by James A. Bacon
If local governments want to avoid Detroit-style insolvency and financial collapse, they need to be savvier about how they make capital investments, argues Charles Marohn on the Strong Towns blog. They need to ask themselves three questions:
- Will the capital investment generate a real rate of return (ROI)?
- Will that rate of return be capturable in amounts sufficient to fund the project?
- Will the revenue stream sustain the improvement over multiple life cycles?
If the answer is yes, the investment qualifies as low risk. If local government can’t answer the questions, the project is speculative… a gamble.
Marohn contends that local governments should devote 95% of their capital investments to low-risk projects, where there is a high degree of confidence in the payback, and 5% to high-risk projects with uncertain payoff but the prospect of outsized gains. Many of these experimental projects, he suggests, could go to “tactical urbanism,” small-bore initiatives like creating parklets, planting trees, making streets more walkable and the like. If they flop, there’s no big loss. But if they succeed, they can be replicated to great benefit.
Bacon’s bottom line: Needless to say, nothing like this is practiced in Virginia. State and local government officials talk all the time about “investing” in roads, education and what have you, but few of them have the faintest idea of how to go about calculating ROI, much less possess the political will to do it. No successful business would ever “invest” money the way government does, with no idea of projected return and no method to track it to determine if it succeeded.
It would be difficult for Virginia government to start treating its capital investments like a growth portfolio with specified risk-return objectives, but it’s essential to start doing so. Yes, essential. It’s no longer a matter of merely saving taxpayers money, as I once would have argued, but of avoiding avoid fiscal collapse within another generation.
Once upon a time, the United States was an extraordinarily wealthy country with powerful economy that could afford to be wasteful. No longer. The economy is flying at just above stall speed, federal finances are a toxic waste dump, and the condition of state/local finances, even in fiscally conservative states is far more precarious than anyone cares to admit.
Once upon a time, Virginia was a national growth leader. We haven’t fallen to basket case status — Illinois and California will go belly up long before we will — but our growth is slowing, fiscal pressures are mounting and we remain scarily dependent upon the solvency of the federal government. It is policy folly to expand programs (Medicaid) that we may not be able to fund 10 years from now, and fiscal quackery to embark upon infrastructure improvements (expansion of the Washington Metro) without any idea of where the money will come from to maintain them.
The answer isn’t to stop investing — that’s a recipe for stagnation. The answer is to invest intelligently.
If I were running the Virginia Municipal League or the Virginia Association of Counties, I would make it the No. 1 highest order of priority to pull together the best brains in the business to figure out how local governments can calculate ROI on their capital spending projects. Anything else is just applying Band Aids.
