Reply to Richard Carson's "Paying for Our Growth in Oregon" Report

by Evan Manvel
Planning Advocate

Oregonians should understand the financial and social impacts of growth on our communities. This memo details my concerns about a recent publication, Richard Carson's "Paying for Our Growth in Oregon."

While the "POGO" report provides an interesting perspective of the growth issues we face, many of its conclusions include leaps in logic and others are based on poor economic reasoning. Two aspects of Carson's argument are especially troubling: the mixing of cost-benefit, fiscal impact, and regional income analyses, and the characterization of paying for growth as solely a local government financing challenge.

A casual glance may cause readers to erroneously believe Carson's report quantifies the cost of growth to Oregonians (from the title, "Paying for Our Growth in Oregon," and the absence of his problem statement from the subtitle and executive summary). Instead, the report lays out a strategy for how local government can cope with increased infrastructure costs resulting from growth. Carson's plan relies heavily on shifting costs to other actors; most notably, education costs to the state, utility costs to all ratepayers, and social and environmental costs to community residents.

As to the "true costs" of growth, Carson relies on a three-page memo by Sonny Conder. Without defending the memo's reasoning or assumptions, Carson relies on its numbers and draws conclusions using faulty economic reasoning. Specifically, Carson:

• Confuses cost-benefit analysis with fiscal impact analysis and regional income analysis;

• Ignores distinctions between average costs and marginal costs (of new growth);

• Has no base-case scenario for comparison with his costs of growth;

• Counts jobs created as an economic benefit; and

• Ignores the role regulation has in correcting market failures.

Throughout his report, Carson flips between complete faith in the market (as to what sorts of housing is built, and that citizens of a municipality pay for all the costs of growth) and complete skepticism in it (arguing there are huge profits to be made in land newly annexed and noting the capital market will not lend based on future SDC income). He also fluctuates on whether cost savings are passed on to the consumer; saying on the one hand (annexed land) they are not, and on the other (lower SDCs) they are. Unspoken, questionable assumptions about the land, housing, and capital markets are buried in these assertions.

Upon close review, much of the "report" is no more than Carson's opinions and ideas divorced from factual background, logical progression, and hard data. That said, it is easier to be a critic than an author. Carson offers a useful set of recommendations on how local governments can fund specific infrastructure needs, and a review of many of the financing issues Oregon communities face. The rest of my comments respond to specific arguments throughout the study.

Preface

Carson says: "This report addresses that specific issue [of how to pay for the cost of growth in Oregon]." This is an overstatement. The report only addresses how local governments can pay for their infrastructure costs related to growth.

Executive Summary

Carson's Point 1. Carson: "This study determines that the cost of growth for a single family residence is estimated to be $23,013." A more accurate opening sentence would read: "[Conder's] study determines that the monetary cost of building some of the needed public infrastructure to accommodate growth for an average single family residence is estimated to be $23,013 ... I concur with Conder's analysis."

Carson's Point 2. Carson: "If the level-of-service drops for any government service, activity or infrastructure, then that is what the local voters are willing to live with as their quality of life."

This argument ignores the transaction costs associated with moving and poorly informed consumers, two common critiques of Tiebout's theory (that communities are like any other product, and residents will move between them until they find the service mix they want).

Even for those who believe Tiebout, Carson's statement does not mean dropping service standards has no cost. If Carson actually conducted a cost-benefit analysis, this drop in LOS would be part of the equation. Because he is mostly focused on a fiscal impact analysis (which he wrongly calls a cost-benefit analysis), the social costs of the LOS drop are externalized and ignored.

Carson's Point 4. Carson: "All four of Oregon's metropolitan areas are now in the 14 most expensive... housing markets in the nation."

This statistic comes from a National Association of Home Builders study comparing recent single-family home sales with local median salaries, and determining what percentage of the homes on the market could be purchased by someone earning the median salary. There are several flaws to this simple calculation. First, many people choose housing other than single-family homes. Second, home financing is based on much more than salary; FANNIE MAE gives homebuyers credit for selecting a home near transit (thus not having to finance a second car). Third, salary is half the equation. One could read the same statistic to say Oregon's metropolitan area employment markets are among the 14 worst paying.

Looking solely at price, buying the average home in the "most affordable" housing market in the West (Anchorage) costs $7,000 more than in the second "least affordable" market in the nation, Eugene-Springfield. As Benjamin Disraeli (and later, Twain) said: "There are lies, damn lies, and statistics."

Second, Carson has converted "least affordable" to "most expensive," an important semantic change.

Third, Carson seems fixated on the cost of housing, instead of what we are really concerned about: the cost of living. If we werenít doing such a "great job of making the developer and home buyer pay for the costs of growth" then we would all be paying for the costs of growth through rates, taxes, or service deterioration. Carson does not compare the incidence of SDCs with the incidence of increased property taxes or utility rates (incidence means who ends up bearing the economic burden, instead of who is initially charged for something). Without this, we may as well assume that growth paid for in non-SDCs increases cost of living just as much as SDCs.

Short-Term Solutions

Carson's Point 5. Carson: "voter-annexation has made a complete shambles of [the 20-year supply of housing inside the UGB] process."

The 20-year supply of land within the UGB standard is not, as Carson implies, a thoughtful, non-political process. Many creative individuals have used the process to make a mockery of good planning. Further, in pointing the finger at annexation policies, Carson ignores what has actually happened under these laws: over 90% of annexations have been approved.

Carson's Point 7. Carson characterizes the call for Taxpayer Impact Statements for new developments as "disingenuous because it breaks with the conscious decision of Oregonians to do both environmental and land use planning before development occurs and not damage control after it is too late."

