laffer and associates draft report on fiscal neutrality in sarasota county

Sarasota.Draft 14 DRAFT. For Discussion Purposes Only 12/20/13

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I. Executive Summary

In 2011, Florida made major revisions to the Local Government Comprehensive Planning and Land Development Regulation Act (The Growth Management Act) in order to lessen the burden of prescriptive land use policy at the local level. Previously, Florida’s Growth Management Act had placed some of the most restrictive “smart growth” policies in the country on land development. Smart Growth is an idea going back at least as far as the Industrial Revolution that involves using central economic planning to reduce the existence of the suburban lifestyle in favor of more densely populated urban life. In theory, the benefits of these policies were supposed to be reduced suburban sprawl, reduced traffic congestion, increased housing affordability, increased racial and income integration and diversity, and better and more sensitive environmental results, among others. Yet the high associated regulatory burden imposes the effective overall economic equivalent of increased taxes—higher regulatory costs, higher taxes, higher costs of living, and restrictive central economic planning. It was in light of understanding this tradeoff that Florida reduced its growth management restrictions in 2011. In this new land use policy environment in Florida, a number of counties across the state are reassessing whether existing local growth management policies are appropriate. Indeed, the economic effects associated with “smart growth” suggest that such policy examination is warranted. Economic theory links restrictive land use policies to an inelastic supply of housing, meaning the supply of homes is less responsive to changes to in price. By reducing the ability of the market for housing to clear, smart growth policies thus lead to higher and more volatile housing prices, in addition to slower population and employment growth, and more volatile wages. Vast amounts of research literature support the theory with real-world data from the United States and abroad. Sarasota County, Florida fits right into this discussion by having some of the most prescriptive growth management policies in the country. Beyond fitting into the Florida growth management programs, the County has done little to reduce the restrictions on development following revisions to the Growth Management Act (now Community Planning Act) in 2011. In addition, the County has an urban service boundary, outside of which new development is required to satisfy a fiscal neutrality provision—new development must demonstrate on an on-going basis that the additional costs of providing service to the development will not exceed the revenues received by the County on account of the development. Such a restriction greatly diminishes the ability of developers to secure outside financing, making housing supply even more inelastic in the County and exacerbating the effects of existing state growth management restrictions. Accordingly, Sarasota has some of the highest and most volatile housing prices in the state, and is growing slower than both the state average and Manatee County. If instead, Sarasota County would like to see the opposite results—more affordable housing, faster population growth, and a more vibrant employment situation—the County should focus on reversing these smart growth policies and moving toward an “actual growth” land planning environment. The best example of such an environment nationwide is Texas, which coincidentally has been perhaps the best economic performer of all the states over the past decade. Such a shift would involve removing as many zoning restrictions and regulations as possible, following only state-mandated concurrency requirements and avoiding all optional requirements, and removing the fiscal neutrality provision in its entirety. Based on the understanding those suggestions are not politically feasible at this time, Sarasota County should employ the following recommendations.

The on-going and open-ended nature of the fiscal neutrality provision should be removed. Instead, fiscal impact analysis should be employed by the County at the outset of any project to determine the expected fiscal impact.

First, the County should estimate the future ongoing revenues and expenses, then discount them back to a present value using the current interest rate on Sarasota County municipal debt. The


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County should compare the present value of the cash flows to the required upfront infrastructure investment.

o If the figure is positive, then the future revenues to the County on account of the development are so large that the County can fund the infrastructure via a bond offering that can be serviced by a portion of the future revenues.

o If the figure is negative, the County should work with the developer to determine how the remaining infrastructure costs will be financed. The County should be agnostic to the developer’s decision, which can take the form of impact fees, direct payment by the developer, creation of a community development district, or simply forgoing the project.

When thinking of costs and revenues to include in the fiscal impact analysis, the County must focus on the margin. For instance,

o Bringing existing County infrastructure up to sufficient levels of service is a cost that will be incurred regardless of whether there is additional growth and thus should not be included. For this reason, the changes to the state transportation concurrency requirement are appropriate.

o Each new resident assumes a pro rata share of the County’s existing debt, a benefit which should be included in the fiscal impact analysis.

o New residential development also necessitates additional retail, commercial and industrial development, a benefit that should be included in any fiscal impact analysis.

The County should employ per capita/average cost analysis for Hamlets and the case study/marginal cost method for Villages.

The County should work with both the developer and an outside consultant in a process that is quick, transparent and repeatable to define the assumptions and use sensitivity analysis to hone in on the assumptions that are most important to determining the fiscal impact.

The County should view these fiscal impact analyses as a guide but not a determining factor. There are times when non-monetary considerations may be important enough to go forward with a development even if it shows a slight negative fiscal impact on the County.


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II. The Economics of Smart Growth1

The history of land use policy in Florida in general, and Sarasota in particular, is marked by policies from the line of land use planning known as “Smart Growth”. The vision of Smart Growth involves central economic planning to impose regulation that generally leads to a more urban lifestyle. That regulatory burden imposes increased housing prices and reduced housing affordability as well and an effective overall economic equivalent of increased taxes -- the Smart Growth tax. To the extent that “Smart Growth” policies limit the supply of land that can be developed into housing, or restrict housing development by regulation, reducing the housing supply, the price of housing will rise, reducing housing affordability. That was the result in Portland, and everywhere else that such “Smart Growth” policies have been tried. Under standard economics, the result could not be anything else. Numerous economic studies have connected restrictive land use ordinances to higher housing prices. One survey—which includes a literature review of some 25 studies over 30 years, every one of which found a link between restrictive growth management and higher housing prices—described the evidence as follows: “Considerable econometric and other empirical research has examined the association between prescriptive land use policies and higher house prices. The research overwhelmingly indicates that stronger land use regulation is associated with higher house prices.”

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This fits with both common sense economics and the business of land development. In terms of the former, as we have described, restrictions in supply lead to higher prices. In turn, differences in land prices are the largest drivers in the variation in housing costs. In particular, it is the all-in cost of making land available for sale (i.e. purchasing the land, fulfilling all of the necessary regulatory requirements, and paying all of the necessary taxes and fees) that drives housing prices. Naturally, the more restrictions there are, the more expensive they will be to comply with, in addition to the restrictions already driving up land prices. In other words, the market left to its own devices is very efficient. Government intervention, on the other hand, can create great distortions in the process. By restricting the types of building, driving up the process cost, and lengthening the time to market for a project, government restricts the ability of a developer to move land to its highest valued use, creating a deadweight loss to the community. In addition, the added transactions costs—in terms of both money and time—prevents the market from clearing efficiently. Simply put, the supply of property under strict land use regulation is inelastic—large changes in home prices only create small changes in the supply of houses. It is for this very reason that the accelerator kicks into play and housing prices are higher and more volatile in areas that employ smart growth policies. The outsized housing price increases then affect different segments of society differents.

Table 2

Effects of Smart Growth on Various Groups of Citizens

Group Result Effect

Renters Higher Rents Negative

Future Residents Higher Housing Prices Negative

Owners of Undeveloped Property Higher Development Costs Negative

Current Homeowners Higher Housing Prices Positive

And, beyond simply having direct effects on current and future holders of property, because the affordability of housing is an important factor in migration decisions, housing prices also have an indirect

1 For a more detailed description of smart growth and its economic effects, see Appendix A and Appendix B.

2 “The Association between Prescriptive Land Use Regulation and Higher House Prices”, Demographia, January 2012.

http://www.demographia.com/db-dhi-econ.pdf


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effect on population growth and employment growth. In other words, aggressive growth management policies don’t just drive up housing prices; they also create higher wages. Higher wages in turn lead to higher unemployment. These negative effects of smart growth policy provide the backdrop to any discussion of changes to the Sarasota County comprehensive plan and should not be taken lightly. Any move away from smart growth policies encourages economic growth, improving the way of life for all County residents. III. The Sarasota County Comprehensive Plan

As required under state law, Sarasota County has developed its comprehensive plan.

3 Like Florida’s

growth management legislation under which it falls, the Sarasota County Comprehensive Plan is explicitly based on Smart Growth principles. While the County plan does not seem to include some of the more coercive policies and practices discussed above that can be encompassed by the term “smart growth”, it takes other policies much further than prescribed by the state. The plan provides for further development, but under comprehensive regulation that requires all such new communities to bear any resulting additional costs, within prescribed settlements involving compact, mixed use developments, relying on multimodal transportation, including pedestrian, bicycle, transit and automobile alternatives, with extensive, mandatory, open spaces, surrounded by greenbelts. But is that consistent with the additional goal as well of housing affordability? And is that central economic planning vision well suited for a geographic location expected to continue to include substantial retirement populations? Are people moving to Sarasota, Florida because they are searching for planned communities based on development principles arising out of a path-breaking study of Greenwich Village in New York City? Setting aside the economics momentarily, it seems difficult to imagine that the same “smart growth” community planning and design goals would transfer fluidly from a massive urban center to a small community with a much higher percentage of second-homes and retirees. Yet that seems to be precisely the purpose of the comprehensive plan. The goal of the development regulation is to establish a development policy framework that enhances the livability of the County and preserves its natural, cultural, physical and other resources. That is meant to cover urban/suburban development, economic development, Estate and Rural Heritage communities, Village developments with preservation of extensive open spaces, and preservation of Greenways and Agricultural reserves. The comprehensive, central planning regulation arose to implement the Organizing Concepts and Principles of Directions for the Future, Resolution 2000-230, adopted October 10, 2000. The planning principles include “Avoid Urban Sprawl” and “Reduce automobile trips.” But where citizens want to live, their personal living styles and arrangements (suburban/urban/mixed use), and the extent to which they use automobiles, should ultimately be a matter of individual choice of consumers in the marketplace, rather than dictated to them by government officials. And providers, of housing and other social goods and services, should be free to respond to those consumer preferences as expressed in the marketplace. The Sarasota County Comprehensive Plan does seem to allow some scope for such consumer freedom of choice, and the freedom of providers and producers to serve those choices. But the plan also allows a lot of discretion regarding how its policies are implemented, and they ultimately can be a lot more prescriptive and even coercive than as expressly described in the language of the plan. That is why it may be desirable to expressly include consumer freedom of choice among the explicit principles of the plan, and repeatedly reference in the plan discussion how that principle will be implemented as well.

3 For a detailed description of land use planning requirements in Florida, see Appendix C.


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The plan does reference that it involves an “incentive-based structure” to achieve its goals, which is structurally compatible with consumer freedom of choice as expressed in markets, and the freedom of producers to serve those choices. The Sarasota 2050 chapter of the Sarasota County Comprehensive Plan states as Objective 1: “To create an incentive-based structure that will enhance the livability of Sarasota County and preserve its natural, cultural, and physical resources.” That is a very promising objective. But again the ultimate result depends on exactly how those terms are implemented under the plan. The plan and the policies served may benefit from more explicit, organized and featured discussion of the role and structure of such incentives in the plan.

A good example of that is Policy US2.3 in the Sarasota 2050 chapter, which states that the County shall evaluate within one year of the effective date of the Sarasota 2050 Plan,

the effect of the current Zoning Ordinance, Land Development Regulations and building codes on re-construction and revitalization efforts and identify areas where alternative regulations can support reconstruction, while continuing to ensure the health and safety of the citizenry. Such alternative regulations may provide for accessory living units and live/work units.

That properly invites an evaluation of the degree to which current regulations are counterproductive regarding reconstruction and revitalization, and whether reduced regulatory burdens and barriers may be more effective. That is the kind of incentive that can work powerfully. The same is true for Policy US3.1 regarding expedited review for infill development and redevelopment and rehab. The Sarasota County Comprehensive Plan does also include an “urban service boundary,” which specifies a geographic limit within which the County is prepared to provide public services to support any additional development. In practice, however, that could serve more like the Portland Urban Growth Boundary, limiting growth beyond the boundary, which had the effect of seriously increasing housing costs, and seriously reducing housing affordability as a result.

Steering growth within an urban service boundary, where all of the infrastructure is established to provide public services, can be a perfectly logical matter of common sense. The plan does seem to include flexibility for that urban service boundary to expand to accommodate economic growth for both families and businesses. But the current ambiguities could be limited with more explicit specifications regarding consumer freedom of choice, the freedom of producers to serve those choices, and the incentives that would induce them to do so. Housing Affordability

Among the goals of the Sarasota County Comprehensive Plan is affordable housing. That is defined as housing with monthly rents or monthly mortgage payments including taxes and insurance that do not exceed 30 percent of the annual gross income of families at or below area median income. Regulations implementing the Sarasota 2050 plan for Village housing developments require that a minimum of 15% of the dwelling units of such housing be affordable, with two-thirds of that affordable to families at or below 80% of area median income for Sarasota County and one third affordable to families making up to 100 percent of the median income for Sarasota County.

Over 40% of the population of Sarasota County is expected to be over age 60, reflecting the long term appeal of the county as a retirement haven. That population does not exhibit rapidly rising incomes. So rocketing housing prices as experienced with Portland’s urban growth boundary would quickly demolish housing affordability in Sarasota. Consequently, maintaining housing affordability would require flexible urban service area policies to accommodate necessary housing growth. Sarasota is not seeing rapidly rising population growth, so sufficient housing supply growth to keep prices stable should not be difficult. But in the first five years of the last decade (2000-2005), housing prices in Sarasota County doubled. So maintaining housing affordability would be more assured if more explicit goals regarding consumer


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freedom of choice, the freedom of producers to serve those choices, and the incentives that would induce them to do so were included in the plan.

The Sarasota County Comprehensive Plan states in Housing Goal 1:

Enhance Sarasota County’s sustainability as a community by encouraging the development of affordable, safe, and sanitary housing with variety in type, density, size, tenure (rental and ownership), cost, and in various locations to accommodate the needs, preferences and financial capabilities of current and future residents.

This principle sets as the driving force for housing development in Sarasota County the needs and preferences of residents, or consumers. This is a very desirable principle that does put consumer preferences expressed in the market in charge of housing development. So maintaining this as the top priority in implementation of the County Plan would be highly desirable. Moreover, Housing Objective 1.1 of the Sarasota County Comprehensive Plan states,

Encourage the market to provide ample diversity in housing types and affordability levels to accommodate present and future housing needs of Sarasota County residents.

This principle essentially suggests maintaining the necessary incentives for the market to produce sufficient housing supply. So it would be highly desirable to maintain this principle as another top priority in implementation of the County Plan. Community Housing is defined in the Sarasota County Comprehensive Plan as housing which is affordable to those making less than 120 percent of area median income. The Sarasota County Comprehensive Plan specifies as among its principles, derived from the 2004 Housing for All report of the Affordable Housing Work Group that “Incentives and regulatory changes that stimulate private sector development of community housing are integral to community housing.” This is a very desirable principle that would help to maintain private sector development of adequate housing supply sufficient to maintain housing affordability. Housing Policy 1.2.4 of the Sarasota County Comprehensive Plan states,

Facilitate the development of Community housing through the provision of a Community and Affordable Housing incentive program based on regulatory concessions, financial incentives and assistance, density bonuses or other means. Continue and promote the existing incentive program, which grants expedited processing to projects including Community housing.

This principle even more explicitly endorses maintaining sufficient private sector incentives for the market to produce sufficient housing supply. On the other hand, another principle of the Sarasota County Comprehensive Plan, derived from the same source, states, “The application of Smart Growth principles is the building block for community housing.” This is a vague, open-ended statement that can provide a foundation for counterproductive regulations that would undermine housing affordability, given the poor record of “Smart Growth” regulatory controls in maintaining Housing Affordability, as discussed in the previous section above. Housing Density The Sarasota County Comprehensive Plan provides for Low, Moderate, Medium and High Density housing density areas within the Urban Service Boundary.


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Low density is defined as less than two residential dwelling units per acre. That applies mostly to established subdivisions with such low density, and to developments and land subject to special flood hazards with current low density development or zoning.

Moderate density is defined as more than two and less than five dwelling units per acre. That

designation applies to all existing development with such density and to all vacant residential parcels within the Urban Service Boundary that do not have any special characteristics to qualify them for high density or to restrict them to low density.

Medium density is defined as between five and nine dwelling units per acre. Properties

covered by this designation could be rezoned for multi-family residential or single family residential. This applies to current development with this density and to vacant parcels next to non-residential development with frontage on collector or arterial roads.

High density is defined as more than nine dwelling units per acre. That applies to locations

along major arterial roads next to existing intensive non-residential development. This land would be appropriate for zoning for multi-family housing.

Medium and High density development is also permitted by policy near commercial and employment centers. Outside the Urban Service Boundary, Semi-Rural areas are designated for density of one dwelling unit per two acres, considered to provide for “estate” style residential development, which includes possible agricultural uses. Rural areas are designated for density of one dwelling unit for every five acres, which is considered ideal for agricultural development. Parcels adjacent to the Urban Service Boundary are eligible for densities between two and five dwelling units per acre under Affordable Housing priorities. Villages, Hamlets, and Settlement areas Also outside the Urban Service Boundary, the Sarasota 2050 Plan provides for urban level densities but seeks to prevent urban sprawl by allowing for compact, mixed-use, pedestrian friendly developments designated as Villages, Hamlets, and Settlement areas, surrounded by large areas of permanent open spaces. Village developments range from 1,000 to 3,000 acres, with a minimum density of 3 dwellings per acre and a maximum density of 5, or 6 if the additional dwelling qualifies as affordable housing. The minimum size of a Village is intended to be sufficient to support a public elementary school.

Hamlets are collections of rural home and residential lots clustered around crossroads that may include small-scale commercial or civic buildings with shared amenities. Hamlets would include 50 to 150 dwelling units, up to a maximum of 400, with a density of 0.5 to 1 dwelling per acre.

The Sarasota 2050 Plan Chapter of the Sarasota County Comprehensive Plan states, “Each of these development types is designed to avoid the negative impacts of Urban Sprawl by minimizing infrastructure costs, traffic congestion, and environmental degradation.” The Villages and Hamlets are to “be formed around Neighborhoods that include a broad range of family sizes and incomes in a variety of housing types, including a substantial number and proportion of Affordable Housing Units.” The majority of such housing is to be “within walking distance or one quarter mile of a Neighborhood Center.” That Neighborhood Center is to include schools, parks, churches, community centers, offices, and small scale neighborhood retail stores, all of which together would provide for most of the daily needs of the residents. The streets and roads of these Villages and Hamlets are to be designed to “encourage alternative means of transportation such as pedestrians, bicycle, and transit.” Have any studies been done to indicate the degree to which residents want to themselves actually use these pedestrian, bicycle and transit alternatives (rather than just hope others will use them)? Given the high proportion of older, retirees


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among the resident population, would the residents have even less interest in pedestrian and bicycle alternatives than the general population?

Open Space requirements apply outside the jurisdiction of these Villages and Hamlets, which preserve the rural character of these developments. The Sarasota 2050 Plan states that each Village “shall be surrounded by large expanses of Open Space that are designed to protect the character of the rural landscape and provide separation between Villages and existing low density rural development.” These Open Spaces are defined as supporting “the environmental goals of this Plan by preserving important environmental features, connections and functions on site.”

These Open Spaces must be at least as large as the developed areas, constituting a 50% Open Space requirement. For Hamlets, the Open Spaces must be at least 1.5 times the developed area. Regulations providing for county-wide Greenways also apply regarding Village and Hamlet developments.

Villages and Hamlets are also to include recreation spaces sufficient to serve the needs of residents as well. Each Village and Hamlet also must be surrounded by a Greenbelt. As the Sarasota 2050 Plan Chapter of the Sarasota County Comprehensive Plan states,

The purpose of establishing a Greenbelt around each Village and each Hamlet is to help define these as separate and compact communities. As part of the Open Space requirement for development… the Master Development Plan for each Village and each Hamlet shall establish a Greenbelt that is a minimum of 500 feet wide around the perimeter of the Developed Area that preserves Native Habitats, supplements natural vegetation, and protects wildlife within the area.

Villages and Hamlets also must comply with the Fiscal Neutrality provisions, which are discussed further below. The Sarasota 2050 Plan provides for the flexibility of expanding the Urban Service Boundary if public services and facilities can be provided to the newly included area, and there is a demonstrated need for additional urban residential capacity and other urban development. Further residential development is allowed outside the Urban Service Boundary to such possible additions in designated Settlement Areas, with minimum density equal to the average density within the Urban Service Boundary, which is 2 dwellings per acre. These Settlement Area developments are to be pedestrian friendly, with their own internal roadway system, ample open spaces, and recreational amenities. This policy allows the opportunity for development to follow consumer and family preferences as reflected in market demand.

The Sarasota 2050 Plan favors Settlement Area development that conforms to the standards of Village development but with close proximity to non-residential uses, similar to more mixed-use development, and minimum density of 3 dwellings per acre. The Plan promotes neighborhoods as the basic building block of such development, with a mix of residential housing types, and the majority of that housing within walking distance or one quarter mile of a Neighborhood Center.

Just as with Village development, that Neighborhood Center is to include schools, parks, churches, community centers, commercial offices, recreation spaces, and small scale neighborhood retail, that together would provide for most of the daily needs of the residents. The Settlement Area is also to maintain Open Space requirements for 50% of the area in perpetuity, and full alternatives for pedestrians and bicycles as well as automobile use. The regulations for Settlement Area development are to be quite prescriptive, including physical design, development approval processing, the ratio of non-residential to residential development, and baseline design guidelines. The Sarasota 2050 Plan Chapter of the Sarasota County Comprehensive Plan states,


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The general design guidelines will include, at a minimum, architectural standards, street design, transit friendly design requirements, landscaping, lighting, access and circulation, parking, lot development standards, parks and Recreational Space and facility requirements that will exceed current County standards. In addition, innovative resource conservation measures will also be included to address water conservation, non-potable water usage, and other resource conservation measures including, but not limited to, materials and energy.

These regulations overall may be too prescriptive and may end up denying the actual preferences of residents, consumers and families. Developers and their subdivisions are subject to market competition, and perhaps they should be designing the structural and other amenities of their developments, rather than government central planners. This regulatory framework overall seems to follow the principles of Smart Growth and the New Urbanism. But will it be implemented with sufficient flexibility to allow producers in the market to serve the preferences and expressed market demand of consumers and families? Or will the implementation seek to dictate and impose the preferences of elite government planners on those consumers and families? Transportation The above Housing density requirements provided for in the Sarasota County Comprehensive Plan and the Sarasota 2050 Plan should be low enough to avoid the traffic congestion problems that arise from Smart Growth density policies as discussed in the previous section above, where the residential density overwhelms any reduced automobile use due to pedestrian friendly policies and mass transit development. But Sarasota County still suffers from serious traffic congestion. That can be relieved only by adequate road and thoroughfare development. That is necessary if county development is going to follow the actual preferences of consumers and families, rather than the preferences of elite planners and government officials. The Sarasota 2050 Plan Chapter suggests “access management” as one alternative to relieving congestion or inadequacy of roads, instead of road widening. Just what is envisioned in such “access management” is not specified, but seems potentially ominous and coercive. The Sarasota County Comprehensive Plan recognizes that there is no opportunity or real consumer demand in Sarasota County for mass transit by train or subway at present or even decades into the future. The Plan does call for expanded bus services. But that is not going to relieve traffic congestion to any significant extent. Studies show that 81% of the work force drives alone to work, only 10% even car pools, and less than 1% uses mass transit. Given lifestyles in Sarasota County, that only reflects consumer preferences that are not going to change significantly. The Sarasota Fiscal Neutrality Provision The Sarasota 2050 Plan defines the Fiscal Neutrality Provision as follows:

Each Village and each Hamlet development within the Village/Open Space RMA shall provide adequate infrastructure that meets or exceeds the levels of service standards adopted by the County and be Fiscally Neutral or fiscally beneficial to Sarasota County Government, the School Board, and residents outside that development. The intent of Fiscal Neutrality is that the costs of additional local government services and infrastructure that are built or provided for the Villages or Hamlets shall be funded by properties within the approved Villages and Hamlets.

