of cials have pouredmoney into nonessential city activities while essentialservices such as police, re, and roads suffer.

These activities are often tied to the quest for economic development and justi ed by highly paidconsultants who produce distorted and incomplete

data that always concludethat the new subsidized fa-cility will be an economic

boon.Information regard-

ing other cities experi-ences with constructioncost overruns, budget sub-

sidies, fewer visitors, and,more importantly, whatwould have happened if the money had remainedin taxpayers pockets is

almost always missing from these studies. Informeddecisionmaking requires that city councils and countycommissions hire two cons

center for local innovation city & county issue guide 2008

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