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Funding Community Development

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Michael Silliman
January 15, 2018

Battles within local government budgets are heating up. Tight budgets are nothing new for municipalities of course, but there are several factors that make this moment especially difficult for local governments that will require creative funding solutions for desired community development projects.

Local governments are always asked to do more with less. They are responsible for capital investments like roads, bridges, schools, fire stations, water purification facilities, storm water management systems, sewage systems, libraries, parks, recreation centers, cultural centers and much more. The annual operating budgets for municipalities must be balanced and are always tight.

When it comes to funding major infrastructure projects or raising money for a new or increased need in a community beyond the operating budget, local governments have used a whole host of tools like municipal bonds (debt), saving in accordance with long term regional planning, grants from the state or federal government and property tax increases (normally done through a ballot measure that links increase in revenue directly with a service like public schools to avoid political fallout).

Debt is the most common way to pay for municipal investment projects, but as engineer and founder of Strong Towns Chuck Marohn argues, municipal debt has exploded as a share of GDP and these investments are clearly not paying off:

The municipal bond market, which includes state and local borrowing, was just $20 billion at the end of World War II, roughly 1% of gross domestic product (GDP). By 1960 it had grown to 2% and then to 6% by 1980. Since 1980, municipal debt has exploded from $361 billion to $3.7 trillion. Municipal debt is now 27% of GDP, an 18,400% increase since World War II.

Municipal bonds as a tool for local governments has grown rapidly, and Chuck and others are concerned about how sustainable this is and how it represents a change in how centrally organized our society has become. Cities across the country are already struggling to service their growing debt, so it seems unlikely municipal bonds will be a sustainable solution to pay for development projects.

The most straight forward way to pay for development projects is to plan and pay with cash. Most municipalities have 20-year plans and can save enough to directly pay for smaller community improvements. There is no way local governments are going to have enough to pay for the pending infrastructure needs.

Grants and tax incentives are declining so local governments would be smart to not rely on these. While there is some talk of a federal spending bill, it sounds like it will take the form of private partnerships which even President Trump is skeptical of. Via the Washington Post, the idea would to be to spend $200 billion and with that leverage $1 trillion in private spending. Seems unlikely.

Moreover, the federal government has proven to be an unreliable and inconsistent partner. The Tax Cuts and Jobs Act (TCJA) limits the State and Local Tax (SALT) deduction, severely limiting the ability to raise funds from new property, income or sale taxes (especially hard for high taxed communities). The TCJA also cuts a number of tax credits that are used in development like the Historical Preservation Tax Credit and others. According to The National League of Cities, these cuts are meant to “Offset the cost of lower corporate taxes by limiting deductions for state and local taxes as well as some of the tools that help finance local infrastructure and build strong, vibrant and economically sound communities.” This federal administration may claim they want to leverage local infrastructure spending, but their actions are directly making it harder for municipalities to do so.

The last common way for local governments to raise money for development projects is to pass a tax through a ballot measure. This is how Seattle passed its Sound Transit 3 expansion in 2016, and is a common way to pass funding for feel good projects like new school buildings or a needed fire or police station. Along with the capping of the SALT deduction making this harder to pass, taxing for specific projects raises what is coming to be known as “generational equity” issues. As Seattle’s Assistant City Attorney Jenifer C. Merkel explained,

Is it fair to tax a resident over many years to provide funds to acquire and construct a public park, only to construct the park after the resident has moved away and can no longer enjoy that facility? When approaching these decisions, some basic equity issues confront all municipal governing bodies. Generational equity is the concept that users of a capital project will change over its useful life and fairness requires those costs to be spread to those who will use the infrastructure over time.

The argument here is that funding projects by taxing the people that will use those spaces is the fairest. On the other hand, if “fairness” means those that benefit from a public service should be the ones that pay for it, how do schools work? Funding schools through a ballot tax measure is especially hard in a retirement community where the majority of voters do not have school-aged children.

With tight budgets and growing obstacles in community development financing, local governments will have to get creative. Options such as Tax Increment Financing or Value Added Taxes could help projects pay for themselves. Other communities will turn to charity or crowdfunding like the Michigan Economic Development Corporation. As development funding sources dry up, look for the popularity of creative funding to grow.

Author: Michael Silliman holds a Master’s in Public Administration from George Mason University and during the day works as a Program Manager at ICMA (International City/County Management Association). He studies and writes on the topics of civil society, community development and third-party governance. You can reach Michael at [email protected] or follow him on twitter @michaelsilliman 


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