That means that any Village or Hamlet developed in accordance with the planning policies of Sarasota 2050 must pay for its own public services and infrastructure. As the Sarasota 2050 Plan Chapter of the


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Sarasota County Comprehensive Plan explains, this means that Village and Hamlet developments must themselves finance all localized and Countywide impacts on County, City, State, and Federal transportation facilities (such as roads, intersections, sidewalks, lighting, medians, etc.), public transit, schools, water supply and delivery, sewage transmission and treatment, solid waste, storm and surface water management, law enforcement, fire and emergency management, courts, jails, administrative facilities, libraries, parks and recreation, and public hospitals. The Village and Hamlet developments must also finance maintenance of all the required Open Spaces, Greenbelts, and Recreational Areas around them. Villages, Hamlets and other developments can bear the costs of their own services and infrastructure. That just involves market efficiency. But if the development and its residents are required to bear costs for financing services that they would not choose or prefer to finance, or bear costs that benefit others, then the result will be to increase the cost of housing, reduce housing affordability, and for the supply of housing to fall behind population. Putting the Sarasota Plan in Context Circling back to our discussion of Smart growth as compared to Actual Growth, what we are calling the goals of land planning as put forth by the Kemp Commission, it is clear that Sarasota’s comprehensive plan puts it squarely in the former camp. First and foremost, having to comply with the Florida growth management requirements, even in their scaled back fashion, place the plan very close to, if not in, the smart growth arena. Moreover, the additional aspects in Sarasota 2050 that go above and beyond the Florida requirements clearly push Sarasota into the smart growth camp. It is true that there are sections of Sarasota’s growth management plan that resemble the Kemp Commission suggestions, such as having a goal of housing affordability and having mandatory standards for development impact fees. But these are but two portions of Actual Growth with which Sarasota complies, and really they only apply on first blush. While a specified portion of every development must be set aside for “affordable housing”, that does not lead to more affordable housing on the whole. Nor is fiscal neutrality applied in Sarasota in a fashion that leads to a streamlined and objective regulatory process. While the stated focus on incentives and encouraging the market to provide property types that are desired by inhabitants is nice, all of the regulations, restrictions and requirements bely that the true goal is not development based on market principles, but based instead on smart growth principles. Indeed, the main thrust behind the Kemp Commission Report was to reduce regulations, costs and barriers on property development, allowing the free market to dictate the types of development and make housing more affordable in the process. Instead, the Sarasota 2050 Plan follows smart growth principles, thus creating additional institutional barriers by adding time, cost and prescriptions to the development process. Among the policy items that explicitly place Sarasota in the smart growth camp are: the urban service boundary, the prescriptions of housing density levels, the fiscal neutrality provision, the specification of development types with required open spaces, the focus on minimizing “urban sprawl”, the encouragement of alternative forms of transportation, baseline design guidelines, etc. etc. Likely the most damaging of these policies is the fiscal neutrality provision, which we will explore in detail. IV. The Sarasota Fiscal Neutrality Provision

It is easy to understand the goals of Sarasota County encompassed by the fiscal neutrality provision in the County’s comprehensive plan. Broadly speaking, the fiscal neutrality provision satisfies the requirement of any locality to balance its budget. Every local government faces the necessity of providing certain public services to its citizens. Those services, of course, must be balanced against the revenues that the government receives. Indeed, most state governments require local governments to run a


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balanced budget on an annual basis.4 Once a community is comfortably operating at a neutral fiscal

position, if it can guarantee any future development is also fiscally neutral in terms of the added services required and added revenues received, it will help solidify the fiscal position of the community in perpetuity. More specifically to Sarasota, the County’s fiscal neutrality provision also met the state concurrency and capital improvement elements of the state Growth Management Act in one fell swoop, thus satisfying some of the more onerous portions of state land use policy. At the same time, however, there are a number of negative consequences to consider in relation to the fiscal neutrality provision. Moreover, with the recent revisions to the Growth Management Act, specifically as related to concurrency, it is natural to revisit the fiscal neutrality provision. General Rationale Sarasota’s fiscal neutrality provision for Villages and Hamlets fits into the broader category of fiscal impact analysis (FIA), the practice of projecting cash flows that new development generates for the public sector and netting them against required public expenditures to support that development. These analyses can prove very valuable to local governments in their short and long-term planning. Indeed, city planners have been using FIA since the 1930s, when it was first used “in attempts to fully justify investments in public housing and urban renewal programs.”

5 The practice has become more widely

used since the 1970s as a tool in the smart growth arsenal. We will address the constraints of fiscal impact analysis below, but there is no question that the fiscal impact of development is one aspect of any proposal that should be studied, particularly when the local government is responsible for reviewing proposed development. The modeling techniques have become much more sophisticated over the years, allowing decent insight into the effects of any new development. Moreover, FIA now often takes into account “both the direct and indirect fiscal impacts of land uses” and is also used to “evaluate existing development” in addition to its previous focus on new development.

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is little wonder that FIA is being used more frequently as one measure of evaluating land use options. However, we believe the usefulness of FIA is as a planning tool, not as a constraint on development. In part, the limitations of FIA stem from the reliance on a great deal of art to go with the science involved in the process. For instance, there are a number of qualitative decisions that need to enter into any FIA—both from the planning side in defining the process and from the analysis side in terms of assumptions that are used. The choices made at each level can have a huge impact on the results of the analysis. Moreover, there are a number of negative consequences if a local government focuses too narrowly on fiscal neutrality. Accordingly, it is exceedingly rare that a government requires fiscal neutrality. Indeed, even the strongest proponents of fiscal impact analysis acknowledge that it should be but one aspect of land use planning. As the American Planning Association puts it,

It is important to keep in mind that the fiscal impact of development policies, programs, and activities is only one of the issues that local government officials should consider when evaluating policy or program changes related to land use and development. Land uses that are a financial drain or are less beneficial financially than other alternatives should not necessarily be excluded, since they may be necessary to the community’s goals related to affordable housing, economic diversity, quality of life, and so on. Moreover, localities have a responsibility to consider other impacts too. Court cases have suggested that, in addition to fiscal impacts, local governments need to evaluate environmental impacts, regional needs for housing and employment, and other concerns. Nevertheless, fiscal impact data can be used as part of a larger cost-benefit analysis to

4 Over the course of a community’s life, the initial revenues for a local government typically come from selling land, then shift to

property taxes, and over time also come to include a combination of sales taxes and various fees. 5 L. Carson Bise II, Fiscal Impact Analysis, Methodologies for Planners, American Planning Association, 2010. pg. 1.

6 Ibid. pg. 2.


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craft a land-use plan that incorporates the appropriate mix of land uses necessary to achieve fiscal sustainability or, at a minimum, fiscal neutrality.

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We find it dubious that a number of the issues raised above actually have much bearing upon whether a developer should be able to develop land to its highest valued use. However, the important fact to note, again, is that even proponents of fiscal impact analysis stop short of promoting a fiscal neutrality requirement for all development. As the APA makes clear, “while a fiscal impact analysis is an important tool in making planning decisions, fiscal impact analyses should not be used in isolation from other types of analysis.”

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Fiscal Neutrality in Context The reason for discussing impact fees so thoroughly in the Appendix, beyond the fact that Sarasota County also has employed impact fees since 1988

9 and they make up a large portion of the one-time

revenues associated with any new development, is that the fiscal neutrality provision functions very similarly to an impact fee. First, it requires that a development be fiscally neutral (and in some cases allows payment of an additional fee by the developer to help reach neutrality), ostensibly the same desired ends as when impact fees are employed. Second, as we have chronicled in detail, the effects of smart growth regulation are incredibly similar to those of impact fees, acting as a tax on the sale of new homes. Most specifically, however, the fiscal neutrality provision as currently constituted is directly analogous to an impact fee. To wit, the developer must pay first to produce a fiscal impact analysis report, next assumes significant additional costs to comply with the regulatory process, and finally faces much higher financing costs to underwrite its development. Each of these represents a direct regulatory cost incidence on the developer that acts in precisely the same fashion as an impact fee. Accordingly, the effective burden on housing acts in the same fashion as well, acting as a tax on home building, driving up the price of new and existing homes, and leading to less development and fewer jobs. Even more insidiously, however, the loss to Sarasota County is greater in the case of the fiscal neutrality provision than in the case of impact fees. While impact fees would accrue to the benefit of the County, the fiscal neutrality analysis accrues to varied consulting firms, most of which are not local, as do the financing and process costs. In other words, the deadweight loss to the area is much higher in the event of the fiscal neutrality provision because at least the County would benefit from the higher housing prices if driven by impact fees. Additionally, the use of impact fees rather than smart growth regulation has the added benefit of expediting the approval process, lowering process costs to developers and the County. Instead, by employing the fiscal neutrality provision, the County receives all of the losses associated with impact fees yet none of the benefits. Moreover, this is on top of already utilizing impact fees, which should be set equal to the excess (if any) of marginal cost over marginal benefit of development. In other words, the fiscal neutrality provision, beyond imposing huge costs itself, should be moot. Instead, fiscal impact analysis should be used as a County tool to ensure that the upfront investment by the developer and/or impact fees are set appropriately. Can Fiscal Neutrality Be Achieved? (Task 1) The National Association of Homebuilders has done a series of papers studying the average costs and revenues associated with development. These reports present “metro area estimates of the impacts of home building in a typical metropolitan area, with values of land and new housing units, local taxes, and

7 Ibid. pg. 4.

8 Ibid. pg. 8.

9 For a full discussion of the impact fees currently assessed in Sarasota County and how the fees are set, see:

https://www.scgov.net/PlanningServices/Impact%20Fee%20Docs/2012%20Annual%20Impact%20Fee%20Report.pdf


13

local government expenses per household set equal to national averages.”10

Using national averages across industries within a metropolitan area, NAHB has developed a dynamic economic model that estimates local government revenue, taking into account direct and indirect one-time revenues from construction, as well as the on-going annual revenues.

11 Similar modeling is then employed on the cost

side, extrapolating from the various state and local data.12

The authors, looking at new construction of single family homes, conclude that, “In the typical case shown here, residential construction pays for itself and begins generating surplus revenue for local governments in the area after only a few years.”

13 Multi-family rental apartments also pay for themselves, over a longer

timeline of ten years, and analyzing joint development of single family and rental apartments leads to development that pays for itself within three years.

14

The conclusion of the NAHB is that development, on average, pays for itself. Moreover, single-family construction has a more positive fiscal impact than multi-family. If the NAHB conclusions truly hold, the appropriate question for the County to be asking is when should we not allow development, not under what situations does development pay for itself. Of course, the NAHB looks at the average development in the U.S. Moving toward more specific cases, Mark Dotzour, Chief Economist of the Real Estate Center at Texas A&M University, has performed analyses on the fiscal impact of new subdivisions in several Texas cities. A 1997 report studied the fiscal impact of new subdivisions in San Antonio, one of the largest cities in the country as ranked by both population and land area. The study analyzed five recent subdivisions, all chosen within the city limits and on the San Antonio Water System, but otherwise sought to be diverse in terms of geographic location, housing values, and whether it was a perimeter development or nonperimeter development.

15

Dotzour first broke out the costs of development into one-time capital improvements and on-going municipal services. The capital expenditures were then separated into ones paid for directly by the developers, homebuilders and homeowners versus those paid for by the city. The latter capital expenditures, along with the cost of ongoing services, were then compared to revenues received by the city, particularly focusing on the fiscal impact on the city’s general fund, debt service fund, and the San Antonio Water System (SAWS) fund. Dotzour concluded that new development pays for itself. More specifically, his conclusions were as follows:

“The results of this research indicated that each of the five subdivisions pays more into the general fund that the average San Antonio household.”

16

“The impact fees levied against each new home appear to be equitably calculated to allow SAWS to recover their actual costs expended (per household) to provide the services required.”

17

“Results indicate that the amount of new borrowing capability created by the revenue from four of the five subdivisions greatly exceeds the actual amount spent for capital improvement to support them.”

18

10

“The Local Impact of Home Building in a Typical Metro Area: Comparing Costs to Revenue for Local Governments”, National Association of Home Builders, June 2009. 11

“The Local Impact of Home Building in a Typical Metro Area: Income, Jobs, and Taxes Generated”, National Association of Home Builders, June 2009. 12

“The Local Impact of Home Building in a Typical Metro Area: Comparing Costs to Revenue for Local Governments”, National Association of Home Builders, June 2009. 13

Ibid. 14

Ibd. 15

Mark G. Dotzour, “The Fiscal Impact of New Residential Subdivisions on the City of San Antonio, Texas”, Technical Report 1209, The Real Estate Center at Texas A&M University, December 1997. 16

Ibid. 17

Ibid. 18

Ibid.


14

The lone exception mentioned in the last bullet point above was a development that required capital costs per home that were slightly higher than the additional borrowing capability created (cost of $2125 versus borrowing capacity $1974). For this subdivision, the surplus general fund revenue generated per home was greater than the excess of capital cost over borrowing capacity, so on net the development still had a positive fiscal impact. But the circumstances surrounding the capital improvements remain enlightening.

The fifth subdivision required capital costs slightly in excess of its ability to pay, for two atypical reasons. First, the city paid for the improvements of the major arterial road that supports the area. In all other subdivisions, the developer was required to pay for this cost. Second, Brooks AFB occupies a substantial portion of the benefit district for the arterial improvement. Consequently, the entire cost of this road improvement is spread over a benefit district that is only a small fraction of the normal situation.

19

In other words, only in cases in which the city strays from the typical setup of developer cost contributions does the city run into problems on capital expenditures being unfunded. Accordingly, Dotzour was able to conclude:

The results indicate that the typical new subdivision has a substantial positive fiscal impact on the city. The revenue provided by property taxes from homeowners in these subdivisions supports a level of capital expenditures that greatly exceeds the amount spent to provide the needed capital improvements. These new subdivisions provide the city with the financial capability to also make additional capital improvements in the community.

20

Thus, an application of Dotzour’s analysis would imply that development is fiscally neutral or better under the following circumstances:

The combined average property tax, sales tax and franchise taxes per household that benefits the general fund exceed the average general fund expenditure;

The developer entails a substantial portion of the cost of one-time capital improvements to serve the community;

Impact fees are set to cover a large portion of the remaining capital expenditures not paid for by the developer; and,

A portion of property taxes are allocated to the debt fund and create borrowing capacity greater than the additional debt needed to fund one-time capital expenditures.

If these conditions are all met, the other characteristics of the development—geographic location, whether it is within or outside the existing city perimeter/urban growth boundary, the makeup of housing homes, etc.—are irrelevant. Dotzour has also done studies looking at cities in Colorado, Kansas, and Arizona, with new development paying for itself in every case. In his mind, there is “only one situation in which a new home subdivision would not pay its share of public costs—if a developer is not required to pay for the capital improvements within the development itself.”

21 In the case of a Colorado Springs, CO study, he

and his co-authors found that just the “sales taxes realized by the city from building materials purchased for each home more than offset” the initial capital cost of each home.

22

One of the main conditions of the Dotzour analyses is properly specified impact fees. Indeed, there is no reason that any new development should ever provide anything but a positive (or at the very least neutral) fiscal impact if impact fees are properly specified. Otherwise, what is the purpose of the fees?

19

Ibid. 20

Ibid. 21

Patrick L. O’Toole, “The Little House That Could”, Professional Builder, November 1, 2001. 22

Ibid.


15

In other words, the question of fiscal neutrality is moot in Sarasota County. All that is truly required is to properly specify the impact fees on new development. This would remove many of the negative effects of the fiscal neutrality provision while still maintaining fiscal neutrality of new development. Yet, there is a significant base of additional research to suggest that new development has a positive fiscal impact prior to even accounting for impact fees. University of Florida economist James Dewey has undertaken studies of several Florida counties, each of which conclude that the net fiscal impact of new development is positive prior to even accounting for impact fees. One of the counties studied is neighboring Manatee County, where he calculated a net local government benefit of $13,343 per housing unit, a benefit that remained positive even in the face of significant shifts in inputs (i.e. sensitivity analysis).

23

Dewey also studied Alachua County, this time in conjunction with David Denslow, a colleague of Dewey’s at the University of Florida, reaching a similar conclusion. Here, the economists calculated that new development contributes $3,114 dollars per housing unit to the state and local government, $5,083 per new home when taking into account accompanying commercial and industrial development.

24

The important takeaway from this research is that development in Florida, even with all of the state requirements, can have a positive fiscal impact without even taking impact fees into account. Given that Sarasota County has relatively high impact fees attached to the production of each new housing unit, this research calls into question the necessity of: a) those very same high impact fees, and b) the fiscal neutrality provisions. If development has a positive impact without impact fees, the presence of the fiscal neutrality provision in addition to impact fees is an unjustifiable addition of bureaucracy to a process that should not be slowed. Moreover, when development pays for itself without impact fees, the presence of impact fees makes clear that they act as a tax rather than a user fee, bringing with them all of the negatives described in the Appendix. In other words, Sarasota should focus the majority of its attention on setting accurate impact fees, then eliminate the fiscal neutrality provision. To be sure, it is true that there is significant literature that makes the case that growth does not pay for itself. For instance, much of the impetus for “smart growth” is based on research that growth has a negative fiscal impact. Additionally, an entire land use planning industry has sprung up to help local governments design ways of counting costs and benefits and putting in place policies to make sure that development does lead to a positive fiscal impact. For a sampling of the literature that questions, or flat out denies, that growth has a positive fiscal impact, Burchell et al summarize both the alleged costs and benefits of sprawl, finding that on the whole the research literature is lacking in terms of scope and specification, but that in general there are a number of costs and benefits to growth.

25 An analysis of the literature by Duncan Associates concludes that

typically residential development does not pay for itself, particularly development in rural areas, although the specifics of the situation do matter.

26 Meanwhile, the American Planning Association goes through a

number of different examples of fiscal impact analysis in their publication on the topic, with the majority showing negative results, with positive fiscal impact less likely outside any urban service area.

27

Unfortunately, like with the studies finding a positive impact of growth, there is no set calculation criteria in the studies that find a negative impact—some are as simplistic as comparing the impact fees charged per home to the per home average capital cost of new infrastructure. Of course, the locations studied

23

James F. Dewey, “Growth and Infrastructure in Manatee County, Florida: Does New Development Pay Its Share of Public Costs?”, University of Florida Bureau of Economic and Business Research, October 13, 2003. 24

James F. Dewey and David Denslow, “Growth and Infrastructure in Alachua County: Does Conventional Development Pay its Share of Public Costs?”, August 2, 2001 25

Robert W. Burchell et al, “The Costs of Sprawl—Revisited”, Transit Cooperative Research Program Report 39, Transportation Research Board, 1998. http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp_rpt_39-a.pdf 26

Clancy Mullen, “The Costs of Growth: A Brief Overview”, Duncan Associates, March 28, 2002. 27

L. Carson Bise II, Fiscal Impact Analysis, Methodologies for Planners, American Planning Association, 2010.


16

also have large variance in the level of impact fees, if they are even levid. Other studies simply focus on the alleged negative benefits of sprawl, again returning us subjective arguments about smart growth. Indeed, the fact that development faces so many barriers, purportedly on account of fiscal discipline, is instead a testament to the triumph of incentives. Those arguing that growth does not pay for itself typically have another dog in the fight. Whether their goals are related to environmental protections, increased size and scope of government, increased need for planning consultants, or simply a desire to maintain the status quo, the arguments can almost always be traced back to self-interest. Lest one deem the results from NAHB, Dewey and Dotzour to be one-off, unreliable results, however, there is a host of additional literature reaching the same conclusion—that growth pays for itself in almost all cases. For instance, an ECONorthwest study regarding growth in the City of Salem, Oregon found that the city’s finances were in better shape in the event of growth than without.

28 TichlerBise found the

cumulative net fiscal impact of growth in Dublin, Ohio to be hugely positive.29

The John Locke Foundation showed growth pays for itself in Chatham County, North Carolina.

30 A number of R.W.

Thorpe & Associates studies display that growth pays for itself in the greater Seattle area.31

Impact DataSource analyzed five subdivisions in greater St. Louis and found each to have a positive fiscal impact on the municipal government budget.

32 The Center for Colorado Policy Studies found that growth

led to lower per capita expenditures over time in Colorado Springs, Colorado, meaning growth there had a positive fiscal impact.

33

The list goes on and one. Perhaps most similar to the situation in Sarasota is a fiscal impact analysis for Jasper County, South Carolina, another coastal county exploring the costs of inland population growth. Under the baseline scenario, the Clemson University authors calculated a net present value of growth (revenues minus expenditures) of $17,132 per household, increasing to $34,148 per household in the more optimistic scenario.

34

In other words, growth typically pays for itself. Indeed, how could it not? The population of the United States grew almost four-fold over the 20

th century and continues to grow, all this with incredibly low

default rates on municipal bonds—the average one-year default rate for Moody’s-rated issuers is 0.012% over the past 43 years.

35 And when there is a municipal default, the reason is almost never continued

residential growth, but instead salaries/pensions allowed to spiral out of control or large cost overruns on big capital projects.

36

Indeed, for a view of what happens when there is no growth, consider Detroit. In 1950, the population of Detroit was 1.85 million. Today, the total number of inhabitants in Detroit has shrunk to 700,000. Now, the remaining citizens of the once proud city are saddled with enormous pension benefits promised to former public employees, a debt that tax receipts cannot cover, and no services to speak of—the city has

28

“Fiscal Impact Analysis Relating to City Growth and Annexations”, ECONorthwest, January 18, 2001. http://www.cityofsalem.net/Departments/CommunityDevelopment/Planning/Documents/Fiscal%20Impact%20Analysis%202001.pdf 29

“Projections and Fiscal Impact Analysis”, City of Dublin, April 30, 2013. http://communityplan.dublinohiousa.gov/fiscal-analysis/projectionsfiscal-impact-analysis/ 30

“Chatham County Doesn’t Need a Land-Transfer Increase”, September 27, 2007. http://www.johnlocke.org/acrobat/policyReports/chathamtax-rb8c.pdf 31

http://mbaks.whidbeyhost.com/library/brochure_pdfs/Growth_Pays.pdf 32

“The Fiscal Impact of Five New Residential Subdivisions in the Greater St. Louis Area”, Impact DataSource, June 3, 2004. http://www.homestcharles.org/hscFiles/ImpactStudy.pdf 33

Daphne Greenwood, “Does Growth ‘Pay for Itself’ Through Increased Revenues or Decreased Costs per Person? An Analysis of the City of Colorado Springs, 1980-2000”, Center for Colorado Policy Studies at the University of Colorado at Colorado Springs, September 2003. http://www.uccs.edu/Documents/ccps/payingforgrowth.colospgs.ccps.pdf 34

Charles Taylor and William E. Molnar, “Fiscal Impact Assessment: Jasper County, South Carolina, Hardeeville, South Carolina, and Ridgeland, South Carolina”, The Strom Thurmond Institute of Government and Public Affairs, January 2006. 35

“Municipal Bond Defaults Have Increased Since Financial Crisis, But Numbers Remain Low”, Moody’s, May 7, 2013. https://www.moodys.com/research/Moodys-Municipal-bond-defaults-have-increased-since-financial-crisis-but--PR_272561 36

Arthur R. O’Keeffe, “Muni Bond Defaults, Bankruptcies and Bondholder Protections”, BNY Mellon Wealth Management, http://www.bnymellonwealthmanagement.com/Resources/documents/PerspectivesDocs/Muni_Bond_Defaults.pdf


17

topped the Forbes list of most dangerous cities for five years running37

, some 40% of the street lights don’t work

38, and only 8% of the city’s eighth grade public students are proficient in reading

39. But at least

the residents of Detroit weren’t overburdened with new development that would bring in new services and new people! If growth did not pay for itself, the incredible growth over America’s history would have led to a long history of municipal bankruptcy. The key is simply to find the proper revenue mixture to accommodate the additional services needed to support the added population. Generally speaking, the literature found single-family development to be more likely to generate a positive fiscal outcome than multi-family, but the main conclusion we draw from a number of fiscal impact analyses is similar to that of Mark Dotzour—the only way growth will fail to pay for itself is if the developer is not asked to shoulder any of the infrastructure costs associated with development. Situations Under Which Fiscal Neutrality Can Be Achieved (Task 1.1) To us, the economics are fairly clear that on average growth does pay for itself, but there remain certain circumstances under which it is more likely to do so than others. One prominent hierarchy of the fiscal impact of various forms of land use was developed by Rutgers economists Robert Burchell and David Listokin in the 1970s.