This is nonsensical, as the impact statements would be part of the planning process, done before development occurs and before "it is too late."

A Long-Term Solution

Carson argues against using SDCs as "this practice drives up the cost of housing so high that our own children are priced out of the American dream of owning a home." You can almost hear the national anthem being played in the background. Again, Carson fails to recognize that the overall cost of living is what is important, and that higher housing costs will probably translate into lower utility and property tax rates. Further, housing is expensive across the west, even in cities without SDCs.

Carson argues local utilities should put all the cost of new infrastructure into their rates. This is interesting, given his argument in Chapter 6: "it is important to separate the initial cost of the capital improvement... from the ongoing operation and maintenance of the system." Carson is quietly arguing for the costs of new growth to be shifted to all ratepayers, "externalizing" the costs caused by new development.

Chapter 2: Growth in Oregon

Carson refers to "no growth special interests" and implicitly ties them to the Klu Klux Klan. There is no talk about "home building special interests," despite the builderís stronger financial interests in the growth issue. Carson fails to note important distinctions between managed growth, slow growth, and no growth advocates. He also removes an important part of Governor McCall's quote about moving to Oregon: "Please come visit us in Oregon again and again. But for heavenís sake donít come here to live. Or if you do have to move here to live, don't tell any of your neighbors where you are going." The last sentence was left out in the POGO report.

Chapter 4: Legislative Mandates and Case Law

Carson argues: "The argument against voter-annexation is that too many ëno votesí will drive the demand for housing to neighboring jurisdictions." This appears to be the only basis for Carson's conclusion that such policies should be destroyed. In practice, there are very few ënoí votes, and the evidence I have seen linking Corvallis annexation policies and housing costs is anecdotal at best.

Chapter 5: Needs Analysis

While cable television is defined as "infrastructure and service needs of growth," public art and fiber-optic cable are not. Otherwise, Carson has a fine and fairly comprehensive list.

Chapter 6: Cost-Benefit Analysis

This chapter demonstrates Carson is a planner and not an economist. There are a litany of errors and overstatements:

Carson makes an elementary mistake in calling his effort a "cost-benefit analysis." His study is more a fiscal impact analysis, which looks at the fiscal impact of an action on one actor (local government), than a cost-benefit analysis, which looks at the total costs and benefits on all actors (including non-fiscal costs and benefits, such as increased congestion).

On municipal utilities, Carson says: "New development is anticipated and built into the rate so theoretically growth always pays its way." This does not follow. I presume Carson is arguing that because new development is anticipated, rates increase on an ongoing basis, instead of when growth happens (the marginal cost is built into the average cost). This is very different from what he says, and may not be how local utilities manage their rates.

With school funding, Carson infers that because the state covers 70% of total education costs, they "should" be allocated 70% of the school infrastructure costs of growth. This erases an important distinction between average costs (existing system) and marginal costs (new development).

In his discussion about "What Does Growth Cost?" Carson fails to create a base scenario to compare the costs of growth against. Are we to assume a no-growth scenario with no technology change, or something else? Again, lack of a base case is a common mistake in economics.

Just as Carson says "it is impossible to make any judgment about subsidies unless we discuss municipal financing," it is impossible to make a judgment about overall subsidies with the fiscal impact analysis methodology, as it purposely focuses on one sole actor (in this case, municipal government).

Carson notes "Additional benefits of growth," which are benefits to other actors as well as the government. He does not mention costs to other actors, such as traffic congestion. Carson is mixing fiscal impact analysis, regional income analysis, and cost-benefit analysis, a common mistake.

Carson asserts less controlled growth leads to "greater choice in the marketplace" which seems intuitive, but could end up being false, given the hesitancy in the capital markets to address unfamiliar projects. More data is needed to back up this claim.

Carson makes yet another common mistake in economics: arguing job creation is an economic benefit to the community. This is only true if the jobs created are taken by unemployed people who were doing nothing of value; otherwise, we have an opportunity cost (skilled workerís time is being used up) canceling out the job benefit. In practice, most new jobs are filled by new community residents, which can drive up housing costs and cause other problems.

Carson then argues more regulation equals less affordability. Again, this seems true, but numbers are needed. Regulation can correct many market failures, which could lead to more affordable housing and lower overall cost of living. Basic economics may dictate regulation costs money, but more sophisticated economics recognizes that regulations may save money. Michael Porter from the Harvard Business School is a leading proponent of this idea.

Carson relays a message from Jon Chandler: "housing affordability has not been an issue very many people gave a damn about..." For anyone who has worked in our statewide planning program, or dealt with housing issues in the Metro region, this statement rings hollow.

Finally, Carson argues "[d]evelopment is a highly competitive enterprise that gets no grants from government." This is flat-out wrong. One obvious example is the tax breaks given for homeownership, which make housing development more lucrative compared to other products. Carson says: "Citizens of a municipality will pay for all the costs of growth and not the developer." Here he fails to address important issues of incidence and externalizing costs to other areas, and switches back to full faith in the perfect economic model which he criticizes in other parts of his report.

Chapter 8: Organizational Solutions

SDCs can be charged for transportation capital projects, not just roads.

Chapter 11: Conclusions, Recommendations, and A Solution

Carson says: "The real cost of growth is the dollar amount of public financing and taxation that the Oregon voter is willing to pay or to levy to support growth." This is simplistic and wrong. The real cost of growth would be figured out through a global cost-benefit analysis, going far beyond simple taxation issues, including such things as the value we put on the positive and negative changes in our lives resulting from growth.