Report: To keep up with infrastructure maintenance costs, local governments need to rethink land use policies

For better or worse, geographical boundaries separate local jurisdictions and define parameters within which local governments can operate. The land and its value dictate tax revenue—land that’s rich in natural resources, or that’ close to important destinations, demands more value than that which is remote. 

It’s a finite resource that must be thoughtfully managed. As localities densify and the world spins further into the digital era, outdated land management strategies are becoming strikingly obvious. Oftentimes, land use plans don’t account for the monetary impact certain features will have over the long term, according to the latest paper published in the Rethinking Revenue project, a joint venture of the Government Finance Officers Association and the International City/County Management Association with support from the American Planning Association, the National Academy of Public Administration, the National League of Cities, the Government Finance Research Center and The University of Chicago’s Harris School of Public Policy. The paper was co-authored by Joe Minicozzi, principal owner of the consulting firm Urban3, and Shayne Kavanagh, senior manager of research at the finance association.

The project is focused on rethinking the way local governments fund themselves through novel revenue ideas and alternative taxation norms that are more in-line with modern business practices. Previous publications have outlined the problem with current revenue systems and developed a criterion for evaluating the effectiveness of proposed changes. 

“Historical land use decisions did not provide for sufficient taxable activities to pay the cost of maintaining the infrastructure that was built to serve the development,” reads the report, “The root of local government revenues,” which outlines the importance of land use, and unpacks the relationship between land and revenue. At least in part, this lack of forethought explains why “many local governments face difficulties funding infrastructure maintenance and replacement.” 

As an example, the report describes the expansion of South Bend, Ind.’s sewer system, which is based on a review by Urban3. In 1960, the system served a population of 132,000 people, and expanded over the years by adding more lift stations and water mains. Today, however, the population has shrunken to a little over 100,000, and the city is facing a challenge like that faced by many cities across the United Sates: “Land use development patterns that are incompatible with long-term financial realities. Sprawling, lower-density development patterns cause infrastructure to grow beyond the city’s ability to generate revenue to maintain it.” 

In this modern era, the onus is on local governments to think beyond the immediate expenditure of a given project, the report argues. They must seek “a long-term, dependable solution to their structural revenue and expenditure imbalances,” and “become more intentional about making financially savvy land use decisions.” 

A major hurdle local governments face in expanding current land use practices centers around precedence: Is it appropriate for governments to change the way they bring in revenue? Traditionally, public services are perceived by constituents as entirely altruistic and for the broader good. But while this perspective might be accurate in theory, it fails to consider the mechanics of responsible management practices.  

Another sticking point, as noted in the paper, is that “higher revenues per acre will usually require denser, more intensive development per acre than many communities tend to support. This historical aversion to denser development may lead to objections to local government using its regulatory power to encourage higher revenue per acre.” 

On its own, the private market might not evolve in a way that supports local government, and constituents don’t understand the complexities of municipal management—even when it’s in their best interest, or in the best interest of their children. 

“In many communities, there isn’t enough revenue per acre in the community to fund the upkeep of infrastructure that has been built to serve less dense areas,” the report says. “These areas require more lane miles, linear feet of water pipe, etc., to serve the same number of people. Insufficient revenue per acre means that the maintenance and replacement costs are deferred to future generations. Hence, current consumption is subsidized by future taxpayers.” 

Density is dictated by zoning, and the researchers argue that it’s within local administrator’s purview to leverage regulatory power in ways that “promote a public policy goal of financially sustainable local government. A financially healthy local government a better maintain transit, public safety, and other public services.” 

To that end, the report outlines concrete steps local governments can take to improve revenue-per-acre: Make financially savvy development the easier choice by changing it so that conventional development patterns aren’t the default; calculate revenue per acre for all areas to develop a baseline; encourage infill development and build up as opposed to out; require a cost-benefit evaluation for potential new development; understand the fiscal impact of building and zoning regulation, then adjust accordingly; identify areas where cross-subsidization is happening and consider charging for it. 

“Cross-subsidization occurs where the cost to develop in one area is subsidized by revenues generated in another area of the community,” the report unpacks. “Sometimes cross-subsidization is intentional and acceptable. Other times it is unintentional and unrecognized. In the latter case, it may be savvy to remove the subsidy, especially where the subsidy encourages unsustainable development patterns.” 

These methods have proven successes. South Bend, for example, tweaked its regulations to encourage density and reuse existing buildings, in-filling unused areas within the sewer system. And Lancaster, Calif., identified low-density development (the city had more infrastructure than its tax base was able to support) and was able to encourage denser development to even the gap over the long-term. Both case-studies were cited in the report via Urban3, which conducted the research.

Regardless of policy changes, “local governments need to rethink how their approach to land use planning considers the financial impacts of development choices,” the report concludes. “Land uses underpin a local government’s revenue system because the property tax (and sometimes the sales tax) is an important source of local revenue. If the land within a government’s boundaries is not productive at generating revenues, then local government will find it difficult, if not impossible, to keep up with the costs of providing services and maintaining infrastructure.”