40

Land Use

Research Office Parks

Office Parks

Industrial Development

High-Rise/Garden Apartments (studio/one-bedroom)

Age-Restricted Housing

Garden Condominiums

Open Space

Retail Facilities

Town Houses (2-3 bedrooms)

Expensive Single-Family Homes (3-4 bedrooms)

Town Houses (3-4 bedrooms)

Inexpensive Single-Family Homes (3-4 bedrooms)

Garden Apartments (3+ bedrooms)

Mobile Homes (unrestricted occupancy)

Examination of the table yields a few guiding conclusions:

As a standalone, commercial development has a more positive fiscal impact than retail, which is more positive than some forms of residential property and less positive than others.

The more expensive the residential property, the more positive the fiscal impact due to higher property taxes collected.

The fewer people living in a residential property, the more positive the fiscal impact due to less marginal impact on infrastructure.

37

David Fisher, “Detroit Again Tops List of Most Dangerous Cities, As Crime Rate Dips”, Forbes, October 22, 2013. http://www.forbes.com/sites/danielfisher/2013/10/22/detroit-again-tops-list-of-most-dangerous-cities-but-crime-rate-dips/ 38

Michael Guerriero, “The Number: 40%”, The New Yorker, July 21, 2013. http://www.newyorker.com/online/blogs/newsdesk/2013/07/40-per-cent-street-lights-detroit.html 39

Terence P. Jeffrey, “Only 7% of Detroit Public-School 8th Graders Proficient in Reading”, CNSNews.com, December 11, 2012. http://cnsnews.com/news/article/only-7-detroit-public-school-8th-graders-proficient-reading#sthash.Xjhr0cRl.dpuf 40

Robert W. Burchell and David Listokin, The Fiscal Impact Handbook: Estimating Local Costs and Revenues of Land Development. Rutgers University Center for Urban Policy Research. 1978.


18

The fewer children expected to live in residential property, the more positive the fiscal impact because the property would be paying property taxes without adding to the number of students in the school district.

The conclusions in relation to types of residential development make sense and should be accounted for in fiscal impact analysis. The delineations between residential, commercial and industrial development, however, are inappropriate. This is because residential development further necessitates additional commercial development and vice versa; in the modern era you can’t have homes without businesses to provide services to their owners and you can’t have jobs without homes to house the employees. In the extreme, if a municipal government viewed only commercial development as fiscally positive, the presence of a fiscal neutrality provision would prevent growth in perpetuity, for there would be no commercial development in an area with no citizens. It is for this reason that many practitioners recommend fiscal impact analysis take into account that commercial and residential development go hand-in-hand. Some research also suggests that growth outside an urban growth boundary is more expensive than within the boundary, as the marginal cost of providing services to new areas is more expensive than infilling areas that already have sufficient infrastructure. Inherently this statement has some truth to it—it is cheaper to hire a few new police officers to add capacity to an area with a police station than build a whole new station. At the same time, however, when new infrastructure is needed, it is much cheaper to build in areas that are less developed—imagine the cost of adding lanes to every road through Manhattan. To bring local specificity to this concept, it is true that initially providing infrastructure to the areas east of I-75 is quite expensive, especially on a per capita basis. Yet given that the County already has to provide fire, police, etc. to a low-density area, adding more population to that area will greatly reduce the per capita costs of supplying the services. In cases such as this, where much of the infrastructure is already in existence and there are impact fees to collect in addition to new taxes associated with increased population, the revenues are very likely to exceed the costs. Others conclude that the research typically shows residential development to pay for all new infrastructure but that the impact changes to negative when taking into account the added costs on schools.

41 There are, however, a number of questions as it relates to how education should be counted

in a fiscal neutrality analysis, including a large disconnect between an impact fee on housing for educational purposes and the use of public education by the purchasers of new homes.

42 Moreover, all

taxes throughout the County, from businesses and residences alike, are used in part to fund education. As will be discussed in greater detail later, you cannot hold new development fully responsible for updating educational facilities on the cost side and yet on the revenue side not incorporate additional taxes to be collected from commercial development that must be made to accommodate the new residential development. As it applies here, however, the general principle to keep in mind is that the more students added to the public school roles by new development, the greater the cost to the County and the less likely the development is to satisfy the fiscal neutrality provision. In general, however, we find compelling the strand of the growth literature that concludes all development pays for itself, particularly if the developers contribute to the infrastructure requirements, which is the case in Sarasota County.

41

Samuel Staley, “Does Growth Pay for Itself”, Reason Foundation, November 6, 2006. 42

Samuel Staley, “School Impact Fees Create Unfair Financial Burden,” Reason Foundation, January 9, 2006. http://reason.org/news/show/122769.html


19

Applying Fiscal Neutrality to Villages and Hamlets (Task 1.2) Villages and Hamlets represent two new forms of mixed-use development approved for the Village/Open Source Resource Area outside the Urban Service Boundary. They are attempts at smart growth design in areas that are currently less heavily populated. Villages are much larger, contain more commercial and retail spaces, and have a higher dwelling density, but for both Villages and Hamlets a majority of the housing is to be within ¼ mile of the Village/Neighborhood Center and there shall be a variety of housing types, supporting diverse family sizes and incomes (including at least 15% of the housing affordable for families with incomes below the County median). Each also contains large open space requirements.

43

While fiscal neutrality will have to be determined on a development by development basis, we can apply the generally accepted parameters under which growth is most likely to exert a positive (or negative) fiscal impact to the objectives and policies of Sarasota 2050, particularly vis-à-vis the Village and Hamlet development designations.

Open Space: Open space is generally seen as having a positive fiscal impact. Intuitively this makes little sense as it is area that must be maintained, policed, etc. but provides no revenue in return. Moreover, open space certainly has a large opportunity cost, as it precludes other uses that could have a more positive economic and fiscal impact. We would treat this portion of each development type as a wash.

Mixed-Use: Most forms of fiscal impact analysis would consider the presence of retail and commercial spaces to make it more likely that the Villages, and Hamlets to the extent they have commercial and retail, will have a positive fiscal impact. As we explain below, all residential development necessarily entails retail and commercial development, so do not view this attribute of the design as making either development type more or less likely to exhibit fiscal neutrality.

Affordable Housing: The higher the proportion of affordable housing, the less likely the developments will be to exhibit fiscal neutrality, as the property tax receipts from those homes will be lower than the County average. Additionally, to the extent that the affordable housing is occupied by families, that will increase the burden on public schools as opposed to private schools.

Family Housing: The greater the proportion of vacation/second homed and retirees in the communities, the better the chance a development will exhibit fiscal neutrality. This is because there will be fewer students burdening the local public school system.

High Density: While smart growth is designed in part as a mechanism to save local governments money, generally speaking the higher the density of housing, the less likely a development is to exhibit fiscal neutrality.

Urban Service Boundary: To the extent Villages and Hamlets are placed adjacent to the urban service boundary or in areas that already have much of the required infrastructure, they will be much more likely to represent a net fiscal benefit to the County.

Again, these are guidelines that generally hold, but the prospects for fiscal neutrality are largely dependent upon the plans developed. More importantly, based upon the research cited previously, it is likely that development will pay for itself. Considerations in Developing a Fiscal Impact Analysis There are a number of important considerations that go into the design of a fiscal impact analysis. In order to make the analyses comparable across projects and across time, the local government must set clear expectations surrounding the costs and revenues to be considered, any specific methods that must be employed, and any guidelines on the assumptions made in the calculations. The analysis must then be explicit that it stuck to the prescribed instructions, highlight anywhere that it was unable to follow

43

“Sarasota 2050: Resource Management Area System”, https://www.scgov.net/CompPlan/Comp%20Plan%20Amendments/Chapter%209%20-%20Sarasota%202050.pdf


20

protocol, evaluate any potential alternative scenarios, and explain all assumptions employed. If these responsibilities are not fulfilled by the parties involved, the value of the analysis is greatly diminished. Among these considerations are the following. Appropriate Costs and Revenues to Count (Task 3) The previous generalizations on what types of development can exhibit revenue neutrality all turn on the precise definition of revenues and expenses used in the fiscal impact analysis. Economics teaches us that the only costs and benefits that should appropriately be considered are those that occur on the margin on account of the project. To illustrate a few examples of this tenet, the revised Florida transportation concurrency requirements appropriately do not hold developers responsible for bringing the level of service of an already deficient roadway up to par because that improvement already must be made. Similarly, if an old apartment building is being torn down and replaced by condominiums, the foregone taxes from the apartment tenants must be included as a cost of the project because the county would collect them absent the condominium development. More specifically, the revenue resulting from development depends upon the revenue structure of the given state and locality. Generally speaking, the most common sources of revenue are property taxes, local sales taxes, local payroll and income taxes, and user fees from public services (e.g. parking, parks, etc.) within the jurisdiction. In Florida, general sales tax revenue goes to the state and then is redistributed to counties based upon a formula that is largely based upon population. In addition, Sarasota County has its own sales tax of 1%

44,

meaning more development (and thus more people) leads to more revenue. In addition, the County collects impact fees, property taxes and a number of user fees. There is no local income tax, however. Most of these revenues are fairly easy to predict, using current property tax millage rates and expected sales prices of properties. Not as often included, though they should be taken into consideration, are the secondary effects that additional development, when warranted, leads to a more vibrant community with more employment and thus reduced need for many public services, in addition to even greater than anticipated sales tax revenues. The costs to take into account will flow from the services provided by the jurisdiction. In addition, the level of service required must be taken into account. The exact calculations will depend, to a degree, upon the calculation methodology chosen (discussed in further detail below). In addition to strongly displaying the positive fiscal impact of development, Dewey makes a number of important points to consider when calculating costs and benefits in a fiscal impact analysis”

“First, new residents should not pay the full price of new infrastructure when they are moving into a community in which the average unit of infrastructure has experienced significant wear and tear, and which new residents will help pay to repair and replace.”

45 New residents pay twice for

infrastructure if forced to pay for the full cost of new infrastructure and then the maintenance of both new and existing infrastructure. Fiscal impact analysis should therefore take into account the degree of depreciation of the current capital stock and credit the new residents with a per capita amount of depreciation.

“Second, new residents pay taxes where they live, where they work, and where they shop so new development should be evaluated on a community-wide basis.”

46 In other words, residential

development also necessitates commercial development, which must be taken into account

44

http://dor.myflorida.com/dor/forms/2013/dr15dss.pdf 45

Dewey, “Growth and Infrastructure in Manatee County”. 46

Ibid.


21

during fiscal impact analysis of any residential project. Of course, that development then brings new jobs, which also creates new need for residential development, in a virtuous cycle. It is difficult to take into account all of these dynamic effects, but they should be understood by policymakers. Again, economics is about changes on the margin. Given the commercial development would not occur without the residential development, commercial development is a marginal benefit of the residential development.

This requirement is obviously true in Villages, where commercial development is a required portion of the development area, yet equally true for Hamlets which will have nominal commercial development within them but also will necessitate further commercial development elsewhere in the County. Our recommendation would be that the County credit new development on a per capita basis with the amount of revenues collected per capita in commercial, industrial and retail spaces.

“Third, new residents should receive credit for assuming a full share of debt obligations that were

incurred to pay for past infrastructure investment.”47

Dewey’s point here is that all residents—both new and existing—are equally liable for making due on the County’s existing debt; new development should thus be credited with bringing in new residents who will assume the average per capita debt burden of the local government. This point requires some clarification, however. The existing debt is a stock variable (i.e. viewed at a point in time), while the government receipts and expenditures that reduce and increase, respectively, the County revenues and expenses are flow variables (i.e. measured over an interval of time). Typically, you sum flow variables to reach the change in the stock variable for that time period. For instance, in your personal finances the excess of income over expenditures (flow variables) represents your change in cash for the year and is added to your cash balance at the beginning of the year to reach your cash position at the end of the year (stock variable). Here, just prior to the new development, the County has an existing debt that will be serviced via the receipts of the County, and all citizens share in that liability. Given that the new residents clearly participate in the future revenues and expenditures (flow variables) required to service the new Village or Hamlet, the question of whether or not new development should also be credited with assuming a share of the existing debt of the County (stock variable) depends upon whether or not revenues from the new residents are also expected to contribute to the existing services and debt of the County. Given that the answer is yes, new development should be credited for each new resident with the per capita debt burden. In other words, these new residents are buying into the County’s current fiscal situation via assumption of a pro-rata share of the County’s existing debt, which is a fiscal benefit of development. While some of the new residents may move from elsewhere in the County, the homes that they left will soon be inhabited by others, and on net the population will increase by the amount of the new development. Thus, the development should receive a per capita credit for each resident in the development.

"Fourth, new residents should receive credit for tax revenues that result from the process of development and are paid before the new resident actually takes up residence, and these revenues should be estimated in a comprehensive way, rather than arbitrary, ad hoc, techniques usually employed.”

48 Fiscal impact analysis should use a consistent means of estimating the

revenues from “property taxes on model homes, sales taxes on the materials used in construction, and documentary stamp taxes on deeds and mortgages,” as the County would not realize any of these revenues without the new development.

49

47

Ibid. 48

Ibid. 49

Ibid.


22

“Fifth, new development will make up more than an equal per parcel share of the property tax roll, and will therefore pay more than an equal share of future property taxes, in present value terms.”

50 While new homes and old homes are subject to the same property tax rate, the new

construction will have no wear and tear, and often has a higher quality finish-level, meaning that for two houses with the same characteristics other than age, the newer house will have a higher assessed value and thus pay more in taxes than an older home. Fiscal impact analysis should account for this disparity as well.

These specifications are well presented and accurate. Accordingly, a listing of the appropriate revenues to consider would be along the following lines:

Table X

Positive Fiscal Impact Items

Category Revenue Item

Upfront Direct Zoning Application Fees

Fees for Platting the Subdivision ec

Sales Taxes on Building Materials

Building Permits and Inspection Fees

Impact Fees

Property Taxes during Development

Developer Direct Improvements

Developer Land Grants

Upfront Indirect New Resident Share of Debt Burden New Resident Share of Depreciation of

Existing Infrastructure

Impact Fees, payments, etc. Associated with Additional Commercial and Industrial Development

Annual Direct General Property Tax

Local Sales Tax

Franchise/Utility Taxes

Occupational Licenses

Intergovernmental Revenue

State Revenue Sharing Proceeds

Charges for Service

Fines and Forfeitures

Interest and Other Earnings

Debt Proceeds and Security Lending

Miscellaneous Revenues

Annual Indirect

Property Taxes, Sales Taxes, etc. Associated with Additional Commercial and Industrial Development

Similarly, a listing of appropriate costs would be as follows:

50

Ibid.


23

Table X

Negative Fiscal Impact Items

Category Cost Item

Operating Expenditures General Government Services (administration, municipal court, city hall)

Public Safety (police, fire, inspections)

Roadways and Streets

Physical Environment

Health Services

Parks and Libraries

Welfare/Human Services

Comprehensive Planning

Economic Environment

Cultural & Recreation

Other Non-Operating Disbursements

Capital Expenditures Roadways and Streets

Law Enforcement & Justice

Fire

EMS

Parks

Library

Water

Wastewater

Solid Waste

General Government

Opportunity Cost of Land Use with Greater Fiscal Impact

How to View Transportation Proportionate Share in Relation to Fiscal Neutrality (Task 4) The concurrency requirements put forth in the 1985 Growth Management Act essentially dictated that all public facilities come on-line for the population concurrent with the development. The public facilities—including wastewater, solid waste, drainage, potable water, parks and recreation, schools and transportation—were to have standards for level of service set by the local governments, and no development was allowed in the event that the requisite levels of service would not be met on all of the public facilities.

51

In 2011, there were major alterations to the Act that relaxed a number of the concurrency requirements, shifting the focus away from concurrency and toward maintenance of service level standards. In particular, parks and recreation, schools, and transportation facilities no longer are included in the state-wide concurrency requirements, meaning the state only requires concurrency of sanitary sewer, solid waste, drainage, and potable water.

52 Local government can choose to require additional public

services—such as parks, recreation, schools and transportation—to meet concurrency requirements, but the state no longer does. In the event that a local government does require concurrency in transportation services, there is a set of additional standards, some of which are required and some of which are optional.

53

51

“Concurrency”, Florida Department of Economic Development, http://www.floridajobs.org/community-planning-and-development/programs/comprehensive-planning/amendment-submittal-and-processing-guidelines/community-planning-act-summaries/concurrency 52

“Growth Management in Florida”, Gunster. 53

“Growth Management in Florida”, Gunster.


24

In the event that a County decides to require transportation concurrency, the standards are as follows:

“The local government Comprehensive Plan must provide the principles, guidelines, standards, and strategies, including adopted levels of service, to guide its application.

Local governments shall use professionally accepted studies to evaluate the appropriate levels of service.

Local governments shall use professionally accepted techniques for measuring levels of service when evaluating potential impacts of a proposed development.

A Comprehensive Plan that imposes transportation concurrency shall contain appropriate amendments to the Capital Improvement Element which shall identify the facilities necessary to meet adopted levels of service during a five year period.

Local governments that implement transportation concurrency must: o Consult with the DOT when proposed plan amendments affect facilities on the strategic

intermodal system o Exempt public transit facility from concurrency o Allow an applicant for a DRI, rezoning or other land development permit to satisfy the

transportation concurrency requirements of the local Comprehensive Plan by entering into a binding Proportionate Share agreement.”

54

Any impact fees or mobility fees paid by the developer count dollar for dollar toward satisfying the proportionate share assessment. Additionally, “a local government may not require payment or construction of transportation facilities whose cost would be greater than a development’s proportionate share of the improvements necessary to mitigate the development’s impact.”

55 The proportionate share

assessment calculation for facilities “significantly impacted” by development is as follows:

Proportionate Share = # of roadway trips at peak transit hour on account of the development / increase in peak hour roadway service volume * construction cost to increase roadway service volume

Importantly, if the road does not currently meet minimum service levels, no portion of the cost to erase the existing deficiency can be forced upon the developers or new residents and must instead be paid from the appropriate portion of the County budget. Based upon the new concurrency standards, impact fees are a justifiable way to satisfy the proportionate share requirement in the event that a County chooses to require transportation concurrency. They must, however, be calculated according to the proportionate share calculation presented above and only imposed upon those development projects that impose a significant impact on affected roadways. Moreover, the impact fees must not lead to payment of an amount greater than the proportionate share. Accordingly, the County is within its bounds to impose a road impact fee on new development. Any road impact fees, paid or to be paid in the future, are applied directly to satisfaction of the proportionate share assessment.

56 Any fees or burdens imposed on development for transportation purposes, however,

cannot exceed the proportionate share assessment. Nor can the County impose additional fees on development for public transportation, so the mention of public transportation in VOS2.9 should be removed and instead public transportation should charge an adequate use fee to supplement other tax receipts that help pay for public transportation. Such a change also fits with the standard view of economics that local governments should levy user fees on citizens to pay for those items where there is a direct linkage between personal expenditure and benefit.

54



“Proportionate Share Calculation Report”, Florida Department of Transportation, December 15, 2011. http://www.dot.state.fl.us/planning/Policy/community/propshare.pdf


25

As it relates to fiscal neutrality, the changes in concurrency requirements mean that the maximum amount the County can assess developers in relation to transportation concurrency has been reduced dramatically. If the County were to maintain the previous standard for concurrency in its fiscal neutrality calculation, it would be much more difficult for a development to prove fiscal neutrality. For the County to comply with the new proportionate share requirements, it must shift its calculation of the costs associated with transportation concurrency to those provided by the Community Planning Act. While this will appear to make it less likely that a development is fiscally neutral, as the County will not be able to assess as much in the way of fees for transportation concurrency to new development, the difference is illusory. The new standards for proportionate share calculation are in keeping with economic standards of only counting costs that are on the margin. Instead the previous standards for fiscal neutrality at the County level required development to pay the full cost of maintenance, construction and infrastructure that should be shouldered by existing citizens. Such a standard grossly overburdens development for costs that the County would already face, regardless of whether or not the development were to occur. That is not fiscal neutrality. It is a massive, explicit tax on development and one that is no longer allowed under Florida law. Accordingly, we understand the County’s questions as to how this will affect the calculation of fiscal neutrality, for the changes to the transportation concurrency requirements do not correspond with the existing County definition of fiscal neutrality. However, from an economic vantage point, the changes have no effect on whether or not a development is actually fiscally neutral, for the new standards are in keeping with the proper calculation of neutrality.

57

Appropriate Calculation Method (Task 3) In addition to choosing the proper costs and revenues to count in any calculation, it is necessary to employ the proper methodology to tabulate them. The two most common ways of calculating costs are using either an average cost technique or a marginal cost technique. Economics teaches us that marginal costs are always the more appropriate measure for determining whether or not to go forward with a new project, yet marginal costs can often be more difficult to quantify than average costs. The two different techniques are broken out in more detail below.

1. Average-Cost Average cost techniques determine the average cost for each public service that needs to be provided on a per unit basis and multiply that average cost by the additional supply required based upon the new development. Most often, the costs of services are averaged on a per capita basis, by dividing the current budget for a certain public service by the current population. As a matter of practice, such an approach assumes that the current level of service will be maintained in perpetuity and that the marginal cost of providing said service to each additional inhabitant will be equal to the average cost of providing the service at present. Generally speaking neither of those are explicitly the case, but average costing does provide a good first order approximation. There are variations on this methodology that use service standards—comparing the additional people served by the new development to the average amount of services required in a city of that size—and proportional valuation—a slightly more complicated approach for non-residential development—but the gist is that the city compares the additional development to the average expected cost of services in the area.

58

2. Marginal Cost

Marginal cost techniques assess the current service capabilities and facilities of the area, taking into account specific needs to reach desired levels of service rather than simply average needs. For instance,

57

We would reiterate, however, that in general we would advise that counties choose to ignore all of the optional concurrency requirements due to the costs they impose on the County in terms of economic growth and the cost of housing. 58

Bise, Fiscal Impact Analysis. pp. 24-25.


26

if certain services must be increased in large increments (e.g. electric capacity, police or schools), then development when there is excess capacity entails less marginal capital costs than development that creates the need for additional capital investment. Marginal cost techniques thus more closely match the actual costs faced by the government, but also create an environment that is uneven for developers, as some development is assessed higher costs for public services than other similar projects. Marginal cost techniques can be based on the specific location, the most accurate approach, or by looking at marginal costs in comparable locations.

59 For instance, the latter option in Sarasota might entail looking at the

actual marginal costs associated with a previously developed Village or a similar project elsewhere in Florida. Unfortunately, neither average nor marginal cost techniques are perfect for all situations or treat developers evenly in all circumstances. In practice, even within a marginal cost analysis a number of the line items will be calculated using a variant of the average cost method. Generally speaking, it is important for the local government to understand the upcoming capital requirements that a marginal analysis entails, while such knowledge is more difficult for a developer to have. Over time, both a marginal analysis and average cost analysis should yield similar results, while the cash flows could vary over shorter periods, particularly over the early years of a development.

60

One of the most important considerations is that the calculations be transparent so that all stakeholders are able to understand how the impact of development is calculated. This entails a clear delineation of costs and revenues to be counted, as well as explicit assumptions at how each number was determined. A consulting firm makes this argument regarding impact fees, but it is just as true for fiscal impact analysis. “The method of calculating impact fees should be capable of being reconstructed. If the recalculation of the [impact] fee cannot reproduce the original fee, the calculation method may be flawed.”

