The Looming Insolvency Of Local Governments

Regardless of who won the presidential election, they stand a reasonable chance of being confronted by the fiscal instability of many municipalities. Here’s another example, this time from Lafayette, Louisiana (boldface mine):

When we added up the replacement cost of all of the city’s infrastructure — an expense we would anticipate them cumulatively experiencing roughly once a generation — it came to $32 billion. When we added up the entire tax base of the city, all of the private wealth sustained by that infrastructure, it came to just $16 billion. This is fatal.

It’s obvious to me why this is fatal, but for those of you for whom it is less clear, let me elaborate.

The median house in Lafayette costs roughly $150,000. A family living in this house would currently pay about $1,500 per year in taxes to the local government of which 10%, approximately $150, goes to maintenance of infrastructure (more is paid to the schools and regional government). A fraction of that $150 – it varies by year – is spent on actual pavement.

To maintain just the roads and drainage systems that have already been built, the family in that median house would need to have their taxes increase by $3,300 per year. That assumes no new roads are built and existing roadways are not widened or substantively improved. That is $3,300 in additional local taxes just to tread water.

That does not include underground utilities – sewer and water – or major facilities such as treatment plants, water towers and public buildings. Using ratios we’ve experienced from other communities, it is likely that the total infrastructure revenue gap for that median home is closer to $8,000 per year.

The median household income in Lafayette is $41,000. With the wealth that has been created by all this infrastructure investment, a median family living in the median house would need to have their city taxes go from $1,500 per year to $9,200 per year. To just take care of what they now have, one out of every five dollars this family makes would need to go to fixing roads, ditches and pipes. That will never happen.

Thus, Lafayette has a predicament. Infrastructure was supposed to serve them. Now they serve it.

This makes high housing prices in urban cores look trivially easy to solve. There are two issues here. First, could we solve this? With federal deficit spending, we could, though if Lafayette is any indication, we are talking about hundreds of billions of dollars per year. But there’s a much thornier question–should we?

After all, if they don’t become more dense (thereby generating more tax revenue), this is simply kicking the can down the road for a few decades, when we’ll have to do it all again.

A low-density suburb is not even close to environmentally-friendly. Unlike urban and ‘urban-ish’ areas where you have the economic, cultural, and societal benefits of cities or rural areas which have vital resource extraction and food production roles, the suburb is essentially a massively subsidized housing system. As long as they were growing in size (number of taxable houses) and those houses were increasing in value, the music hadn’t stopped, so they were ‘fiscally sound.’ But now even wealthy suburbs, which aren’t really expanding very much, are coming under a fiscal crunch, and it’s only going to be worse in middle-class and lower-middle class suburbs.

We’re going to have to confront some very difficult choices. Given that half of our political system doesn’t even recognize the existence of man-made global warming, I’m not optimistic.

I don’t know if this will affect the fortunes of Il Trumpe, but this is something we are going to have to face–and it will be ugly when we do.

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2 Responses to The Looming Insolvency Of Local Governments

  1. Kevskos says:

    The real problem is income inequality, if the money was more fairly shared median income could be around 80K and that tax burden would not be much of a problem. They would also raise a lot more sales tax. We built much of this infrastructure before 1980 when income was shared better. If we could afford to pay for its building there is no reason we should not be able to pay for its repair. Income inequality really hurts the tax base of local jurisdictions because it drives down both sales tax and property tax.

  2. elkern says:

    Mike the Mad –
    Big Thanks for keeping on this problem (unsustainability of suburban infrastructure). I totally agree that it’s a huge monster looming in the medium term, and most people don’t even know about it. The total cost would be less than unchecked Global Warming, but the “Cost/Awareness” ratio (not a thing, yet?) is worse.

    Kevskos –
    The death of Progressive Taxation in the US is a BIG problem, but not the only one. And yes, “no new taxes” has meant “no new infrastructure” AND “woefully insufficient maintenance on existing infrastructure”, but Mike’s napkin-math indicates that US suburbs would be in deep Bantha PooDoo before long anyway.

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