61 In practice, this makes the use of marginal cost methodologies much more difficult, as the cost

assumptions on a purely marginal cost basis often cannot be repeated; the huge number of assumptions in dictating what constitutes maintenance of level of service makes it all but impossible for two people to come to the same conclusion about marginal costs. Accordingly, an average cost approach is frequently the only method that can create comparable and repeatable cost estimates. At the same time, however, clearly marginal costs are important. It is difficult to imagine an instance in which the County would not want the barriers to additional development to be lower in the event that costs to the County associated with additional development are lower. For instance, if one region of the County has ample infrastructure to accommodate new development whereas another region would require entirely new infrastructure, it is to everyone’s benefit that new development occur first in the area that requires no marginal capital investments. The same argument can be made across time periods, whether based upon the amount of capital available or the County desiring to encourage additional development in the event of a recession.

62

In an ideal world then, the case study approach for marginal costing would always be most preferred, if it could produce consistent results when applied by different people. Unfortunately, that is unlikely. Moreover, the costs of a case study are very high. Accordingly, the American Planning Association presents the following guidelines based on research from the field as to which methodology is appropriate under certain circumstances.

59

Ibid. pg. 25 60

Robert W. Burchell and David Listokin, The Fiscal Impact Handbook: Estimating Local Costs and Revenues of Land Development, Rutgers University Center for Urban Policy Research, 1980. 61

Dennis Ross and Scott Ian Thorpe, “Impact Fees” Practical Guide for Calculation and Implementation”, Revenue & Cost Specialists, September 1992. 62

The County currently employs an impact fee strategy along these lines, having put in place a temporary impact fee suspension of certain aspects of the impact fee system in order to encourage additional development.


27

Table X

Suggested Methodology by Situation63

Local Context1

Per Capita Multiplier Method Likely Appropriate

Case-Study Marginal Method Likely Appropriate

Time is Constrained X

Staff Expertise and Resources are Limited X

Budget is Limited X

Data Collection Capacity is Limited X

Most Services are at Capacity X

Significant Unused or Overused Capacity X

Development will Create Unique Service Demands X

New Population likely to Resemble Current Population X

Services Likely to Continue at Current Level X

Development Requires Significant New Infrastructure X

Type of Analysis2

City/Countywide Analysis X

Area/Corridor Plans X

Large Mixed-Use/Planned Unit Developments X

Small/medium-scale developments X

Cost-of-land-uses Studies X

Infill/Redevelopment X

Analysis of Alternative Development Patterns X

Annexation X

Level of Service Changes X

1- Based on Edwards and Huddleston, “Prospects and Perils of Fiscal Impact Analysis”, Journal of the American Planning Association, 2010. 2- Based on Bise 2010

To the extent that the County can work with developers transparently without high process costs, the accepted guidelines would suggest that fiscal impact analysis for Villages be performed utilizing the marginal cost method, while Hamlets should follow the average cost method. Additionally, there are a number of questions that often pop-up in relation to how to account for the timing of the cash flows, whether there is debt, who pays what costs, whether the project is phased, to which fund certain revenues accrue, etc. For instance, the initial investment in infrastructure could be funded via bonds that are supported by future taxes, by impact fees, by direct payment for the infrastructure by the developer, or by some combination thereof. From our vantage point, the precise method of financing is moot. The question of fiscal impact analysis is directly analogous to any investment decision that requires an initial investment in order to receive a stream of future cash flows. Economics dictates that the most appropriate way to determine whether the investment creates or destroys wealth is via a net present value (NPV) calculation.

64 NPV discounts all of

the cash flows from a project back to a present value and then sums those discounted cash flows together. The explicit formula for net present value is as follows:

63

Bise, Fiscal Impact Analysis. 64

Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance, McGraw-Hill, 7th Edition, 2003.


28

where t represents the time period of the cash flow (e.g. t=0 means in the current year, t=1 means the first year, etc.), i is the discount rate (i.e. the County’s cost of debt), and Rt is the net cash flow at time t.

65

A positive net present value indicates that the project will provide a positive fiscal impact and should be undertaken. The beauty of the net present value calculation is thus that it can accommodate any fashion in which the development is financed while at the same time providing a clear verdict on fiscal neutrality. The net present value calculation is incredibly simple for a Hamlet—simply utilize the average cost approach to tabulate the costs and revenues in each year and discount back to the future. If the number is positive, it is fiscally neutral and satisfies the fiscal neutrality provision. If it is negative, it does not satisfy the condition and requires changes to the proposal. The NPV calculation is slightly more complicated for a Village, however, given the use of the case study approach. The APA suggests that an experienced outside consultant work closely with the developer’s team and the County to perform the analysis in order for it to be quick, objective, accurate and repeatable.

66

After calculating the future ongoing cash flows, the County should compare their present value to the required upfront infrastructure investment. If the figure is positive, then the future revenues to the County on account of the development are so large that the County can fund the infrastructure via a bond offering that can be serviced by a portion of the future revenues. If the figure is negative, the County should work with the developer to determine how the remaining infrastructure costs will be financed. The County should be agnostic to the developer’s decision, which can take the form of impact fees, direct payment by the developer, creation of a community development district, or simply forgoing the project. Open-Ended Nature of the Fiscal Neutrality Provision (Task 2) The Sarasota County fiscal neutrality provision goes further than requiring that development demonstrate ahead of time that the entire project will be fiscally neutral. Specifically, if a development is designed to occur in several phases, the developer must show ahead of time that each phase projects to be fiscally neutral. As we have discussed previously, however, different types of development have different likelihoods of demonstrating neutrality. In order to make each stage fiscally neutral, the developer may be forced to bring the project to market in a sequencing that doesn’t make sense from a market perspective solely so that it can comply with fiscal neutrality by stage. It could also easily be the case that forcing the development to be fiscally neutral by stage could lead to a total development with a lower total fiscal benefit to the County. This requirement makes little sense from anyone’s perspective. Even more perniciously, the requirement is also open-ended. After every stage the County will provide a look back to ensure that the stage was indeed fiscally neutral. If the County determines that the stage was not fiscally neutral, or that future stages or the project as a whole no longer will be fiscally neutral, the County can prevent the remaining development from occurring without additional entitlements or impacts paid for by the developer. In other words, after each and every stage, the County requires interim reports, of course paid for by the developer, and has the ability to halt the project or severely alter the economics of the project midstream. Such an arrangement is untenable for any development project that requires outside financing, as most large developments do. Providers of capital want certainty surrounding as many of the cost and revenue assumptions as possible. They are already putting a large amount of capital at risk assuming market conditions won’t negatively change between the time the developer conceives of the project and actually brings homes to market. To have the potential for a project to be stopped midstream, or be burdened

65

“Net Present Value”, Wikipedia. http://en.wikipedia.org/wiki/Net_present_value 66

Bise, Fiscal Impact Analysis.


29

with large, unanticipated fees, makes the ability to forecast financial statements for the development nearly impossible, adding significant risk to the undertaking. This is even more true, given that in multi-stage development projects, the developer often does not begin making money on the project until the final stage(s). To put this concept in perspective, imagine if instead of the shortfall having to be made up by the developer, the responsibility was at the household level. Thus, if at some future time the County determined that the marginal tax revenue from the development was not sufficient to cover the associated services, each homeowner would be sent a bill. How many banks do you think would underwrite mortgages to potential homeowners who faced such an indefinite, contingent liability? The additional risk inherent in multi-stage projects given the open-ended nature of fiscal neutrality means that providers of debt capital will require higher interest rates, and providers of equity capital will require a larger percentage stake in the project, each of which will leave some projects no longer profitable and houses more expensive in those projects that are viable. And those are the results if the projects are able to receive outside financing at all. Many banks and investors are unwilling to assume such a level of government risk. To wit, we have had conversations with bankers and investors across the country, most of whom had never heard of such a provision. While most banks are hungry to make loans in today’s market environment, our contacts all were skeptical that they could provide a loan under such circumstances. The general feedback was, we look at any deal, but the returns would have to be incredibly attractive for us to consider providing financing under those conditions. This feedback we have received is from people in different markets, but others who do business within Florida have come to the same conclusion. Local developers have been expressing their frustration with the provisions since it was put in place. Providers of capital also find the provision anathema to profitable development financing. A letter from July of 2013 to the Board of County Commissioners from Brett Sealy of MBS Capital Markets, a Florida-based investment banking firm that underwrites infrastructure financing for big developments in Florida, described the situation as follows:

the one constant [in providing infrastructure capital] has been the necessity for certainty and definitiveness as it relates to the determination of entitlements and impacts at the outset of the project. This certainty and definitiveness is the most fundamental of underwriting criteria for the provision of infrastructure capital albeit equity or debt. Therefore, subjection to open-ended or even periodic fiscal neutrality will create such significant uncertainty that participation by the capital markets in the provision of infrastructure capital will undoubtedly be entirely non-existent. The obligations of a project must be quantified at the outset of that project to provide the necessary certainty for development to obtain financing from the capital markets. Open ended fiscal neutrality obligations will prohibit any form of long term financing.

67

We understand that the County desires more evidence of the truth of the MBS Capital Markets viewpoint. Given that there are very few other examples of a requirement of fiscal neutrality, let alone of this timing provision, however, it is difficult for us to point conclusively to evidence showing that it is impossible for master developments to receive financing given this provision. However, we would point to the relative lack of Village and Hamlet development when the real estate market in the rest of Florida is rebounding, especially when combined with feedback from developers and providers of financing, and say that the market has made it quite clear that the open-ended fiscal neutrality provision has a dramatically negative effect on development financing. To ignore the feedback and the utter lack of development reminds us of the famous Marx brothers line, “Who you gonna believe, me or your own eyes?”

67

Letter from Brett Sealy to the Board of County Commissioners of Sarasota County, July 8, 2013.


30

It is clear to us that the current regulatory environment for Villages and Hamlets creates a situation in which it is nearly impossible to receive outside financing, meaning the only large-scale development will be by companies that can finance the entire process internally. Yet that may not be efficient for a number of reasons—first, it severely limits the number of firms who can engage in large-scale development projects; second, it creates a huge level of risk for that firm, meaning that if market conditions change the firm could go bankrupt, eliminating a large number of jobs for County residents, and costing the County dearly in a number of ways as the land sits idle; and, third it ties up tremendous amounts of firm capital that could profitably be utilized elsewhere, leading to less growth and higher housing prices. Instead, the County should define the costs upfront and have no further requirements on the developer other than living up to the payment those fees. Such a process allows developers to understand the rules upfront and to model out costs and revenues to see whether they can engage in projects with returns that exceed their cost of capital. The County should remove the staged and open-ended nature of the fiscal neutrality requirement. Negative Consequences of the Fiscal Neutrality Provision There are a great number of negative consequences to consider in relation to Sarasota’s fiscal neutrality provision. Most prominently, as we have recounted on a number of occasions, even prominent advocates of fiscal impact analysis do not believe that there should be a fiscal neutrality provision as a requirement for new development. As the American Planning Association notes, “One criticism of FIA is that it only considers impacts on a jurisdiction’s budget, while ignoring social or environmental costs and benefits, which may be of significant value to citizens. Projects with a negative net fiscal impact could have large potential nonfinancial benefits and be in the best interest of the community to pursue.”

68 In the

case of Sarasota’s fiscal neutrality provision, a project that fits that description could not be undertaken. Additionally, there are huge costs imposed upon developers. For starters, developers must undertake the fiscal neutrality analysis. Yet the developer has the ability to use either marginal or average-cost techniques as the developer sees fit; the developer has the ability to make its own assumptions on every variable included in the analysis; there is no sensitivity analysis required; and, the developer pays for the analysis. Accordingly, there is no question that every analysis will show fiscal neutrality. And indeed, no development proposed to the County following the adoption of the fiscal neutrality requirement has shown a project to be a fiscal drain. But, given the ability of the outside consultant to perform the entire analysis without any sensitivity analysis, the County has no real understanding of where things could do wrong and how they would affect the calculation. Instead, the County needs a defined calculation process that is run internally as a guide, not a rule. The process itself adds significant time and cost to the development process—from the initial analysis, third party review, and demonstrations in front of the County. As we have previously shown, adding time to the process leads to higher and more volatile housing prices, and adding cost to the process also leads to higher prices. Making matters even more difficult, while any initial fiscal neutrality analysis will clearly demonstrate neutrality, the County also requires additional demonstrations of neutrality at each phase of multi-phase developments. If the project fails on a later phase, the project could be halted or forced to pay penalties to the County. Such a requirement makes it impossible for development projects to receive external financing, as it adds too much risk and time to the process. This loaded gun held by the County makes development significantly more difficult and less likely. If the theoretical negatives of the provision are not convincing enough, consider that there have only been a handful of applications, most of which have required revisions to some requirements in order to receive approval, and only one has started building.

68

Bise, Fiscal Impact Analysis. pg. 4


31

The major problem with such an environment is that it restricts the ability of developers to create wealth. One of the principles of economics is that wealth is created by moving assets from lower- to higher-valued uses. The capitalist system allows for greater wealth creation because it lets people follow self-interest and engage in transactions based on their own volition. By definition, voluntary transactions create wealth. Yet by restricting the types of building, driving up the process cost, and lengthening the time to market for a project, you restrict the ability of a developer to move land to its highest valued use, creating a deadweight loss to the community. Even in the instance where the developer is still able to move property to its highest valued use, the fiscal neutrality provision has added more costs, time, and uncertainty to the process. These costs will, when possible, be pushed forward to customers in the form of higher priced buildings. When the developer is unable to push the costs forward, he will seek to lower input costs (e.g. labor and materials), and if unable to do that, will simply accept a lower profit. None of these, however, are positive outcomes. In the former case, we have increased the cost of housing. In the latter, we have guaranteed lower levels of employment and investment in the community. All the developer can do is move property to its highest valued use and do so at a time when it believes that the new properties will be accepted by the market. The County’s fiscal neutrality provisions only serve two purposes: 1) to lengthen the developer’s expected time to market, thus creating the potential for mistiming the market; and 2) to make the process more expensive, thereby preventing some development from occurring. Neither of those processes helps move land to its highest valued use, thus limiting the creation of wealth in the County. In other words, this process actually serves to starve the County of resources, making it more likely to have a budget deficiency over time. Even smart growth advocates acknowledge the difficulty in fiscal neutrality provisions. For instance, Peter Katz recently posited, “While the intent behind such a [fiscal neutrality] requirement is laudable, the analyses at the heart of such studies are often based on subjection assumptions that can be easily gamed”.

69 Indeed, we have already expressed that same problem. Moreover, every instance we can find

of growth management and fiscal neutrality provisions has been accompanied by endless requirements for land use studies and consultants at both the developer and community level. For instance, in Sarasota, there is the requirement for the developer to conduct a fiscal neutrality analysis, then the County contracts for (and developer pays for) an independent review of that analysis. It leads to the question of just who benefits from all of these studies, particularly when the outcome is known before they are even performed. For the County as a whole surely loses. V. Suggestions for Sarasota

There are a number of worthwhile goals put forth in the Sarasota 2050 plan, including housing affordability, a varied housing supply that accommodates the wants and needs of Sarasota citizens, avoiding excessive traffic, and utilizing market-based principles and incentives in development. Unfortunately, a number of the means and several other goals described in the plan conflict with those admirable goals. Economic theory and the evidence dictate overwhelmingly that more restrictive land use policies lead to a less responsive (more inelastic) supply of homes. The growth management policies of Florida and Sarasota County simply do not allow market response to occur in a timely fashion. This causes higher and more volatile housing prices, slower population and employment growth, and more volatile wages. This is true at both the state and local level. We do not view any of these outcomes as desirable. We believe that the land use planning requirements in Florida are already extensive enough to lead to higher and more volatile property prices, slower population growth, and slower employment growth. We see little reason for Sarasota to make these restrictions more onerous on developers than they already are. Indeed, the evidence suggests that Sarasota’s policies heighten each of these negative economic consequences. Instead, Sarasota should work to get as close to the Texas model of land use as possible

69

Peter Katz, “The Missing Metric”, Government Finance Review, August 2013.


32

given the existing Florida growth management regulations. The following suggestions would help Sarasota reach such a policy environment.

Zoning and Regulations We suggest a proactive review of all land use zoning, regulation and restriction. Zoning restrictions and County power to deny development proposals should be removed to the greatest extent possible under state law. County-wide regulation should be limited to those dealing with water supply, environmental preservation, health and safety. Wherever possible, property usage decisions should be left to the neighborhood homeowners associations and deed use restrictions rather than be subject to County regulation. Accordingly, all density restrictions that are set at the County level should be eliminated. The urban service boundary should be eliminated, or at the very least expanded, and the requirements upon Villages and Hamlets should be removed. Finally, the County should put in place additional policies to lessen the time between conception of a development and production. The County should set a maximum review period time for any proposed development, after which the development is automatically approved. Additionally, it should ensure there is a fair, timely arbitration process in place for any disputes between developers and the County or local governments. Concurrency Requirements The County should mirror the reduced concurrency requirements of the updated Community Planning Act and not take on any of the optional requirements. In other words, only sanitary sewer, solid waste, drainage, and potable water need to provided on a concurrent basis alongside new development. Concurrency requirements should not be placed on developers for parks and recreation, schools, or transportation facilities. Developers and the market can dictate whether the other public services are necessary. Fiscal Neutrality Provision Most importantly, the fiscal neutrality provision should be removed in its entirety. (This would, by definition, also remove the requirement to demonstrate neutrality at every stage, a requirement that greatly diminishes the ability to gain outside financing for development projects.) The fiscal neutrality provision goes far above and beyond the Florida growth management policies and is a primary reason that land prices in Sarasota have faster and more volatile growth than the state average. The requirement to have a state-approved comprehensive plan, as well as a capital improvement schedule that is updated annually, allows for decision-making at the local level that is made in concert with fiscal impact analysis. Indeed, given the requirement to map out capital expenditures, and do so within a balance budget, it is reasonable to employ FIA to aid the County in its understanding of capital requirements to come. That said, fiscal neutrality should not be the determining factor, or even a requirement, in whether or not a project is approved. As it is, the process can be gamed with relative ease. Instead, fiscal impact analysis should be a guiding, but not limiting, factor employed by the County.

We always start a policy analysis from the principle of primum non nocere—first do no harm. Unfortunately, many of the policies of Sarasota 2050 clearly are exhibiting a great deal of harm on the ability to profitably engage in development projects in the County. Making changes in line with these suggestions would position Sarasota County as an economically dynamic county within the state of Florida. Moving land use in the County away from “smart growth” and toward “actual growth” would allow


33

for true market responses, leading to more affordable housing, less volatile housing prices, faster population growth, and a more vibrant employment market. That said, we also do understand the realm of politics and that not all policies changes that should be made actually can be. Accordingly, the proper perspective is to hold the ideal policy mix as the “North Star” and seek to move toward that policy whenever possible. In the case of Sarasota County, we understand that the fiscal neutrality provision, amongst many other features of the comprehensive plan, is here to stay. So, the question is how to implement this policy in ways that are least restrictive to economic growth and overall prosperity in the County. In particular, in order to achieve the stated goals of Sarasota 2050—consumer choice, affordable housing, and avoidance of traffic congestion—through an incentive-based system in which development is a fiscal benefit to the County, we would make the following recommendations.

The on-going and open-ended nature of the fiscal neutrality provision should be removed. Instead, fiscal impact analysis should be employed by the County at the outset of any project to determine the expected fiscal impact.

First, the County should estimate the future ongoing revenues and expenses, then discount them back to a present value using the current interest rate on Sarasota County municipal debt. The County should compare the present value of the cash flows to the required upfront infrastructure investment.

o If the figure is positive, then the future revenues to the County on account of the development are so large that the County can fund the infrastructure via a bond offering that can be serviced by a portion of the future revenues.

o If the figure is negative, the County should work with the developer to determine how the remaining infrastructure costs will be financed. The County should be agnostic to the developer’s decision, which can take the form of impact fees, direct payment by the developer, creation of a community development district, or simply forgoing the project.

When thinking of costs and revenues to include in the fiscal impact analysis, the County must focus on the margin. For instance,

o Bringing existing County infrastructure up to sufficient levels of service is a cost that will be incurred regardless of whether there is additional growth and thus should not be included. For this reason, the changes to the state transportation concurrency requirement are appropriate.

o Each new resident assumes a pro rata share of the County’s existing debt, a benefit which should be included in the fiscal impact analysis.

o New residential development also necessitates additional retail, commercial and industrial development, a benefit that should be included in any fiscal impact analysis.

The County should employ per capita/average cost analysis for Hamlets and the case study/marginal cost method for Villages.

The County should work with both the developer and an outside consultant in a process that is quick, transparent and repeatable to define the assumptions and use sensitivity analysis to hone in on the assumptions that are most important to determining the fiscal impact.

The County should view these fiscal impact analyses as a guide but not a determining factor. There are times when non-monetary considerations may be important enough to go forward with a development even if it shows a slight negative fiscal impact on the County.


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Appendix

A. The Roots and Intellectual History of “Smart Growth”

The ultimate root of the urban planning doctrine of “Smart Growth” can be traced back to the very first, surviving, recorded use of the word “suburb” in the English language, which appears in Chaucer’s The

Canterbury Tales in the 14th century. He begins the Tales, in fact, in 1388 at the Tabard Inn in

Southwark. Southwark was medieval London’s first suburb. It included pubs, inns, “stewhouses,” “bull and bear pits,” theaters which later featured the works of Shakespeare, and entertainment of ill repute. Complaints about “suburbs” arose even during medieval times. Professor John Stigloe of Harvard University summarized these complaints more recently, writing, “Medieval English suburbs grew haphazardly, stretching ribbon like along the main roads leading to town gates.”

70

The Industrial Revolution and the Rise of Urban Planning As urban areas were transformed by the Industrial Revolution, their troubles grew, and by the 19

th century

major cities seemed to be in crisis and in need of rescue. Urban planner Peter Hall explained in his book, Cities of Tomorrow, “Twentieth-century city planning, as an intellectual and professional movement, essentially represents a reaction to the evils of the nineteenth-century city.”

71 Randall O’Toole of the Cato

Institute explained those evils in his book, The Best Laid Plans, as “slums so crowded that often two or more families shared a single room; poor sanitation; rampant disease; high rates of crime; and (perhaps most shocking of all to Victorian sensibilities) prostitution and other forms of immoral behavior.”

72

One response to these troubles was the City Beautiful movement arising in the late 19

th century, originally

associated with Frederick Law Olmsted, who is recognized as the father of American landscape architecture. The concept behind City Beautiful was to counter urban squalor with large city monuments and parks that would both beautify the city and promote a sense of civic pride and community. City Beautiful supported suburbanization because the suburbs provided broader opportunity for design around parkland and civic monuments. City Beautiful is recognized as the foundation of urban planning in the United States. The high point of the City Beautiful movement was the model city featured at the World Columbian Exposition of 1893 in Chicago, composed of all white buildings and monuments (the White City). Ebenezer Howard published his guidebook out of the 19

th century urban morass in 1898 with his

influential book, Garden Cities of Tomorrow.73

The book promoted a vision of new, pre-planned, self-contained cities outside the sphere of existing cities, free of slums and featuring what he saw as the best of both town (opportunity, amusement and good wages) and country (beauty, fresh air and low rents). The new cities were to be surrounded by a permanent belt of agricultural land. This was a classic vision of the modern suburb. The book gave rise to the Garden City movement, which resulted in the construction of several new suburban Garden Cities in England in the early 1900s, with echoes in Germany. The movement also spread to the United States, leading to the establishment of suburban Garden Cities. Those included Forest Hills Gardens on Long Island in New York in 1909, designed by the architect urban planner F.L. Olmsted, Jr., son of Frederick Law Olmsted. Another was Radburn, NJ, in 1923, and the entirely newly constructed Suburban Resettlement Program towns of the 1930s, which included Greenbelt, MD,

70

John R. Stigloe, Borderland: Origins of the American Suburb, 1820 – 1939 (New Haven: Yale University Press, 1988), p. 1. 71

Peter Geoffrey Hall, Cities of Tomorrow: An Intellectual History of Urban Planning and Design in the Twentieth Century (Cambridge, MA: Blackwell, 2002 ed.), p. 7. 72

Randal O’Toole, The Best Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future (Washington, DC: Cato Institute, 2007). 73

Ebenezer Howard, Garden Cities of Tomorrow (London: S. Sonnenschein & Co., Ltd., 1898).


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Greenhills, Ohio, Greenbrooke, NJ and Greendale, Wisconsin. But the same ideas influenced suburban developments all across America, and the western world. The Roots of “Smart Growth” and the New Urbanism Another milestone in the urban planning literature of the 20

th century was the publication in 1935 of The

Radiant City, by the architect/urban planning visionary known by the more pseudonym of Le Corbusier. A French citizen born in Switzerland, he was devoted to improving living conditions for the residents of crowded cities, especially in the lower income slums. His career spanning five decades involved the architecture for the construction of buildings throughout Europe, India and the United States. His book involved the culmination of his earlier practical architectural work, proposing an urban vision of modern, concrete, high rises separated by green recreational spaces and connected by broad avenues and highways, which he believed would be the most efficient way to house rapidly growing populations. Visiting New York in 1935, he criticized Manhattan skyscrapers for being too small and too close together. He proposed replacing all of them with one giant Cartesian skyscraper with both residential and commercial/office units. This would have cleared space for more parkland, he reasoned. O’Toole explained that “it was Le Corbusier’s authoritarian strain that has become dominant in urban planning for the last 60 years.”

74 By authoritarian, O’Toole meant that despite the persistent preference of

rising middle classes throughout the western world for classic suburban living, each family with their own private yard, and heavy reliance on their own personal automobiles whenever they had the personal means for that, Le Corbusier insisted on imposing his vision of the good life for them, stacked in high density, multifamily structures, and relying on mass transit. O’Toole attributed that to Le Corbusier’s Swiss obsession with maintaining well-ordered structure, rather than liberal freedom of choice and respect for individual preference. This is a classic forerunner for today’s “smart growth” movement. But Hall identifies as the central irony of urban planning that it was “the market,” not planners, that managed to “dissolve the worst evils of the slum city through the process of mass suburbanization,”

75 a

view endorsed by O’Toole as well.76

Suburbanization enabled escape from the overcrowding, poor sanitation, disease, crime and other afflictions of the central cities, which was made possible not by planners pursuing their vision of the public good, but by developers pursuing profit by serving the preferences and desires of real people and their marketplace demand. O’Toole reports that mass suburbanization “started taking place as soon as streetcars allowed white-collar families to escape the crowded cities and accelerated as automobiles became affordable to blue-collar families.”

77

The planners initially welcomed suburbanization, as reflected in the City Beautiful and Garden City movements. But as O’Toole explains, “as soon as working-class people started moving to the suburbs, which was the goal of some of the early, non-Corbusian strains of planning, planners started complaining about the evils of the suburbs.”

78 Hall adds that by the 1930s British suburbs “were universally derided

and condemned. The fact was that the prosecutors were all upper-middle class and the offenders were mostly lower-middle class in a typical such suburb.”

79 Hall explains that the residents of these new

suburbs “were enjoying a quantum leap in their quality of life.”80

But that had no meaning for the upper middle class architects and planners, who “repeatedly in their journals, at their congresses, during the 1930s…railed about the suburbs.”

81

74

O’Toole, p. 168. 75

Hall, Cities of Tomorrow, p. 5 76

O’Toole, The Best Laid Plans, p. 168. 77




Hall, Cities of Tomorrow, p.80 81

Hall, Cities of Tomorrow, p. 80


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Harvard historian John Stigloe recognized the same pattern in regard to American suburbs, writing that until the 1920s, “most intellectuals favored their creation.”

82 But when working class families began

moving to the suburbs, then “urban writers, especially in New York, turned on the suburbs as the home of narrow-mindedness, [as] architects entranced with the flat-roofed, cement apartment houses of 1930s Berlin reeled from their steadfast urban love of single-family, pitched-roofed houses, [and as] city planners championing great boulevards and public parks learned of gardeners anxious to shape their own private spaces.”

83

Hall identified the class prejudice hidden beneath this supposedly aesthetic view, saying that the critics of the newly emerging suburbia had “a terror of what Anthony King has called the democratization of the countryside: the lower middle class and the working class invasion of an area that had hitherto been the preserve of an aristocratic and upper-middle-class elite.”

84 English critic Thomas Sharp complained

about working people moving to the suburbs, “Tradition has broken down. Taste is utterly debased. There is no enlightened guidance or correction from authority.”

85 Another upper class critic, C.E.M. Joad,

complained of “hordes of hikers cackling insanely in the woods” and of “people, wherever there is water, upon sea shores or upon river banks, lying in every attitude of undress and inelegant squalor.”

86 O’Toole

explained more bluntly what these critics meant, “The countryside, obviously, should be preserved for those who know how to properly appreciate it.”

87

Joad was not content with complaining alone. He urged action. Presaging in 1937 today’s smart growth urban planners, Joad proposed that “the extension of the towns must be stopped, building must be restricted to sharply defined areas, and such re-housing of the population as may be necessary must be carried out within these areas.”

88 Sharp further proposed stacking up the hoi polloi in greater densities as

future smart growth planners would, calling for suburban housing to involve, “great new blocks of flats which will house a considerable proportion of the population of the future town.”

89

O’Toole summarized this reactionary response to working people flourishing in the suburbs, saying,

This, of course, is Le Corbusier’s vision: not only his Radiant Cities but his authoritarianism. Le Corbusier promoted a ‘famous paradox’: cities are congested because they were too dense, and the solution is to increase their density by building Radiant Cities. This fit right into the elitist view that most people should be confined to high-density areas because, after all, they would at least get to enjoy the spaces between the high rises.

90

Implementation of Smart Growth and the New Urbanism Begins

The first policy implementation of what has become the smart growth movement, or the New Urbanism, is the Town and Country Planning Act of 1947 enacted in Great Britain. That Act radically removed the right of development from land ownership in Britain. Any development required planning permission from the local planning authority, consolidated by the Act into 145 authorities across the country, matching county or borough councils. Each planning authority was required under the law to prepare a comprehensive development plan for their local area. The local planning authority enjoyed the power to issue compulsory purchase orders,

82

Stigloe, Borderland, p. 4. 83

Stigloe, Borderland, p. 4. 84


Thomas Sharp, Town and Countryside: Some Aspects of Urban and Rural Development (London: Oxford University Press, 1932), p. 11. 86

C.E.M. Joad, “The People’s Claim,” in Britain and the Beast, ed. Clough Williams-Ellis (London: J.M. Dent, 1937), pp. 72-73. 87


Joad, “The People’s Claim,” pp. 81-82 89

Thomas Sharp, English Panorama (London: Oxford University Press, 1936), p. 107. 90

O’Toole, The Best Laid Plans, p. 170.


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under which the authority could buy the land at the value of its current use, and resell it for that price to a developer. The developer would then be charged a development charge equal to the additional value of the land with the approved development. So development rights were taken from landowners and redistributed to the government, which would receive the extra value of the property due to the development rights. Or the planning authority also had the power to undertake development or redevelopment of the land itself. The current owner, of course, could apply for permission to develop his or her own land. O’Toole finds that the Act “greatly restricted the development of rural lands.”

91 He writes, “In

implementing this law, the government disregarded the preferences of most of its subjects for living in single family homes. Instead, housing was provided by building hundreds of new mid-rise and high-rise apartment buildings.”

92 Hall reports that in many of these apartments, “the architect was uninspired or

non-existent, and tenants found themselves uprooted into hurriedly constructed system-built flats lacking amenities, environment, community: lacking, in fact, almost everything except a roof and four walls. The remarkable fact was how long it took for anyone to see that it was wrong.”

93

But that was less remarkable given that the prior housing had just been heavily bombed out by the war. Planning critic Wendell Cox found, however, that under the Town and County Act policies, the average size and quality of housing for British residents were dramatically lower in the 1950s, and remained lower in the 1990s, than they had been in the 1920s.

94

Sociologist David Popenoe, who supports these same policies for the United States, reports on the similar postwar experience of these policies in Sweden. He writes, “A public opinion poll at the time in Stockholm showed that a majority of people wanted single family homes. Needless to say, the people did not get them.”

95 Instead, they got “mainly high-density, mid-rise and high-rise housing,” with 76 percent of

Stockholm residents in apartments by the 1980s.96

Popenoe explained, “The housing desires of individual residents were not a serious input [into the policies]. Swedish housing densities are a planners’ alternative, and for better or worse, Swedish cities are planners’ cities. In this sense Swedish urban development is much more akin to that of the Eastern European socialist countries than it is to the United States.”

97

O’Toole, who opposes such policies for the United States, explained that besides high density housing, the Swedes adopted a second policy centrally favored by smart growth advocates in the United States today:

The Swedes did more than plan for and build at high densities in the 1950s and 1960s. Like the Soviets, they tried to discourage auto use, partly by heavily taxing both autos and fuel. In addition, to encourage people to ride transit instead of driving, ‘they have even gone so far, in some areas, as deliberately to locate car owners’ private parking spaces further from their residences than the nearest public transportation stop.’ As a result of such policies, ‘only 7 percent of households have two cars, while 45 percent own no automobile at all.’

98

Hall explains that in 1970 came “a quite sudden reaction” against high density housing and the Swedish planning system. “Vacancy rates soared, which critics blamed on a housing-industrial complex consisting

91


O’Toole, The Best Laid Plans, pp. 176-177. 93

Hall, Cities of Tomorrow, p. 244. 94

Wendell Cox, “Democratizing Prosperity: The Role of Homeownership,” (Presentation to the 2005 Preserving the American Dream Conference, Bloomington, MN, June 25, 2005). 95

David Popenoe, Private Pleasure, Public Plight: American Metropolitan Community Life in Comparative Perspective (New Brunswick, NJ: Transaction, 1985), p. 61. 96

Popenoe, Private Pleasure, Public Plight, p. 44. 97

Popenoe, Private Pleasure, Public Plight, p. 61. 98



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of the construction industry and the planning bureaucracy.”99

Hall adds, “The new mood blew up in 1971,” with street protests objecting to proposed urban plans. “Protestors no longer accepted politicians’ arguments of economy and functionality, and exposed ‘official’ plans as inconsistent, misconceived, and inaccurately based.”

100 After 1972, Swedish housing “tipped sharply towards owner-occupiership” and

new construction tipped “towards single family homes.” Before 1970, “nearly three-quarters of all new units were multi-family apartments [but] by 1980 the proportions were reversed.”

101 The apartments were

subsequently left to the poor and foreign guest workers. Hall summarizes the result, “attempts to persuade everyone to live in apartments failed.” This is in Sweden in the 1960s and 1970s. Today, Stockholm is suburbanized and “indistinguishable from its counterparts in California and Texas.”

102

O’Toole adds,

Stockholm planners are also losing their war on the automobile. Auto ownership in the greater Stockholm area increased from about one car per four people in 1970 to one car per two people in 1990, while per capita driving increased by 30 percent. Nor is Sweden unusual. If anything, population densities are declining and per capita driving is increasing even faster in most other European cities.

103

In 1977, Popenoe asked, regarding Sweden, “Why, in a country so affluent, with high car ownership, so recently rural, and with so much land, was it necessary to put so many people into small high density apartments?” Apparently, most Swedes were asking the same question, and could find no good answer. Smart Growth and the New Urbanism in the United States The same two themes in these postwar urban planning experiences in Great Britain and Sweden, increased housing density through multifamily dwellings rather than single family homes, and policies to decrease automobile ownership and use and increase reliance on mass transit and other alternatives to cars such as walking and bicycling, have been central to the Smart Growth and New Urbanism movements in the United States in recent decades. Policies associated with these themes include mixed use development, with stores, offices, and restaurants, in close proximity with housing; pedestrian friendly development, with walking and bike paths; regional planning cutting across jurisdictional lines to corral those trying to escape the overall plan and policies; urban development boundaries to restrict suburbanization; agricultural belts surrounding cities to enforce suburbanization restrictions; ring highways around cities, which were to also provide a boundary or barrier to suburban development beyond the ring; limited highway development and parking; and more mass transit and “light rail” and other similar policies. The benefits of these policies were supposed to be reduced suburban sprawl, reduced traffic congestion, increased housing affordability, increased racial and income integration and diversity, and better and more sensitive environmental results, among others.

A seminal event in the coalescence of these ideas into modern American urban planning movements was the publication in 1961 of The Death and Life of Great American Cities, by Jane Jacobs. Jacobs began, “This book is an attack on current city planning and rebuilding,” including the emerging policies of urban renewal in the United States. But because the book was written from the perspective of Greenwich Village in New York City, it was taken as an admonition that urban planners should promote all the features of the inner city Village in housing developments universally, indeed, globally. That included, of

99

Peter Hall, Cities in Civilization (New York: Pantheon Books, 1998), p. 873. 100

Peter Hall, Cities in Civilization, p. 874. 101

Peter Hall, Cities in Civilization, p. 875. 102

Peter Hall, Cities in Civilization, p. 877-78. 103



39

course, mixed use development, pedestrian friendly development including walking and bike paths, reliance on mass transit rather than automobiles, and anti-suburban policies.

The real point of Jacobs book was that thriving cities were endemic manifestations of spontaneous market development reflecting the preferences of the residents, and that outside urban planning interventions generally interrupted the vital economic and cultural flows that kept urban neighborhoods alive and thriving. O’Toole explained the misinterpretation,

Instead of finding in The Death and Life a warning that urban planning does more harm than good, planners used the book as a model for how they should do urban renewal. If Jacob’s high-density, mixed use communities were so good in the inner city, the planners reasoned, then they should be built everywhere else too, and particularly in the suburbs. Calling themselves New Urbanists, they proposed that all new developments be like Greenwich Village: high densities, mixed uses, with limited room for the automobile. They also urged that existing suburbs be redeveloped along these lines.

104

The planners called the concept “urban villages,” and they were off and running to the same place they were going before. That seems to be the fate of all intellectual developments in this modern age. They are interpreted to support the powers that the ruling class wants, and political correctness sets in to short-circuit any dissent. The restoration back to Le Corbusier and the Radiant City was completed with the publication in 1973 of Compact City: A Plan for a Livable Urban Environment, by George B. Dantzig and Thomas L. Saaty. O’Toole explained, “The advantage of a compact city…is that congestion would be reduced because neighborhoods would be so dense that people could get around on foot or by transit rather than by driving.”

105

Leading architect Andres Duany in Florida took up the cause proclaiming his goal was to increase residents’ “sense of community.”

106 Another leading architectural force, Peter Calthorpe in California, also

embraced the cause, proclaiming that his goal was to create “pedestrian villages” that would reduce the amount of driving that people needed to do.

107 O’Toole explained the culmination,

In 1991, Duany, Calthorpe, and other architects and planners met at the Ahwahnee Hotel in Yosemite Park and wrote the ‘Ahwahnee Principles.’ The principles emphasized designing neighborhoods so that ‘housing, jobs, daily needs and other activities are within easy walking distance of each other,’ and planning regions around ‘transit rather than freeways.’ These architects called their ideas New Urbanism and soon formed the Congress for the New Urbanism to promote them.

108

O’Toole explained the connection with past doctrines,

New Urbanism retained planners’ historic animosity toward low-density suburbs, coupled with a new animosity toward the automobile that they shared with the soviet planners but not with Le Corbusier. New Urbanism retained the goal of high-density housing, merely substituting Brooklynesque mid-rise developments for Radiant City high rises. Both models shared the ideas of mixed use developments, mixed income housing, and transit oriented and pedestrian friendly design. While New Urbanism accepted that people

104



Andres Duany and Elizabeth Plater-Zyberk, “The Second Coming of the American Small Town,” Wilson’s Quarterly, Winter 1992, pp. 19-48. 107

Peter Calthorpe, The Next American Metropolis: Ecology, Community, and the American Dream (New York: Princeton Architectural Press, 1993), p. 17. 108



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would want dwellings much larger than 600 or 700 square feet, both models minimized the size of private yards and substituted common areas.

109

O’Toole added, Moreover, New Urbanism, or at least its smart growth incarnation, is just as authoritarian as Le Corbusier or [the book] The Ideal Communist City. The Ahwahnee Principles required that ‘government take charge of the planning process’ rather than allow ‘developer initiated, piecemeal development.’ As noted [previously], the Congress for the New Urbanism at least at one time urged that all new developments be required to follow New Urban designs and that all existing suburbs be reconfigured to such designs.

110

While some in the New Urbanism movement have distanced themselves from such authoritarianism in favor of more freedom of choice, the roots of the doctrine and its logic are still based on compulsion to follow the plan rather than freedom of choice and consumer preference under market competition. Smart growth is more associated with prescriptive zoning codes, insufficient parking space by design, and other coercive policies to impose elitist views favoring smaller, high density living spaces and highly limited opportunities even to choose traditional American automobile use. But these policies transgress powerful, ingrained American preferences for bigger houses in spacious suburbs, and what has been often described as an outright American love affair with the automobile. Every teenage boy lusts after getting his own car as soon as possible, and when he marries, the couples’ American Dream is to move to the suburbs to raise their children sooner than possible. This is supported by definitive polling data.

111 A major, thorough 2002 poll found that 82 percent of

Americans prefer a single family home in the suburbs, while less than 20 percent would prefer New Urban communities. Only 7 to 9 percent want to live closer to “the city” or public transportation. Only 18 percent want a home in the city, close to work, public transportation, shopping, entertainment and restaurants, while 64 percent want a larger home than presently. But anyone who has lived and grown up in America doesn’t need polling results to confirm these overwhelming preferences. Smart growth policies, in fact, have a long history of failing to produce the desirable outcomes which are touted on its behalf. Rather than affordable housing, the results are always soaring housing prices because of the restrictions on housing development (supply). Rather than reduced traffic congestion, the results of increased housing density are always more traffic congestion. Rather than reduced automobile use, developments reaching farther out from the city to escape smart growth restrictions can result in much greater automobile use. But the tendency for everyone of driving age to passionately seek their own car is exploding automobile use more than fast enough anyway. Americans tell pollsters they favor mass transit thinking that is for other people to get them off of the roads and out of their way. Mass transit is definitely the one concept where if you build it, they will not come. Families with children are not interested in mixed use development, or in walking or cycling as an alternative to the family car(s). Rather than more green, positive environmental results, higher density living is more associated with environmental degradation. More green living closer to nature is found, in fact, in the much derided suburbs, not in high density city living. The Portland Failure Of all American cities, smart growth development policies have been most aggressively adopted by Portland, Oregon. That stemmed from the rapid growth of Portland in the late 1980s and early 1990s. As O’Toole explained, “Environmentally conscious Oregon worried that this growth would ‘Californicate’

109





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Oregon and ‘turn Portland into Los Angeles.’ Indeed, Los Angeles is the bogeyman for people all over the West who worry about the effects of growth on their community.”

112 That is because Los Angeles is

pictured as the epitome of suburban sprawl, and runaway freeways fostering overuse of automobiles, with associated heavy pollution and smog.

Those “smart growth” policies began with the establishment of a regional government for the Portland area in 1992, approved by voters in a referendum. That regional government was empowered with the authority to write land-use and transportation plans for 24 cities and 3 counties in the Portland area. That regional government was sold to voters on the grounds that it would save Portland from becoming like Los Angeles.

113

Metro developed a 50 year master plan for Portland development, called the Region 2040 Project. That plan “would implement the smart growth vision of constrained urban land supply and more compact urban development, with a heavy emphasis on building and subsidizing fixed rail transit,” as John A. Charles explained in his contribution to A Guide to Smart Growth, a collection of essays on smart growth published by the Heritage Foundation.

114 A Guide to Smart Growth is one of the best treatises objectively

appraising smart growth, rather than simply cheerleading for it.

A second major smart growth policy adopted by Portland was the urban growth boundary, an arbitrary line drawn around Portland and its then suburbs as early as 1979. The policy behind the urban growth boundary was to limit urban development of Portland to the 364 square miles within the boundary, which was intended to preempt suburban sprawl and increase residential density.

Metro’s plan, in fact, called for increasing population density within the urban growth boundary by 70 percent. That was sought to be achieved by rezoning neighborhoods of single family homes for multifamily dwellings. Those policies began to foster some fundamental transformations of settled neighborhoods, provoking hostile reactions from residents, who thought they had voted for development planning that would slow or even stop disruptive growth.

Economist Anthony Downs of the Brookings Institution, a committed supporter of smart growth policies like the Portland urban growth boundary, nevertheless lamented that, “Where rapid growth is occurring, such tight boundaries would soon require significant increases in residential densities in built-up neighborhoods. But attempts to increase residential densities there would provoke hostile political reactions from residents.”

115 As Charles similarly observed, “when increased densities are forced on

individual neighborhoods, citizens will resist strenuously.”116

Such hostile citizen reaction forced Portland to abandon increased density rezoning in North Portland and Southwest Portland neighborhoods. In one Portland suburb, three city council members, including the Mayor, who supported rezoning to increase density were recalled and removed from office. In another, where Metro’s plan called for increasing population density from 8 people per acre to 31 by designating a Town Center in the middle of the development, fierce local opposition forced Metro to abandon the plan. Still another smart growth policy adopted in Portland was to devote major expenditures to development of a fixed-rail transit system, while sharply limiting funding for new roads and especially freeways. As O’Toole observed,

Other aspects of Metro’s plan included the construction of more than 100 miles of light-rail and commuter rail lines so that people would have alternatives to the automobile.

112



John A. Charles, “Lessons from the Portland Experience,” in Jane S. Shaw and Ronald D. Utt, eds. A Guide to Smart Growth (Washington, DC: Heritage Foundation, 2000). 115

Anthony Downs, New Visions for Metropolitan America (Washington, DC: The Brookings Institution, 1994), p. 197. 116

Charles, “Lessons from the Portland Experience,” p. 125.


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Metro wanted developers to build scores of high density, mixed-use developments so that people could walk to cafes, shopping, and perhaps even to work. Such transit oriented developments would be located on major transit corridors so people could ride the bus or light-rail to get to places that were too far to walk. With all the emphasis on transit, Metro proposed to build very little road capacity, and that would mainly serve industrial areas, not commuters or shoppers.

117

One benefit of such smart growth policies is supposed to be reduced traffic congestion, as people reduce driving to take mass transit, or walk or bicycle in pedestrian friendly zones. But the fundamental reality is that such possible reductions in driving are relatively minor, and more importantly are overwhelmed by the sharply increased traffic resulting from the many more people in the area due to increased density. As Charles observed, “Any rise in transit ridership resulting from higher density almost inevitably will be overwhelmed by the increased number of vehicular trips arising from the increased population. Since more than 90 percent of American adults own cars, and the rate of vehicle miles traveled has been rising steadily for decades,”

118 more American adults in an area due to increased population density is obviously

going to mean much more traffic congestion. Charles illustrates,

In a typical city, for example, if urban population densities doubled (as desired by many smart growth advocates), the percentage of residents using transit would have to increase more than tenfold in order to bring about a net reduction in local traffic. Trends of urban transit use show no evidence that this will occur. In fact, the trends are moving in the opposite direction of declining market share.

119

O’Toole further explains,

In addition, the higher densities required by smart growth more than make up for any per capita reductions in driving. Doubling density will reduce congestion only if per capita driving is cut by more than 50 percent. The actual reduction in per capita driving that would be associated with a doubling in density is more like 5 to 10 percent, which would mean an 80 to 90 percent increase in driving per square mile.

120

Even the Portland Metro regional government seemed to recognize that increased traffic congestion would result from its plans. Metro’s regional plan “called for increasing population densities within the urban-growth boundary by 70 percent, building 125 miles of rail transit, and redeveloping dozens of neighborhoods into high density, mixed use regional and town centers.”

121 Metro’s own planners

projected that this plan would more than double transit’s share of trips from 2.8 percent to 6.4 percent and increase the share of trips by walking and cycling from 5.2 percent to 5.8 percent. But that would mean that the automobile’s share of trips would fall by less than 5 percent, from 92.1 percent to 87.8 percent. Since auto trips tend to be longer than transit, cycling or walking trips, the auto would still be used for well over 90 percent of travel measured in passenger miles.

O’Toole explained further, “Of course, a slight reduction in the automobile’s share of trips would not reduce congestion because metro also projected a 70 percent increase in the region’s population. Given that increase, Metro projected that overall driving would increase by 67 percent. Since Metro was planning only a few small additions to the region’s road system, it projected a quintupling of congestion and a 10 percent increase in smog by the year 2020.”

122

117

O’Toole, The Best Laid Plans, pp. 83-84. 118

Charles, “Lessons from the Portland Experience,” p. 126. 119




O’Toole, The Best Laid Plans, pp. 89-90.


43

Indeed, perhaps this point is best demonstrated by the experience of Manhattan, which has the highest population density in the country by far. It also is filled with mixed use properties, and well served with mass transit. Yet it also has the worst traffic congestion in the country. Another impact of Portland’s smart growth policies has been to sharply increase home prices, sharply reducing housing affordability. Charles reports that by 1996 the price per acre for single family residential areas had reached $150,000 to $120,000 just inside the urban growth boundary. That was 7 to 8 times the price per acre just outside the boundary of $18,000.

123 Moreover, “even compared with such growth

centers as Denver, Las Vegas, Phoenix, and Tucson, Portland has experienced the largest increase in the median price of homes for the period from 1990 to 1996,”

124 which was the period during which, or

right after, Portland’s “smart growth” policies were adopted.

O’Toole adds that from 1991 to 1995, the cost of land in Portland for residential development soared from $25,000 per acre to $80,000. Within another two years, the price of such land had doubled again, “and the National Association of Home Builders ranked Portland the nation’s second least affordable housing market after San Francisco.

125 Of course, this should have been expected. When the area for

development is sharply constrained, and population density is increased, the natural result is to expect increased prices.

The greatest irony in Portland’s experience with Smart Growth is that the densest urban area in the country actually turns out to be Los Angeles. While the city of New York is denser than the city of Los Angeles, New York is surrounded by low density suburbs, especially in Connecticut and New Jersey, while Los Angeles, which includes in the city itself the nation’s largest expanse of land with more than 10,000 people per square mile, is surrounded by fairly dense suburbs. As a result, the 2000 Census reported that the Los Angeles metropolitan area was 33% more dense than the New York metro area.

126

Moreover, contrary to the song, which tells us that LA is a great big freeway, Los Angeles actually has the fewest miles of freeway per capita of any major urban area. The average U.S. urban area has twice as many freeway miles per million people as Los Angeles, with some almost three times as many. O’Toole adds, “Los Angeles also operates commuter, light rail, and subway trains on nearly 400 miles of track, and in 1994 had plans for many more.”

127

Sounds like LA, the bogeyman that everyone is supposed to avoid with Smart Growth policies, actually was a pioneer of “Smart Growth.” Portland’s Metro planning commission ultimately was forced to admit this great irony, saying in a 1994 report, “In public discussions we gather the general impression that Los Angeles represents a future to be avoided. Yet with respect to density and road per-capita mileage it displays an investment pattern we desire to replicate” in Portland.

128

O’Toole concluded,

Some might ask how a plan that was supposed to save Portland from becoming as congested as Los Angeles got turned into a plan that specifically aimed to ‘replicate’ Los Angeles-like congestion in Portland. But the real question should be: why did anyone think that planning was the solution to Portland’s growth problems in the first place? Unfortunately, few people were willing to ask, much less answer, this question.

129

123

Charles, “Lessons from the Portland Experience,” pp. 123, 132. 124








44

The Kemp Commission and the Return to the Market But the more fundamental question than high density versus low density, or more cars, highways, and parking or more mass transit, or bigger houses or smaller flats, is who decides? And even more fundamental, in a society traditionally based on markets, and personal decisions, and democracy, can policies running counter to strongly ingrained consumer preferences even work? And, indeed, why would anyone even want to try to make them work, imposing elitist views on personal living decisions contrary to the strongly held preferences of middle class families and working people? Does their freedom of choice now suddenly not count for anything?

The bottom line is that urban planning at root is analogous to central economic planning, which the entire 20

th century seemed to be devoted to proving does not serve the interest of the public in economic

growth, prosperity, jobs, rising incomes, declining poverty, and serving their needs and preferences. Would it not make more sense instead of trying to decide personal issues of where to live, housing preferences, automobile use, etc. through collective central planning, to adopt market policies that would empower each worker, and family, to decide for themselves, and which would serve the preferences and needs of each, rather than imposing the preferences and decisions of some self-appointed elite on them?

That was the approach of the Kemp Commission Report in 1991, issued under the auspices of then Secretary of Housing and Urban Development Jack Kemp, which focused on removing regulatory barriers to affordable housing.

130 Note that in this case affordable housing does not refer to federal housing

assistance programs such as Section 8, but instead is the idea that families can buy or rent homes that they desire within their budget. The cover letter for the Report from Commission Chairman Thomas Kean and from Vice-Chairman Thomas Kudlow Ashley to then HUD Secretary Jack Kemp set the tone, saying,

The American Dream for every family has at its core a comfortable home in a safe neighborhood, a home available to buy or rent at a cost within the family budget, a home reasonably close to the wage earner’s place of work. Unfortunately, too many American families today cannot fulfill their version of that dream because they cannot find affordable housing. The cost of housing is being driven up by an increasingly expensive and time-consuming permit approval process, by exclusionary zoning, and by well-intentioned laws aimed at protecting the environment and other features of modern-day life. The result is that fewer and fewer young families can afford to buy or rent the home they want.

131

What is important about that paragraph that is very different from Smart Growth is that the driving force is the preference of the consumer. The focus is for young families to buy or rent the home that they want. What is important is for American families to each fulfill their version of the American Dream. And the strategy is to remove regulatory burdens, costs and barriers so that markets would be freed to serve those wants and dreams of each American family. This is really the opposite of Smart Growth, which essentially shows no interest in the wants and dreams of American families. Smart Growth instead seeks to impose on American families what planners and government agencies are certain is best for them. Indeed, what planners and government agencies are certain is best under Smart Growth is often directly contrary to what American families consistently seem to want, such as affordable, expansive, luxury, single family homes with big yards in the suburbs, and communities built to accommodate the American love affair with the automobile, such as wide boulevards, convenient highways and plenty of parking.

130

“Not In My Back Yard,” Removing Barriers to Affordable Housing, Report to President Bush and Secretary Kemp by the Advisory Commission on Regulatory Barriers to Affordable Housing, July 8, 1991, 131

“Not In My Back Yard,” Letter from Chairman Kean and Vice-Chairman Ashley to Secretary Kemp, July 8, 1991.


45

The report itself begins, “Unnecessary regulations at all levels of government stifle the ability of the private housing industry to meet the increasing demand for affordable housing throughout the country.”

132

Here again the goal is to serve the market demand from consumers, and the government policy is to free the private housing industry to meet that demand, not regulate the private housing industry to serve what government planners and bureaucrats are certain that consumers really need, regardless of what those consumers believe they want and need. Next the Report identifies as the real problem “an increase of 20 to 35 percent in housing prices attributable to excessive regulation is not uncommon in the areas of the country that are most severely affected.”

133 That is a major barrier to satisfaction of consumer demand and preferences in the market.

Moreover, much of that excessive, unnecessary cost is probably due to Smart Growth regulation itself. Indeed, the Report seems to refer precisely to such Smart Growth regulation when it advises that, “States should thoroughly review and reform their existing zoning and land planning systems and remove all institutional barriers to affordability.”

134 Zoning reforms should include housing affordability and

opportunities among the primary objectives of such regulation. The Report also seems to target Smart Growth regulatory burdens and excesses in recommending that each State enact a statewide subdivision ordinance and mandatory land development standards, which seems to promote suburban development. Or the Report suggests that alternatively states could formulate model subdivision and land development codes for adoption by localities. The Report states that “Land-development standards should be based on supportable data and research regarding traffic usage, density, and similar criteria,”

135 which would

seem to require hard data to support regulatory restrictions, rather than fashionable, “smart growth” assumptions. The Report recommends that each state adopt a program of regulatory barrier removal and reform for both the state and its local governments. That would include zoning and land planning regulations, and updated model building codes with flexibility for differences between entirely new structures, and rebuilding and rehab of older buildings. The Report proposes that federal law be changed to condition HUD housing assistance to states on each state’s satisfactory development of such a regulatory barrier removal and reform program. States that do so would be rewarded with waivers or adjustments to Federal regulations to increase the supply of affordable housing, as well as increased HUD assistance. The Commission Report also recommended that states adopt time limits on building code, zoning and other regulatory processing of reviews and approvals, with statutory deadlines and automatic approvals if those deadlines are not met. The burden of proof would also be shifted to the regulatory agency for denials of applications for approval. A single state agency should be granted authority as well to shorten and improve both state and local approval processes. The Commission further recommends that States establish neutral third party conflict resolution and mediation procedures to resolve conflicts between developers and local governments, which would be another change freeing suburban development.

The Report urges as well that state and local governments provide and maintain adequate infrastructure in support of affordable housing and growth. That would include roads, highways and bridges to service automobile use, contrary to “Smart Growth” dogma. The Commission further recommends that states enact legislation establishing mandatory standards and uniform procedures for imposing impact fees on development, which should be limited to costs resulting from the development. The Commission also proposes that a Housing Impact Analysis be required for every federal agency before it issues any major rule, revision or regulation.

132

“Not In My Back Yard,” p. 1. 133



“Not In My Back Yard,” p. 15.


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The Commission’s recommended reforms consistently focus on freeing markets, developers and investors from regulatory burdens, restrictions and costs, to enable them to serve the needs and preferences of consumers as expressed in the marketplace by consumer demand. That is essentially an opposite and alternative vision to Smart Growth policies. That vision can be further expanded to include revisions to burdensome and counterproductive tax policies that stifle investment and entrepreneurship to serve housing affordability and consumer needs and preferences regarding their urban and suburban environments. Lower marginal tax rates at all levels of government would maximize incentives to serve consumer needs and preferences and housing affordability. The broadest vision would encompass tax, regulatory, and spending policies that would maximize economic growth, job creation, entrepreneurship, employment, wage, and income growth for all. That could be a complete, alternative, and, indeed, opposite program of policies to Smart Growth, perhaps called Actual Growth. Smart Growth versus Actual Growth The vision of Smart Growth involves central economic planning to impose smothering regulation to deprive middle class and working families of the suburban lifestyle, based on their love affair with the automobile, that they prefer. Instead, they get the urban lifestyle preferred by single adults and childless couples, based on easy neighborhood access to adult socializing without children or cars. That regulatory burden imposes increased housing prices and reduced housing affordability as well and an effective overall economic equivalent of increased taxes -- the Smart Growth tax. Higher regulatory costs, higher taxes, higher costs of living, and elitist central economic planning for what should be vibrant, world leading, American cities is not a prescription for booming economic growth and prosperity, with increased jobs and rising wages and real incomes. The true alternative vision of Actual Growth, germinating from the vision of the 1991 Kemp Commission report, involves removing government regulatory and tax burdens to empower the market to serve the actual needs and preferences of American families of all income levels. That involves increased investment to provide increased supply of the affordable housing that American consumers and workers want, with the freedom to choose to rely on the family car, or cars, to the extent that each family desires. That vision leads to increased economic growth, more jobs, higher wages and incomes, booming prosperity, and vibrant, world leading American cities.

Table 1

Smart Growth Compared to “Actual Growth”

Smart Growth Actual Growth

Goal Urban Lifestyle, Easy Neighborhood Access Market-determined Needs and Preferences

Means Increased Government Regulation Reduced Government Regulatory and Tax Burden

Results Reduced Supply, Increased Housing Prices Increased Supply, More Affordable Housing

B. The Economics of Smart Growth

Economics in the western world has focused on how markets work to satisfy consumer needs and preferences. The analysis includes what works to advance economic growth, and general prosperity, including job creation, wage and income growth, capital investment, and other factors. “Smart Growth” actually ventures outside this western tradition of economics, because “Smart Growth” is not even conceived or designed to serve consumer needs and preferences, especially within a market context. Smart Growth is conceived and designed to pursue what various “elites,” intellectual, progressive, governmental, bureaucratic, believe is most preferable in urban, and suburban, development, and what those elites think will best serve consumers, workers, families, the middle class, working people, the poor, and all other interests, regardless of what those interests or populations may think they want or prefer.


47

Consequently, Smart Growth does not actually rely on a traditional, western, market framework. It literally relies instead on central economic planning, by supposed experts or “elites” that may actually be largely or effectively self-appointed. Indeed, while Smart Growth policies are generally advanced within a democratic political framework, the operation and implementation of those policies can be said to be outside the democratic framework, in that the policies and their implementation are generally imposed by unelected bureaucracies, which may not even involve public officials. They may often be self-asserted “experts,” or self-appointed political activists, lobbying unelected bureaucracies, stalking public meetings, winning contracts from unelected bureaucracies, or perhaps suing in courts, where their “elite” opinions can be expressed in legal documents, seeking court orders to impose those opinions on the public, and all other interests. Even more troubling and difficult as a matter of economics is that the opinions of those elite “experts” or political activists may, and probably are, directly contrary to the needs and preferences of consumers, workers, families, the middle class, working people, and the poor, especially as expressed in markets, and of the investors, developers and other businesses trying to serve the market expressed needs and preferences of those interests. To make matters worse, central economic planning, particularly by bureaucracies and self-appointed “elites,” has a long history of unqualified failure throughout the 20

th century. Indeed, that failure may be

said to be the central lesson of the 20th century.

But none of this means that “Smart Growth” policies cannot be analyzed, and their likely outcomes determined, by the tools of standard, traditional, western economics, especially in the context of the markets in which they still must operate. Traffic Congestion Supporters of “Smart Growth” promise reduced traffic congestion as a result, as residents can walk to shopping, entertainment, and work, or take mass transit, rather than driving. But the analysis above regarding Portland shows how simple minded these “Smart Growth” assertions are. The fallacy is that the increased housing and population densities of Smart Growth development increase

traffic congestion far more than any increased walking or mass transit reduce it. So do the restrictions on new roads, highways and freeways that the wise Smart Growth central economic planners impose on the hapless public wondering why they cannot live as they want, rather than as single or childless Smart Growth wizards imagine they want. This is the central fallacy of central economic planning. The planners can never have all the information to make wise decisions that markets collect and communicate to everyone through market prices, including the subjective preferences borne in the heart of every consumer. That is why central economic planning always fails compared to the market, which the history of the 20

th century proved to anyone paying attention.

Another fallacy is that given the American love affair with the automobile, imposing the Smart Growth walkathon on the American people effectively constitutes another wedge between the suburban development and lifestyle consumers desire, and the urban development they get and have to pay for. That effectively imposes the economic equivalent of another tax increase on the subjects under Smart Growth. Paying higher taxes to finance mass transit that working people, and the middle class, especially with families and children, are not going to use is just another aspect of the overall elitist Smart Growth Tax. Supply, Demand and Housing Affordability One of those tools of standard economics is the concept of supply and demand. To the extent that “Smart Growth” policies limit the supply of land that can be developed into housing, or restrict housing development by regulation, reducing the housing supply, the price of housing will rise, reducing housing


48

affordability. That was the result in Portland, and everywhere else that such “Smart Growth” policies have been tried. Under standard economics, the result could not be anything else. Such rising housing prices would be the inevitable result of any urban growth boundary, proclaiming that all housing development must be inside the boundary, as in Portland. That knocks out the supply of land and possible housing supply from development outside the boundary. So supply down, housing prices up. At the same time, that focuses demand on the land and housing inside the boundary. So demand up, housing prices inside the allowed boundary up. Again, we saw that in Portland. Economic research actually points to regulatory barriers as being more limiting on the supply of land and housing than even natural barriers such as water or mountains.

136 Moreover, numerous economic

studies have connected restrictive land use ordinances to higher housing prices. One survey—which includes a literature review of some 25 studies over 30 years, every one of which found a link between restrictive growth management and higher housing prices—described the evidence as follows: “Considerable econometric and other empirical research has examined the association between prescriptive land use policies and higher house prices. The research overwhelmingly indicates that stronger land use regulation is associated with higher house prices.”

137

This fits with both common sense economics and the business of land development. In terms of the former, as we have described, restrictions in supply lead to higher prices. In turn, differences in land prices are the largest drivers in the variation in housing costs. In particular, it is the all-in cost of making land available for sale (i.e. purchasing the land, fulfilling all of the necessary regulatory requirements, and paying all of the necessary taxes and fees) that drives housing prices. Naturally, the more restrictions there are, the more expensive they will be to comply with, in addition to the restrictions already driving up land prices. Such effects on the price of housing hold true across the nation in areas where “smart growth” has restricted the supply of land available for development, such as Las Vegas, Phoenix and California. Figure 1 below compares the national housing market to an index we have constructed of home prices in markets with artificial constraints on land supply due to government land use policies.

138 This is very

much a first order approximation of an index, but it displays the basic outcome of government restrictions on land usage via “smart growth”: a housing market characterized by higher, more volatile prices. Again, this is just as economic theory would predict.

136

See, for instance: Wendell Cox, “Constraints on Housing Supply: Natural and Regulatory”, Econ Watch Journal, Vol. 8, No. 1, January 2011. http://econjwatch.org/articles/constraints-on-housing-supply-natural-and-regulatory 137

“The Association between Prescriptive Land Use Regulation and Higher House Prices”, Demographia, January 2012. http://www.demographia.com/db-dhi-econ.pdf 138

We have included in this index Phoenix, Los Angeles, San Francisco, San Diego, Las Vegas, and Portland. We do not include Miami or Tampa because Florida changed its state-wide restrictions in the middle of the time period, although the results are the same prior to Florida’s policy change if we include those cities.


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Figure 1

Year over Year Growth in National Home Prices Compared to Growth in Prices in Cities with Government Restrictions on Land Supply

(National: S&P/Case-Shiller U.S. National Home Price Index, Quarterly, YoY growth rate) (Restricted: S&P/Case-Shiller city indices, quarterly data point of monthly data, YoY growth rate)

139

As another example of this process in motion, in 2010 Demographia looked at eleven large housing markets and characterized their land use policies as more restrictive or less restrictive as part of their “Residential Land & Regulation Cost Index”.

140 All of the cities are included as metropolitan statistical

areas in the House Price Index compiled by the Federal Housing Finance Authority (FHFA).141

The cities with more restrictive land use ordinances—Minneapolis-St. Paul, Portland, San Diego, Seattle, and Baltimore-Washington—have higher and more volatile housing prices than do the cities with less restrictive land use ordinances—Atlanta, Dallas-Ft. Worth, Houston, Indianapolis, Raleigh-Durham and St. Louis. Again, this is just as economic theory would predict. As one study noted,

In places with relatively few barriers to construction, an increase in housing demand leads to a large number of new housing units and only a moderate increase in housing prices. In contrast, for an equal demand shock, places with more regulation experience a 17 percent smaller expansion of the housing stock and almost double the increase in housing prices.

142

139

Restricted Index is equal-weighted total of the S&P/Case-Shiller city indices. 140

“Demographia Residential Land & Regulation Cost Index: 2010”, Demographia, http://www.demographia.com/dri-full.pdf. 141

In an ideal world, we would be able to use a home price index that looks only at the specific cities studied by Demographia, rather than the whole metropolitan statistical area. The S&P/Case-Shiller Home Price Index is specific to a city, but it only has city indices for 20 cities, covering only two of the six cities termed “less restrictive” by Demographia. Comparing those two cities to the six “more restrictive” cities provides similar results to using FHFA data, but we prefer the latter as it includes all of the cities in Demographia’s study. 142

Raven E. Saks, “Job Creation and Housing Construction: Constraints on Employment Growth in Metropolitan Areas”, Harvard University Joint Center for Housing Studies Working Paper Series, December 2004.

-30.00%

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Figure 2

Year Over Year House Price Appreciation in Cities With More Restrictive vs. Less Restrictive Land Use Policies

143

(FHFA MSA indices, quarterly data, YoY growth rate)

To the extent impact fees are imposed on housing development, that will increase the price of the housing as well. That will be true even if the fees are used to finance amenities incident to the development, such as common parklands, or community facilities, or golf courses, or other public services, as enhanced features of the housing would naturally cost more. But to the extent the fees are siphoned off to finance activities not desired by the housing purchasers, such as subsidized housing for the poor, or public facilities or services supplied to others, the increased price of the housing would not even be offset by enhanced amenities. The Smart Growth policy of increased housing density can also increase housing prices, or costs. Charles reports in A Guide to Smart Growth that the costs of development for densities above 200 units per acre are double those for densities of 0 to 20 units per acre.

144 That results because denser housing

tends to be subject to stricter building codes, and incurs costs for such services as elevators and off street parking. Charles adds, “There is also evidence that increased density increases the costs of public services, rather than decreasing them as smart growth proponents suggest.” Maybe that is why public schools in denser urban areas consistently cost more and incur higher expenses than in less dense suburban areas. Then there is the economic issue of consumers, working people and families not being able to get the housing they really want under smart growth policies and regulations. Families especially with children may want big yards, bigger more spacious housing with more and larger rooms, decks where they can barbeque and eat outside in good weather, multicar garages, and other features of a typical suburban paradise. Especially families with children will not see the benefits of mixed use development, where they

143

Based on Demographia land use ratings. FHFA HPIs for Durham-Chapel Hill, NC and Raleigh, NC averaged to reach an HPI for Raleigh-Durham; FHFA HPIs for Dallas-Plano-Irving, TX and Forth Worth-Arlington, TX averaged to reach an HPI for Dallas-Ft. Worth; and FHFA HPIs for Washington-Arlington-Alexandria, DC-VA-MD-WV and Baltimore-Columbia-Towson, MD average to reach an HPI for Baltimore-Washington. 144

Charles, “Lessons from the Portland Experience,” p. 122.

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Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

More Restrictive

Less Restrictive


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can walk to restaurants and shops, and work, with better socializing opportunities for adults than children, who would like much better to play with their friends in spacious suburban parks, with other families with lots of kids nearby. This disconnect between the housing that consumers and families want and what they can get under Smart Growth imperial design effectively constitutes an economic “wedge” between what consumers get, and the net gain they get back in return. That wedge effectively operates like a tax on housing, reducing the net gain to the consumer from the housing, and so effectively raising the costs of the housing more. All of these impacts of Smart Growth on housing can effectively be seen as a tax on housing that is effectively borne by consumers, who are forced by “Smart Growth” to pay more to get less in terms of the personal utility they and their families are getting from the housing they pay for. That is why Smart Growth itself can best be understood economically as another big tax increase on those subject to it. Housing Affordability Globally Indeed, “Smart Growth” policies have been shown to have this effect the world over. As Brookings summarized the work of Kate Barker, who performed a detailed analysis of land use policy in the UK for the Bank of England:

Taking roughly 10 years to produce, the plans could not be revised rapidly enough to avoid acute price pressures in booming local economies. While existing homeowners may feel they benefit from rapid price run-ups, new households and migrants are penalized. If this is an issue in the U.K., it can be a very serious one in developing countries like India whose cities are growing faster, and whose technical capacities and information base for fine-tuning tight planning systems are far less. The Barker review observed that the planning system produced beneficiaries, local governments, existing landowners, and to some extent well-established developers who understand how to operate in the complex planning system. The benefits to them are plain. The costs to the losers, those households who cannot afford to buy into the system and must pay more for their housing, are far less transparent, yet just as real and can be more substantial.

145

The 9th Annual Demographia International Housing Affordability Survey rates housing affordability in 337 metropolitan markets in Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom and the United States. It is co-authored by Wendell Cox, formerly of the Reagan White House, and Principal of the public policy consulting firm of Demographia focusing on housing development issues, and by Hugh Pavletich, Managing Director of a commercial property development and investment company in New Zealand.

The Survey measures affordability by the “Median Multiple,” which is median house price divided by gross before tax annual median household income. The Median Multiple is widely used in housing affordability analysis. Housing is rated as affordable where the Median Multiple is 3.0 or less, meaning the median housing price is 3 times or less the annual median household income. It is rated as moderately unaffordable where the Median Multiple is 3.1 to 4, seriously unaffordable where the Median Multiple is 4.1 to 5.0, and severely unaffordable where the Median Multiple is over 5.0.

The 2009 Survey states,

145

“Housing Supply, Affordability and Land Use Regulation and Planning: Lessons from the United Kingdom”, Brookings, http://www.brookings.edu/~/media/Events/2010/2/08%20urban%20development%20uk/20100208_urban_development_uk_summary.PDF. For the complete study by Barker, see: Kate Barker, Barker Review of Land Use Planning, December 2006. http://www.ukcip.org.uk/wordpress/wp-content/PDFs/Barker_review_landuse.pdf


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Historically, the Median Multiple has been remarkably similar in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States, with median house prices having generally been from 2.0 to 3.0 times median household incomes….This affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in the past decade in Australia, Ireland, New Zealand, and the United Kingdom and in some markets of Canada and the United States. In every market where there has been a sustained and significant increase in the Median Multiple, there has also been the implementation of more restrictive land use policy….

146

That restrictive policy is often referred to as "smart growth," "urban consolidation," "compact city policy,” or "growth management." Cox explains that housing affordability is similar across the United States, except where such restrictive land use policy prevails. The 337 markets studied included 81 major metropolitan markets, defined as those with more than 1,000,000 population. The study found,

Among these major metropolitan markets, there were 20 affordable major markets, 23 moderately unaffordable major markets, 14 seriously unaffordable major markets and 24 severely unaffordable major markets. All 20 of the affordable major markets were in the United States while two of the moderately unaffordable markets were in Canada and one in Ireland with the other 17 in the United States. All of the major markets of Australia, New Zealand and Hong Kong were severely unaffordable. One-half of the major markets in Canada and the United Kingdom were severely unaffordable, while only six of the 51 major US markets were severely unaffordable.

147

Detroit was the most affordable major market, with a Median Multiple of 1.5, which reflects the depressed state of the city’s economy. The most affordable other major markets within the U.S. are Atlanta, Cincinnati, Rochester, St. Louis, Cleveland, Indianapolis, Jacksonville, Dallas-Fort Worth and Houston, the latter two being the fastest growing markets with more than 5,000,000 population included in the Survey. Hong Kong was the most unaffordable major market, with a Median Multiple of 13.5. That reflects its inherently limited supply of land. Vancouver was the second most affordable, with a Median Multiple of 9.5, Sydney third most unaffordable, with a median multiple of 8.3, followed by San Jose (7.9), San Francisco and London (7.8), and Melbourne (7.5). In these cities, the supply of land for housing was artificially restricted by regulation. The Survey summarized,

Among all 337 markets surveyed, there were 109 affordable markets, 100 in the United States and 8 in Canada and one in Ireland. There were 110 moderately unaffordable markets, 87 in the United States, 17 in Canada and 4 in Ireland and 2 in the United Kingdom. There were 43 seriously unaffordable markets and 75 severely unaffordable markets. Australia had 30 severely unaffordable markets, followed by the United Kingdom with 17 and the United States with 16. Canada had 6 severely unaffordable markets, while New Zealand had 5.

148

Since the Annual Surveys began, Ireland’s housing affordability has improved the most, while Canada’s has declined the most. Housing affordability has also improved in the U.S. But the United Kingdom, Australia and New Zealand have been severely unaffordable every year.

146

Wendell Cox and Hugh Pavletich, 9th Annual Demographia International Housing Affordability Survey: 2013, p. 1, http://www.demographia.com/dhi.pdf 147

Cox and Pavletich, p. 2. 148

Cox and Pavletich, p. 3.


53

The Survey concludes, Overwhelming economic evidence indicates that urban containment policies, especially urban growth boundaries raise the price of housing relative to income. This inevitably leads to a reduced standard of living and increases poverty rates, because the unnecessarily higher costs of housing leave households with less discretionary income to spend on other goods and services. The higher costs ripple into rental markets, tightening the budgets of lower income households, who already suffer from lower discretionary incomes.

149

Slower economic and job growth is also associated with urban containment regulation. The Survey ends by advising,

Urban policy needs a ‘reset.’ The emphasis should be shifted away from "designing" urban areas to facilitating a better standard of living for the people who live in them. In his epic Civilization: The West and the Rest, historian Niall Ferguson notes that ‘The success of the civilization is measured not just in its aesthetic achievements but also, and surely more importantly in the duration and quality of life of its citizens.’ This requires greater affluence and less poverty, both of which require more affordable housing.

150

Cox adds that within the U.S., housing affordability is basically the same across geographic areas, except for variances due to urban containment land use regulation. Keynesian Accelerator

151

But this story isn’t over yet. There’s a lot more to come and none of it is pretty. But first let us describe what used to be called the Keynesian accelerator—not to be confused with the Keynesian multiplier. The accelerator principle shows how changes in population growth have an exaggerated (or accelerated) impact on output growth which then, in turn, feeds back on population growth. This dynamic feedback loop can have an enormously expansive beneficial effect when it works in the right direction but can also have a devastating impact when it reverses. But first the principle. Imagine a population of 100 families, with each family living in one home. In our scenario, homes depreciate by 1% per year on average. If population is static, then the housing industry will produce one house per year to offset the 1% depreciation on the 100 homes. And that’s that. Now if population were to grow at 1% per year instead of zero percent, the housing industry would have to produce two homes per year—one to replace the depreciation and one to add to the housing stock of one new home. Thus, a 1% increase in population growth leads to a 100% increase in housing construction. That’s the accelerator, but the story doesn’t end there. With a doubling of housing construction more jobs are created, wages rise, housing prices rise and prosperity comes. People move to where the action is. Population growth increases even more and a very powerful dynamic ensues, pushed even further and faster by the accelerator effect. But forever and infinity aren’t real numbers. Sooner or later it all comes to an end, usually precipitated by ignorant public policy. What’s exceptionally interesting about housing and the accelerator effect is that it takes a lot longer and costs a lot more to build a house today than it did in 1990. Effectively, the construction process for homes has been lengthened considerably as well as having been made generally more expensive.

149



This section based upon: Arthur B. Laffer, “California—Who Are You?”, Laffer Associates, February 17, 2006.


54

Taking far longer to construct homes means that the accelerator process is exaggerated even beyond its natural exaggeration. When the market signals the construction industry that more new homes are warranted, the construction industry starts the process of accommodating that need. However, by the time those homes actually are available for purchase, a considerable amount of time has elapsed. And, by the way, not only has a lot of time elapsed, but new demands are piled on top of older demands. What these delays cause are exaggerated swings in unfulfilled demands for housing—especially in areas with increased regulations and restrictions on building. California is the classic example. As you can see, the exaggeration on the upside will cause larger than normal increases in housing prices to allocate the shortage of housing to the existing population. Speculators will get into the fray causing the upswing to be even greater. But once the existing population has been sated with houses, demand must taper, especially if population growth begins to slow. The housing pipeline cannot be turned off quickly, so new homes will continue to stream onto the market well past the need. So housing prices not only go much higher than warranted in good times but in bad times they go much lower. In Figure 3 on the following page we have plotted California housing prices versus prices in the rest of the nation (i.e., the U.S. ex California). We have also plotted the ratio of those two series. Look at just how volatile California’s housing prices are relative to the rest of the nation. The swings in relative housing prices are striking and are a direct consequence of the accelerator and the prolonged construction process in California. At the height of the real-estate euphoria in the mid-2000s, fewer than one in 20 residents (5%) could afford to buy the average home in San Diego and Los Angeles Counties. After that, the state had to endure the inevitable correction, with prices tumbling by 50% in some markets. Homeowners then demanded a revision of their property tax assessments, which only added to the state and local revenue drought.


55

Figure 3

Median Housing Prices: California vs. the U.S. excluding California, and their Ratio (through 3Q2007)


56

Jurisdiction Over Land Use Policy One added consideration that must be taken into account is the locus of jurisdiction over land use policy. Given the system of government in the United States, on one end of the spectrum land use policy could be set at the federal government; at the other end of the spectrum, land use decisions could be left entirely to the holders of land, with no government interference. Of course, regulations could also be set at a number of other, increasingly smaller levels of government, from the state, to the county, to the city, etc. And precisely where those regulations are set is important in determining the economic effects of growth management policies. It is true that one of the key reasons for land use planning is externalities—in other words, the decisions of one landholder can have repercussions that place costs on other citizens. Yet the potential for externalities by no means necessitates government intervention. Indeed, Ronald Coase won the Nobel Prize, largely for his work which demonstrated that the optimal solution is to allow the individuals generating externalities to bargain with the individuals who are impacted by the externality.

152 Coase was

able to show that the case for government intervention was not as strong as previously thought—the outcome achieved from government intervention could in fact be obtained through a mutually beneficial bargain. In fact, government intervention should be a last resort after bargaining fails between the individuals generating the externalities and the individuals being impacted from the externalities. A number of people have applied the tenets of Coase to land use, many of them coming away with the conclusion that legislation is not necessary. Robert Ellickson argues that the primary roles of law—dispute resolution, rule formation, and enforcement—can more efficiently be performed via informal rules. This is particularly true when the transactions costs of legal channels (e.g. learning, changing, or enforcing the law) is high.

153

Even in the case of last resort, when government intervention in growth management is required to solve the problem of externalities, it is very infrequent that a particular externality will spread beyond the local level. Indeed, as Randall Holcombe argues,

local government planning should be sufficient to internalize any externalities arising from land use decisions…. Statewide growth management is undesirable because it crates more poorly defined property rights, which reduce the efficiency of land use decisions. Such management cannot be justified on the basis of externalities. Externalities will largely be confined to local government jurisdictions, such as counties; local government use tools such as zoning and eminent domain to deal with land use externalities.

154

Accordingly, whenever possible there should be no government intervention into property rights; instead, property holders should be left to bargain to eliminate any externalities. When government intervention is required, it should be as minimal as possible and at as local a level as possible. To set up land use policies otherwise simply exacerbates all of the potential problems described above. Total Effects One of the principles of economics is that wealth is created by moving assets from lower- to higher-valued uses. The capitalist system allows for greater wealth creation because it lets people follow self-interest and engage in transactions based on their own volition. By definition, voluntary transactions create wealth. Moreover, independent actors are able to bargain to reduce externalities, in the event the exist, which is often seen as the role of government in growth management.

152

Ronald Coase, “The Problem of Social Cost”, Journal of Law and Economics, Vol. 3 (Oct. 1960). 153

Robert Ellickson, Order Without Law: How Neighbors Settle Disputes, Harvard University Press, 1994. 154

Robert G. Holcombe, “Growth Management in Florida: Lessons for the National Economy”, Cato Journal, Vol. 10, No. 1 (Spring/Summer 1990).


57

In other words, the market left to its own devices is very efficient. Government intervention, on the other hand, can create great distortions in the process. By restricting the types of building, driving up the process cost, and lengthening the time to market for a project, government restricts the ability of a developer to move land to its highest valued use, creating a deadweight loss to the community. In addition, the added transactions costs—in terms of both money and time—prevents the market from clearing efficiently. Simply put, the supply of property under strict land use regulation is inelastic—large changes in home prices only create small changes in the supply of houses. It is for this very reason that the accelerator kicks into play and housing prices are higher and more volatile in areas that employ smart growth policies. Given the economic effects of smart growth on home prices, it is not surprising that the areas that experienced the worst effects of the housing bubble were areas with strong regulations on land use. As Wendell Cox noted in comparing where the losses in housing value during the downturn were concentrated, “The prescriptive markets as a whole accounted for 82 percent of the losses. The responsive markets accounted for just 18 percent.”

155

Yet the economic effects do not stop just with higher and more volatile housing prices. While greater appreciation in property values is great news to current owners of developed property, there is the reverse side of the coin to take into account. Namely, smart growth is thus:

against the best interest of renters (who tend to have lower incomes than homeowners) who will face higher rents, against the interest of future residents who will find higher housing costs whether they rent or buy, and against the interests of owners of undeveloped property who find it more costly to develop because of growth management regulations.

156

Table 2

Effects of Smart Growth on Various Groups of Citizens

Group Result Effect

Renters Higher Rents Negative

Future Residents Higher Housing Prices Negative

Owners of Undeveloped Property Higher Development Costs Negative

Current Homeowners Higher Housing Prices Positive

And, beyond simply having direct effects on current and future holders of property, because the

affordability of housing is an important factor in migration decisions, housing prices also have an indirect

effect on population growth and employment growth.

Because housing prices influence migration, the elasticity of housing supply also has an important impact on local labor markets. Specifically, an increase in labor demand will translate into less employment growth and higher wages in places where it is relatively difficult to build new houses.

157

In other words, aggressive growth management policies don’t just drive up housing prices; they also create higher wages. Higher wages in turn lead to higher unemployment. To see this principle in action, when the economy is strong but the supply of homes is fixed and prices rising, people won't be able to move into the area to live close to their work. Accordingly, businesses that require additional labor will be

155

Wendell Cox, “The Housing Crash and Smart Growth”, National Center for Policy Analysis, June 2011. 156

Holcombe, “Growth Management in Florida: Lessons for the National Economy”. 157

Raven E. Saks, “Job Creation and Housing Construction: Constraints on Employment Growth in Metropolitan Areas”, Harvard University Joint Center for Housing Studies Working Paper Series, December 2004.


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forced to offer higher wages to entice employees into the community in order to offset the additional time and cost involved with commuting. Meanwhile, when the economy is languishing and home prices in areas with constrained housing supply are falling rapidly, many people will now find themselves underwater on their mortgages. Often, such a circumstance locks people into their homes, making them willing to accept much lower wages in order to try to stay in their home and wait out the next rise in housing prices.

158 This process is not efficient, as it prevents people from taking the best jobs and causes

high levels of wage volatility. It strikes us an awfully negative tradeoff to make gaining ground more difficult for the less well-off, while at the same time decreasing market efficiency and the ability to create wealth, all in the name of fixing a problem that private individuals can fix on their own. Moreover, the further away from private citizens the decision-making process is moved, the more these negative effects are amplified. C. Land Use Planning in Florida

159

Florida officially joined the United States as the 27

th state on March 3, 1845. The land was scarcely

populated and the economy dominated by agriculture. Over the last half of the nineteenth century, agriculture in Florida became even more commercialized, with cattle-raising and citrus growing taking off in particular. Over time tourism grew as well, and by the turn of the century the population and wealth of the state were growing, although it was still the least populated state in the South. The Roaring Twenties brought even greater tourism, and along with it hotels, resorts and land development. Yet the land bubble burst in Florida in 1926, devastating hurricanes further hurt the state economy in 1926 and 1928, and then the Great Depression sealed the decline. The state did not recovering economically until World War II. Then, with the rebounding economy, low cost of living, and increased availability of air conditioning, the state began to take off again and has never looked back, growing to the fourth most populous state by the end of the 20

th century.

Due to the incredibly rapid population growth over the second half of the 20

th century causing some

growing pains, Florida was one of the first states to move toward land use planning on a state-wide level. Indeed, only Oregon had state-wide land use regulations in place prior to the passage of Florida’s Growth Management Act in 1985.

160

The expressed intent of Florida’s Local Government Comprehensive Planning and Land Development Regulation Act (The Growth Management Act) was to help provide more orderly growth in the state. The means by which this goal was to be achieved were as follows:

In brief, the Act requires local governments to submit comprehensive land use plans to the Florida Department of Community Affairs. These plans must comply with the provisions of the Act. Two notable features of the Act are, first, that local plans put all land into zones that allow varying levels of development and, second, that there is a requirement that infrastructure be in place concurrent with development.

161

The comprehensive plan, which again had to be approved by the State, would take precedence over any local policies. As stated by the Jackson County Board of County Commissioners,

158

See, for example: Fernando Ferreira, Joseph Gyourko, and Joseph Tracy, “Housing Busts and Household Mobility”, Federal Reserve Bank of New York Staff Reports, no. 350 (October 2008). 159

Historical background on Florida taken from Wikipedia (http://en.wikipedia.org/wiki/Florida#20th_century) and Florida Department of State’s “Brief History of Florida” (http://www.flheritage.com/facts/history/summary/#florida). 160

While Florida refers to its land planning regulations as “growth management” the terms is essentially interchangeable with “smart growth”. 161

Randall G. Holcombe, “Growth Management in Florida: Lessons for the National Economy”, Cato Journal, Vol. 10, No. 1 (Spring/Summer 1990).


59

The Plan is the senior policy document providing guidelines for growth management within that jurisdiction and all other regulations may not supersede the policy set forth in the Comprehensive Plan. Land development regulations are to be implementing instruments for the policies set out in the Comprehensive Plan. In the absence of land development regulations, the Comprehensive Plan policy prevails.

162

The concurrency requirements essentially dictated that all public facilities come on-line for the population concurrent with the development. The public facilities—including wastewater, solid waste, drainage, potable water, parks and recreation, schools and transportation—were to have standards for level of service set by the local governments, and no development was allowed in the event that the requisite levels of service would not be met on all of the public facilities.

163

In addition to concurrency requirements in relation to development, the Act also directed local governments to develop a 5-Year Capital Improvements Schedule that displays the “timing, location and funding of [any] capital projects” required in order to “achieve and maintain adopted level of service standards for public facilities that are necessary to implement the comprehensive plan.”

164 Moreover, this

Schedule was required to be updated annually and submitted as an amendment to the comprehensive plan, meaning it was subject to state review. Finally, the schedule was required to demonstrate financial feasibility. Given these requirements, the major effect of the Growth Management Act was to cause two major shifts in property rights. First, landowners lost much ability to determine how their land was used, as all development became subject to a political process. Secondly, it shifted a great deal of zoning and other decisions away from the local government and to the state government. Accordingly, the more bureaucratic and restrictive development environment led to the same economic impacts as most smart growth policies: reduced supply of land for development and higher prices. As Bank of America reported on the Florida housing bubble in 2005:

The chief impediment to new construction has been a shortage of developable land. The shortage primarily results from a growing resistance to new development. The state is not running out of space. Nearly every community in Florida and the state itself are looking at some type of limitations on new residential development. While well intentioned, these initiatives are making it more time consuming and expensive to build homes in Florida. Others are taking land off the market, designating areas for green space, or preserving space for industrial development. The net result has been dramatically higher land prices across much of the state.

165

Indeed, there is little question that the effect of the Growth Management Act was to drive up housing prices, and thus decrease housing affordability, in Florida. As summarized by urban planning professor Jerry Anthony,

Using data from the entire state over a 16-year period, with two measures of affordability and after controlling for alternative hypotheses, this research finds that Florida’s GMA has had a statistically significant and negative effect on housing affordability in the state.

166

162

“Frequently Asked Questions”, Jackson County Board of County Commissioners, http://www.jacksoncountyfl.net/community-development/frequently-asked-questions 163

“Concurrency”, Florida Department of Economic Development, http://www.floridajobs.org/community-planning-and-development/programs/comprehensive-planning/amendment-submittal-and-processing-guidelines/community-planning-act-summaries/concurrency 164

“Capital Improvements Element”, Florida Department of Economic Development, http://www.floridajobs.org/community-planning-and-development/programs/technical-assistance/planning-initiatives/infrastructure-planning/capital-improvements-element 165

Mark Vitner, “How Sustainable are the Forces Driving Florida’s Housing Boom?”, Wachovia Regional Economic Review, September 8, 2005. 166

Jerry Anthony, “The Effects of Florida’s Growth Management Act on Housing Affordability”, APA Journal, Vol. 69, No. 3 Summer 2003.


60

While there have been a series of minor changes to the Growth Management Act since it was enacted in 1985, the largest changes came in 2011. Some characterize the 2011 revision as ridding Florida of any attempts at growth management from the state level. That reading, however, goes too far. It is true that “smart growth” regulations have been reduced and made development less cost prohibitive, but there is still a large role for state and local governments in growth management. The role of state government has been reduced to “focus the state role in managing growth under this act to protecting the functions of important state resources and facilities.”

167 In addition, the name of the

legislation was changed to the Community Planning Act. While many of the specific details on how the changes will affect development in Florida remain to be seen, some broader trends are more easily foreseeable.

First, local governments have more control over what goes on in their jurisdiction, where only they are impacted. Second, there is increased opportunity for local government cooperation without state intervention, except in those circumstances where the state can show that critical state resources (e.g. intermodal transportation systems and the everglades) are impacted. Third, the cost to obtain development approvals and to develop property should decrease, thereby allowing more cost effective commercial and industrial development, making Florida a more competitive market for new business. Finally, it allows existing development orders to remain in place so that we can maintain a supply of known quantity development as the markets make it feasible to again develop property.

168

For the purposes of an individual city or county, then, the major logistical impact of the revisions to Florida’s land management policies is that certain changes to comprehensive land use plans no longer require state approval, while amendments and plans do still require review, thus returning more control and leeway to local governments. In addition, while the Capital Improvements Schedule still must be reviewed annually by the county, the update is no longer required to be submitted as an amendment to the comprehensive plan. In addition, the schedule no longer needs to demonstrate financial feasibility; it simply must designate improvements as “funded” or “unfunded”, with revenue sources identified.

169

For developers, the major changes are contained in revisions to the concurrency requirements. In particular, parks and recreation, schools, and transportation facilities no longer are included in the state-wide concurrency requirements, meaning the state only requires concurrency of sanitary sewer, solid waste, drainage, and potable water.

170 Local government can choose to require additional public

services—such as parks, recreation, schools and transportation—to meet concurrency requirements, but the state no longer does. In the event that a local government does require concurrency in transportation services, there is a set of additional standards, some of which are required and some of which are optional.

171

While these reductions in state oversight are positive, it does remain clear that the state itself is actively legislating “smart growth.” First, comprehensive plans are still required. Second, the bill legislates away the potential for “urban sprawl”, going so far as to identify “thirteen indicators that urban sprawl is not discouraged… These criteria range from promoting, allowing or designating significant areas as low density to failure to protect and conserve natural resources or agricultural activities."

172 Third, there are

still a host of requirements that the State requires local governments to enforce on development—including, among other regulations, county-level comprehensive plans, concurrency requirements, and

167

http://www.flsenate.gov/Laws/Statutes/2013/163.3161 168

“Growth Management in Florida: A New Direction”, Gunster. http://www.gunster.com/wp-content/uploads/Growth-Management-White-Paper-20111.pdf 169

“Capital Improvements Element”, Florida Department of Economic Development, http://www.floridajobs.org/community-planning-and-development/programs/technical-assistance/planning-initiatives/infrastructure-planning/capital-improvements-element 170



“Growth Management in Florida”, Gunster.


61

maintenance of a capital improvements schedule—that create an incredibly restrictive land use environment. D. Policy Comparisons

While a number of counties suggest fiscal neutrality in projects, and many communities use fiscal analysis of plans, zoning changes, and new developments as part of their planning, it is exceedingly rare to require demonstrations for initial approval, let alone on-going demonstrations in the midst of a project in order to allow it to continue. Accordingly, it’s easy to understand why the property development community—from developers to bankers—finds the process so detrimental and unusual. California Municipal Incorporation One of the main examples of “revenue neutrality” that exists at the municipal or county level is in California. Yet while the words are very similar, the purpose is very different. In California, the second half of the 20

th century was a long period of fragmentation—a smaller part of a city or municipal breaking

off as a newly incorporated entity. A state and local budget crisis in the state in the early 1990s led to the development of the “revenue neutrality” rule, “preventing future incorporations from harming county—and ultimately state—revenues.”

173 For instance, by land area, San Diego is one of the largest cities in the

United States. When the City of Del Mar was incorporated in 1959, it broke off from the City of San Diego. Following the 1992 law, if the amount of property taxes gained taken from the City of San Diego exceeded the amount of services the City of San Diego would no longer have to provide, Del Mar would not have been allowed to incorporate and would instead have to reach a deal with the City of San Diego to provide for incorporation (generally including payments to the larger, original entity) or remain part of the City of San Diego.

174

While the revenue neutrality provision at the municipal level in California is interesting, it relates more to municipal governance than land use and thus is not an apt comparison for Sarasota’s fiscal neutrality provisions. Collier County, Florida The only similar example of a fiscal neutrality provision that we found was for "Rural Lands Stewardship Area" (RSLA) projects as part of the comprehensive growth management plan for Collier County, Florida. The main goal of this program, however, was to preserve much of the rural land in Collier County—particularly wetlands and habitat for endangered and listed species—via a Transfer of Development Rights program. Essentially, landholders are incentivized to preserve environmentally sensitive rural lands in exchange for development rights in more urban areas. Any planned communities following under the RSLA—of which to this point there is only one major example, the town of Ave Maria—must demonstrate a neutral or positive fiscal impact on the County. While Collier County is one of the faster growing counties in Florida—home to the City of Naples—the growth has come primarily in the urban areas of the county, not in the RSLA. Collier County further requires fiscal impact analyses every five years to see whether development has had a positive fiscal impact. The 2010 analysis resulted in a saga over the precise methodology of the fiscal impact analysis, but the Collier County commissioners eventually concluded that the project sufficiently demonstrated fiscal neutrality.

175

173

Tom Hogen-Esch, “Fragmentation, Fiscal Federalism, and the Ghost of Dillon’s Rule: Municipal Incorporation in Southern California, 1950-2010”, The California Journal of Politics & Policy, Volume 3 Issue 1, 2011. 174

Guy Murray, “What is Revenue Neutrality”, Nipomo News, December 30, 2006. http://nipomonews.org/2006/12/30/what-is-revenue-neutrality/ 175

Katherine Albers, “Commissioners Decide Against Analysis of Ave Maria Fiscal Impact”, Naples Daily News, June 13, 2012. http://www.naplesnews.com/news/2012/jun/13/commissioners-decide-against-analysis-of-ave/


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Texas For a sense of a vantage point on development opposite that taken by Florida in general and Sarasota County in particular, let’s look at the policy approach in Texas. On October 18, national land use regulation expert Wendell Cox wrote in the Wall Street Journal,

Florida was hard hit when its housing bubble burst in 2007—ahead of the national meltdown that triggered the financial crisis and subsequent recession….Florida’s restrictive land-use policies helped inflate its property bubble to massive size, making its bursting all the more economically painful. Such growth policies—better known as ‘smart growth’ or ‘urban containment’—limit urban expansion, prohibiting new housing except in small sections of already dense metropolitan areas.

176

Cox further explained how such land use policies increase the cost of housing, writing,

As Brookings Institution economist Anthony Downs argues, these policies can destroy the competitive supply of land, driving land prices up (other things being equal) as demand rises sharply in relation to supply. These higher prices get passed along to prospective homeowners in higher housing costs—often made even pricier by various other regulations and fees.

177

As result of this Florida overregulation, Cox reported,

Almost nowhere else in the U.S. did housing prices get more out of whack than in Florida. From 1995 to the bubble’s largest expansion by 2006, the median house price relative to the median household income in Florida’s four largest metro areas—Miami, Tampa-St. Petersburg, Orlando and Jacksonville—rose a staggering 93%, to a multiple of 5.2, way above the national postwar norm of 3.0….By contrast, in Texas, which has avoided urban containment, the median multiple rose only 32% over the same period, to 3.2.

178

Indeed, in 2011 the median value of an owner occupied home in the Houston metropolitan area was 131,000.

179 But, O’Toole reports, “The median home value in states and urban areas with growth

management planning are far more expensive.”180

San Jose -- $625,000; San Francisco-Oakland -- $589,100; Los Angeles-Long Beach-Santa Ana -- $428,700; Seattle -- $313,300; Portland -- $254,800.

181

Moreover, in 2012, a four bedroom, two bath home in Houston cost less than $179,000. But in San Jose, the same home cost $570,000; in Oakland -- $420,000; in Los Angeles -- $542,000; in Portland -- $364,000; in Seattle -- $578,000.

182

O’Toole summarized,

The highest price-to-income ratios were found in regions with some form of growth management planning. Most of the 25 metro areas with the highest ratios were in California, joined by one from Hawaii, two from Oregon, and two from Florida (which passed a growth-management law in 1985. At the other end of the range, five of the ten most affordable metro areas were in Texas, with the others being in downstate Illinois and upstate New York.

183

176

Wendell Cox, “Florida Sheds Its ‘Smart Growth’ Dunce Hat,” Wall Street Journal, October 18, 2013 177

Cox, “Florida Sheds Its ‘Smart Growth’ Dunce Hat” 178

Cox, “Florida Sheds Its ‘Smart Growth’ Dunce Hat” 179

O’Toole, Houston’s Land Use Regime, p. 12. 180




O’Toole, Houston’s Land Use Regime, p. 13.


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What did Texas do right where Florida went wrong? O’Toole went to the heart of the matter in a recent paper on Texas land use regulation, explaining that the Texas legislature has not granted any land use regulation authority to Texas counties, not even zoning.

184 Another paper from the Texas Public Policy

Institute explains, “Texas has always followed the ‘Dillon Rule’ for counties. The Dillon Rule is a rule of law stating that counties may exercise no power unless it is expressly granted by the state Legislature.”

185

The Legislature has granted counties only very limited regulatory powers to address specific problems with specific, limited authority and only for limited purposes, “such as water supply and drainage, transportation, and other purposes related to health and safety.”

186

But just because the state has granted counties very limited authority over land use policy does not mean that the power instead rests at the state level. There is hardly any specific regulation from the state guiding the use of property aside from directing where the authority lies. Instead, land use jurisdiction rests virtually all at the municipal levels, with very limited authority for counties relating to special sites that need individualized protection. Municipalities do have land use and zoning regulatory authority. But markets limit that regulation as a practical matter, because “developers have unregulated land available outside the city limits.”

187 O’Toole

further explains, “Even though Dallas and most other major Texas cities use zoning, few use that authority to impose strict regulation because to do so would push nearly all new development to the counties.”

188

Moreover, Houston, the nation’s fourth largest city and fourth largest metropolitan area, famously has no zoning, or other restrictive land use development regulation. O’Toole adds that “the Houston area has grown from about 700,000 people in 1950 to 4.5 million people today, and is now the nation’s fastest growing urban area.”

189 Indeed, “Despite this rapid growth, Houston housing has remained highly

affordable for people of all incomes….Houston’s ability to sustain rapid growth without losing housing affordability can be traced directly to the city’s and region’s land use regime.”

190

At the same time, Bernard Siegan added in his famed work, Land Use Without Zoning, that Houston’s experience has proved that zoning “is not even necessary for the maintenance of property values.”

191

The Texas Public Policy Foundation also notes, “In fact, several articles point to the lack of zoning as a significant reason that Houston leads the way in Texas and across the United States when it comes to economic and job growth.”

192

O’Toole explains, “In place of zoning, many neighborhoods in the city of Houston and nearly all in the suburbs rely on homeowner associations and deed restrictions to accomplish the same thing.”

193 But

there is a very important difference between zoning and deed restrictions. Zoning involves government imposing its preferences on property owners. Deed restrictions involve voluntary transactions between citizens, and so reflect the preferences of the city citizen-residents. Deed restrictions also inherently enhance property values, or else property owners would not enter into the deed restriction transactions.

In addition, O’Toole observes,

184

Randal O’Toole, Houston’s Land Use Regime: A Model for the Nation, p. 3. 185

Ryan Brennan, “Limited County Land Use Authority: An Avenue to Protecting Private Property Rights,” Texas Public Policy Foundation Policy Brief, December, 2010, p. 1. 186

Brennan, “Limited County Land Use Authority,” p. 1. 187




O’Toole, Houston’s Land Use Regime, pp. 1, 2. 191

Bernard H. Siegan, Land Use Without Zoning (Lexington, MA: D.C. Heath, 1972), p. 247 192

Brennan, “Limited County Land Use Authority,” p. 2. 193



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One of the arguments for controls on urban sprawl is that it costs more to provide utilities to lower-density developments. In Texas, however, most infrastructure, including streets, water, sewers, is installed by developers. Typically, they create municipal utility districts that can sell bonds to pay for the installation of water, sewers, parks, firehouses, and other utilities and infrastructure. Homebuyers within the district pay an annual fee to repay the bonds. Generally, the fee declines to an amount needed to maintain the infrastructure after the bonds are paid off.

194

In addition, the Texas Legislature enacted The Private Real Property Protection Act of 1995, which provided public compensation to property owners for regulatory takings in Texas, whenever regulations caused a reduction of 25 percent or more in a real property’s value.

195 While the Texas Public Policy

Foundation criticized the act for exempting regulations adopted by municipalities from required compensation,

196 the measure still provides substantial protection for property rights in Texas that is

unparalleled elsewhere within the United States. O’Toole concludes,

While many have blamed the recent financial crisis on subprime lending, the Federal Reserve Bank’s low interest rates, the Community Reinvestment Act, and other national influences, all of these affected cities across the nation. Yet, housing bubbles only happened in states and metropolitan areas that were practicing growth management. Houston prices, for example, were barely affected by this bubble, either upwards or downwards.

197

The Texas system, therefore, is market based, which means infrastructure is developed to suit consumer/resident preferences, and to maximize property values, rather than to suit political exigencies. This strategy of localizing land use decisions and zoning to the smallest possible jurisdiction—even privatizing the decision-making—is also very much in keeping with economic best practices of eliminating externalities but does so in a much more efficient manner than via extensive growth management. D. Outcomes Comparisons

As we have documented, both economic reasoning and the research literature suggest that the addition of growth management or “smart growth” policies leads to slower population growth, slower employment growth, more volatile wages, and higher, more volatile property values. When it comes to the land use policies in Florida in general and Sarasota County in particular, we can document all of these expected results to be the actual outcomes. State Level One of the greatest parts of the American system of government is the ability of states to act as test cases for the multitude of economic policies that can be put forth. States compete for businesses and residents by varying their policies much like companies compete for customers via a combination of product attributes and prices. It is through this lens that we are able to analyze the impact of various policies. When comparing state performance, however, there are a number of considerations to take into account. For instance, there are certain policies that will function much differently in a small state low in population, such as Rhode Island, than in a large state with a massive population like California. Accordingly, it often

194


Ryan Brennan, “Regulatory Takings: The Next Step in Protecting Property Rights in Texas,” Texas Public Policy Foundation Policy Perspective, July, 2010, p. 4. 196

Brennan, “Regulatory Takings,” pp. 4, 6. 197



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makes sense to analyze states within a group of like states. The five largest states by population—California, New York, Florida, Illinois and Texas—are labeled “Mega-States” by the Department of Education in analyzing student performance because the size of the states makes their school systems function differently. We often find these states to be a good comparison grouping for the same rationale. In this case, three “Mega-States” in particular offer an interesting view into the effects of smart growth regulation. Generally speaking, Florida is seen as having much more strict land use regulations than Texas, but less strict than California. Accordingly, you would expect to see the a spectrum in which the effects of smart growth—higher and more volatile housing prices, slower population growth, and slower employment growth—manifest themselves most in California and least in Texas. Lo and behold, that is precisely what we find. Over the past decade, Texas has had the fastest growth and California the slowest growth in population and employment (Table 3).

Table 3

Population and Employment Growth (10-year growth, 2002-2012)

Florida Texas California

Population 15.75% 20.14% 9.09%

Employment 12.15% 16.43% 2.88%

Now, in many ways it is to be anticipated that California would be slowest growing of these states, as its economic policies are anti-growth while Florida and Texas have very pro-growth policies.

198 Yet the

differences in growth between Texas and Florida are much more telling, as the two states have very similar economic polices—no income, low corporate income tax, both right-to-work states, low total tax burden, and the list goes on. Certainly a portion of that outperformance is attributable to Florida’s growth management regulations. Meanwhile, the effects of strict land use regulation show up clearly in property values as well. Property values in Texas experienced the slowest, steadiest growth through the period, while Florida and California experienced much more volatile and rapid growth.

Figure 4

Growth Rate in House Prices by State (FHFA All Transactions Index, YoY, Quarterly Data, Not Seasonally Adjusted)

198

Arthur B. Laffer, Eureka! How to Fix California, Pacific Research Institute, 2012. 75

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County Level Having seen the effect of land use restrictions at the state level, let’s zoom in more closely on policies at the local level. Sarasota’s restrictions on land use are greater than Florida’s, which in turn are much greater than those prevailing across the vast majority of the United States. When it comes to property values, you would thus expect Sarasota County to show the most volatile prices because it has the most constraints on supply, followed by Florida, followed by the United States. Using the House Price Index compiled by the Federal Housing Finance Agency (FHFA), that is precisely what we find.

Figure 5

Growth Rate in House Prices: County, State and Nation199

(FHFA All Transactions Index, YoY, Quarterly Data, Not Seasonally Adjusted)

Similarly, you would expect Sarasota County to grow slower than both neighboring counties, where people will find land more easily, and than Florida as a whole. Again, that is precisely what we find.

Table 4

Population Growth Rate (2000 to 2010)

Florida Manatee County Sarasota County

17.6% 22.3% 16.4%

Source: Census Bureau Moreover, you would also expect to find Sarasota to experience greater volatility in wages—the inelastic housing supply means not as many people can move into or out of the area to accommodate changes in labor demand, causing wages to change more dramatically than in Florida. The Bureau of Labor

199

The FHFA monitors housing prices across the country and compiles that into indices for the nation, regions, states, and approximately 400 Metropolitan Statistical Areas. The Sarasota MSA used for the index stretches as far as Bradenton to the North and North Port to the South.

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Statistics has data at the metropolitan statistical level back to 2007, which show that wages in Sarasota are much more volatile than in Florida as a whole.

Figure 6

Average Weekly Earnings (All private employees, $, monthly, not seasonally adjusted)

Source: Bureau of Labor Statistics

F. The Economics of Impact Fees

In many ways, the fiscal neutrality provision acts as a more generalized case of an impact fee. Many municipalities across the country levy a fee on developers during the permit process. The fee is earmarked for specific services and paid to the local government based upon a predetermined formula. In theory, the fee is meant to offset costs to the local government associated with the development of the land—i.e. all of the costs and externalities included in a fiscal impact analysis—that are not covered by the marginal revenue to the municipality associated with the development. Accordingly, impact fees are generally calculated based on the size of the home (e.g. number of bedrooms), as that is correlated with the amount of additional services required by the development. While nationwide the use of impact fees is widespread, and the methods used to calculate fees and the size of those fees varied, given the analysis provided elsewhere in this paper, it should be little surprise that the two states in which the use of impact fees is most prevalent are California and Florida.

200

The general theoretical impact of impact fees can be described as follows. The market for new homes is described by a demand curve (D) and supply curve (S) as shown in Figure X. The intersection of these two curves—point b—provides the market equilibrium price (Pe) and quantity (Qe), the point where the quantity of homes that consumers desire (and are able) to purchase at a given price is equal to the

200

Clancy Mullen, “National Impact Fee Survey: 2012”, Duncan Associates, August 20, 2012. http://impactfees.com/publications%20pdf/2012_survey.pdf

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quantity of homes that developers are able to bring to market at that price. The introduction of an impact fee is equivalent to putting in place a specific tax on the price of new homes, creating what is known as a “wedge” between the price paid for new homes by consumers and the price received by developers. Now, consumers pay price Pc while developers receive price Pd, with the “wedge” equal to the difference between those prices. In addition, because buyers must now pay a higher price, the equilibrium quantity falls to Q1.

Figure X

The Market for New Homes

At the new equilibrium, consumers are worse off because some have been priced out of the market and those still able to purchase homes have had to pay a higher price. Developers are also worse off because they have sold fewer homes and have received a lower price for those sold. Yes, the County is better off because it has received revenue in the amount of the impact fees collected, but the revenues collected are less than the losses felt by consumers and developers. In other words, there has been a deadweight loss to the society. Specifically, this loss is given by the triangle abc. Certainly there are some simplifying assumptions in this analysis—such as only looking at new housing, assuming all new housing is homogenous, and assuming that home buyers and developers are rational actors—yet the implications are enlightening and are directionally accurate even if the assumptions are not strictly satisfied at all times. It is clear that economics expects an impact fee to increase the price paid for new homes, lower the price received, decrease the quantity of new homes sold, and create a deadweight loss for the community. Because the theory is so clear-cut, it makes sense that those results hold in practice in addition to in theory. Southern Illinois University economist R.W. Hafer conducted a detailed survey of the economic

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literature studying the effect of impact fees on residential housing prices.201

His conclusion from the collected evidence was unambiguous: impact fees reduce housing affordability, both of new and existing housing. Hafer summarized his review of the empirical evidence as follows:

Based on evidence [from 20 years of testing for the effects of impact fees in] Florida, California, Colorado and Illinois, the weight of the evidence is that impact fees raise prices for both new and existing homes…. Using mid-points of each study’s reported results and averaging, on average the price of a new home increases about $2 for every $1 of impact fee.

202

Even others with a more positive view of impact fees acknowledge that they drive up housing prices. Gregory Burge concludes in his review of the empirical evidence, “Impact fees do lead to higher average housing prices,” with an increase in price of new homes between $1.50 and $1.70 for each $1.00 in impact fees, and between $1.00 and $1.68 for existing homes.

203 This more positive spin on impact fees

starts from the premise that they replace property taxes, helping bridge the gap between municipal costs of servicing the development and the revenue resulting from the development. That much is clearly true. Yet the next step is more of a leap, claiming that impact fees function more as a user fee for the services required to support the development than as an excise tax on housing. Clearly an impact fee is not a pure user fee, as the marginal services are not directly correlated to the marginal cost on a per person basis. For example, a tax on the amount of electricity your house uses, directly proportional to the amount of electricity used, is a user fee. An impact fee related to schools for a family with no children is not a user fee; it is an excise tax on housing. To the extent that an impact fee is fashioned and operates as a user fee, however, it leads to much more efficient economic outcomes than as an excise tax.

204 This is because fees directly tie marginal cost to

marginal benefit, leaving the choice in the hands of the end-user of the good or service, whereas an excise tax loses that direct connection between marginal cost and marginal benefit. Accordingly, municipalities should seek to structure impact fees as user fees to the greatest extent possible. Toward this end, local governments should be governed by the following rules when employing impact fees:

Local governments should not use impact fees to provide revenue for infrastructure for which user fees already exist, such as sewer and water, certain forms of public transportation, etc. The reason is that impact fees are beneficial to the extent that they are able to keep property taxes down. Services with their own user fees can adjust those fees appropriately based upon the new development, whereas public infrastructure and services with no user fee must rely on property taxes for their funding.

205

Local governments should only employ impact fees for those costs that require capital improvements.

Local governments should set impact fees equal to the excess, if any, of marginal cost over marginal benefit associated with development. Any amount greater than the excess clearly represents an excise tax on housing, as now the user fee is in excess of the social benefits associated with buying the home.

The standards for imposing impact fees must be well defined. The empirical findings are largely unsettled as to whether impact fees represent an excise tax or a user fee, but in theory each of these options are possible. Provided a government follows the guidelines

201

R.W. Hafer, “The Effect of Impact Fees on Residential Housing: A Survey”, January 2008. https://www.siue.edu/business/economicsandfinance/pdf/Hafer_Impact_Fee_Study_February_2008.doc 202

Hafer, “The Effect of Impact Fees” 203

Gregory Burge, “Impact Fees in Relation to Housing Prices and Affordable Housing Supply”, Chapter in A Guide to Impact Fees and Housing Affordability. Editors A. Nelson, J. Juergensmeyer, J. Nicholas, and L. Bowles, Island Press, 2008. 204

Burge, “Impact Fees in Relation to Housing Prices”. 205

Gregory Burge and Keith Ihlanfeldt, “Impact Fees in Florida”, Chapter in Growth Management in Florida: Planning for Paradise. Editors C.E. Connerly, T.S. Chapin, and H.T. Higgins, London, Ashgate Press, 2007.


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above, however, the economic effects will tend to be much more in-line with those of a user fee. Regardless of whether viewed as an excise tax or as a user fee, there are certain potential benefits from impact fees. As laid out by Burge and Ihlanfeldt,

First, impact fees may expedite project approval. The project approval process can be long and expensive to the developer. In the absence of development fees, funding for new public infrastructure typically comes from the property tax. Hence, depending on the magnitudes of the services required and the tax revenues generated by the new development, existing property owners may face higher property tax burdens when growth occurs. Second, because impact fees are earmarked, they may reduce the uncertainty that developers/employers have over whether the infrastructure they need will be provided by local government or provided in a timely fashion. Developers may view impact fees as a contractual agreement with local government that gives them some assurance that the infrastructure services they need will be provided.

Yet the discussion does not stop even there. The evidence indicates that many localities substitute impact fees for nonmonetary forms of smart growth regulation.

206 To the extent that is true, impact fees

are much preferable. Economics dictates that you should always use a direct cure to address any perceived problems. In this case, the problem is the perception that growth does not pay for itself and thus should either be taxed or stopped. In this case, a user fee is preferable to an excise tax, which is preferable to regulation that stifles growth. The evidence regarding the effect of impact fees on government revenues is complicated. As summarized by Burge,

Direct effects were most notably dependent on the size of the impact fee levies and the effect those fees had on future development rates. The literature concerning the relationship between impact fees and rates of new construction was therefore reviewed. A common theme in this literature is that impact fees may act to reduce other exclusionary barriers to development and, for that reason, may not be strictly subject to the classic Laffer curve trade-off between the rate and the base. The indirect effects of impact fees on local revenues were argued to primarily operate through the property tax, since they have been shown to affect both property value and future millage rates within adopting communities. Because impact fees have opposing effects on property values (positive) and future millage rates (negative), it is entirely possible that the net effect on property tax revenues is negligible.

In other words, after the initial imposition of impact fees, it is difficult to determine whether or not any increase or decrease in fees would have a net positive or negative total effect on government revenues. Moreover, much of the evidence suggests that impact fees themselves are unnecessary, as development typically generates sufficient revenues on its own to outstrip the marginal cost of services. This research relates directly to the question of under what circumstance does development exhibit fiscal neutrality. In Florida, impact fees have been particularly popular. The rapid growth experienced by the state made it difficult for property taxes to fund the infrastructure required to support that growth in real time. Seeking to avoid property tax increases, impact fees became a popular option as a revenue source.

207 The use of

impact fees especially took off after several court cases and the Growth Management Act validated their use, to the point that as of 2007 at least 49 of Florida’s 67 counties had employed impact fees at some time.

208

206

Gregory Burge, “The Effects of Development Impact Fees on Local Fiscal Conditions”, Included in The Changing Landscape of Local Public Revenues. Editors Gregory Ingram and Yu-Hung Hong, Lincoln Institute of Land Policy: Spring 2010. https://docs.google.com/file/d/0B4IiHJT-ST_XcFlkN3BWUzI0SEE/edit?usp=drive_web&pli=1 207

Gregory Burge and Keith Ihlanfeldt, “Impact Fees in Florida”, Chapter in Growth Management in Florida: Planning for Paradise. Editors C.E. Connerly, T.S. Chapin, and H.T. Higgins, London, Ashgate Press, 2007. 208

Ibid.

laffer and associates draft report on fiscal neutrality in sarasota county

Documents

employment growth

floridas growth management

sarasota county

housing supply

land development regulation

manatee county

inelastic supply of

volatile housing prices