Paying For Our Growth in Oregon
Richard Carson	© & Author Info

Abstract

This report determines the public cost of growth and how much of that cost is being paid for by the development industry or subsidized by local government. The report analyzes revenue options and presents alternatives that local government officials can use to bridge the financial gap. The report also looks at the current legal limitations. The report incorporates information from the current literature, including two major research efforts. These are the forthcoming publication of The Costs of Sprawl Revisited from Rutgers University and the other is the work of the Governor's Task Force on Growth in the State of Oregon.

Preface

In the Fall of 1972 the state of Oregon published a highly avant-guard document called The Willamette Valley: Choices for the Future. It began with a letter from then Governor of Oregon, Tom McCall, who said, "Will the valley fall prey to a now-familiar pattern of uncoordinated growth and urban sprawl? Or can its people, working in community, build a different future?" Although few realized it at the time, this was the genesis of statewide land use planning in Oregon. As unique as this blueprint was, there was one chapter missing: how to pay for the cost of growth in Oregon.

We have met the enemy and he is us!

Walt Kelly, Pogo comic strip, Earth Day 1971

Executive Summary

Conclusions

1. The Cost of Growth. This study determines that the cost of growth for a single-family residence is estimated to be $23,013. These costs are either funded, fundable or unfunded.

• There is 59 percent or $13,526 the cost of growth that is completely funded by the developer, and eventually the homebuyer, through on-site improvements and off-site system development charges.
• There is 20 percent or $4,679 of the total cost of growth that is actually unfunded by local government. This cost could be levied against the development industry or could be paid by the local government through other means.
• There is 13 percent or $3,019 of the costs of growth that unfunded by the state that they need to pay for. These costs should be included in the state funding of schools since the voters created a state financed school system through Ballot Measure 5.
• There is about another 8 percent or $1,787 that may already be funded or is easily fundable by local government today. Local governments can collect these revenues through existing utility rates or system development charges.

2. Paying for the Cost of Growth. Paying for the costs of growth in Oregon is a matter of local government financing. Cities, counties and special districts are the ultimate providers of the services that growth requires. Oregon budget law requires governments to achieve a balanced budget, so 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. 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. There are more financing mechanisms available to local governments today than ever before. There are a few state legislative actions that could slightly expand the set of available tools. Specifically, the real estate transfer tax could be reinstated or the types of system development charges could be expanded to include schools and general government functions such as fire, police, and libraries.

3. State Must Pay Its Share. One of the most important things that happened to school financing in Oregon was the passage of Ballot Measure 5. This measure basically left expenditure decisions with local school boards, while taking 70 percent of the financing decisions away and giving it to the state legislature. This immediately resulted in the revenue to all schools became equalized, and it tapped into a variety of other state funding sources like corporate and personal income taxes, and lottery proceeds. Oregon education system has become a state system of education.

4. The Affordable Housing Paradox. There is no magic pot of money out there to pay for what taxpayers are unwilling to pay for. If local government puts the financial burden on the developer, then the developer passes this cost onto the homebuyer and drives up the costs of housing for all Oregonians. All four of Oregon's metropolitan areas are now in the 14 most expensive (or the top 7 percent) housing markets in the nation. Part of the problem is we are doing a great job of making the developer and homebuyer pay for the costs of growth through the use of system development charges and other exactions. Are there alternatives that wouldn't increase housing costs? There are three possible ways to finance growth without increasing the cost of housing: continue the use of traditional voter-approved general obligation bonds and serial levies; introduce an annexation charge that would decrease the profit to the annexing property owner; or program the costs into existing utility rates.

Short Term Recommendations

1. The state legislature should enact new financing tools to help both local government and schools districts pay for growth. The best methods are to: expand the use of system development charges to include city general fund and school capital improvements; lift the moratorium on the use of the real estate transfer tax; and allow cities to levy a charge on land annexed to the urban growth boundary and the city.

2. Off-site conditions of approval required of a developer must demonstrate a reasonable relationship to the development's impact on the community, as required by the U.S. Supreme Court in Dolan v. City of Tigard. The simplest method to achieve this is to require exactions based solely on the Capital Improvement Plan and the use of system development charges, and not by directly requiring the individual developer to make off-site improvements.

3. A state infrastructure financing bank or fund should be created where a city can borrow the money, build the infrastructure, and repay it with the system development charges collected. The problem cities face today is that they cannot bond improvements with system development charges like they can with utility rates.

4. A variation on the 'infrastructure bank' is to encourage cities to utilize public-private development agreements. Some developers are financially solvent enough to finance and build complete off-site infrastructure systems and then collect SDC reimbursements from later development.

5. The Oregon Legislature mandated a 20-year land supply to keep the supply of land adequate enough to hold prices down. However, voter-annexation has made a complete shambles of this process. Either legislatively abolish voter-annexation or make it so unattractive that it will be banished by the voters.

6. The call for the use of Development Impact Statements by the no growth special interests should be rejected 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.

7. If Oregon voters do not want to support better infrastructure or services at the state or local level, then government agencies need to lower their level-of-service requirements.

8. The state of Oregon should develop a cost-benefit allocation methodology by which cities can determine and charge for the actual costs of growth, put the software on a disk, and update it every three to six months.

A Long Term Solution

Oregon's current system of financing growth makes very little sense from a municipal budgeting point-of-view. Local governments levy system development charges on municipal utilities that already can be paid through a rate (i.e., water, sewer, storm, streets). On the other hand, they do not have a method of assessing a charge on those functions that cannot use a rate (i.e., fire, police, library, pool, general government). In the end, 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. This report suggests a major shift from the current political thought and financial practice in Oregon today.

• The developer should pay only for the on-site costs. This lowers the cost of housing surcharge by more than 50 percent and a new home buyer will actually pay $6,348 less.
• The state should assume responsibility for its fair share of school district improvement costs.
• Municipal and special district utilities (i.e., water, sewer, streets, storm water) should be mandated to collect 100 percent of the cost of doing business.
• General government and local school district costs finally gets funded by using an annexation charge, then about $18,000 per acre is collected (using 8,000 square foot lots).

This financial arrangement would do away with system development charges and not use a real estate transfer tax. Both have the effect of adding a surcharge and driving up the cost of housing.

Cost-Benefit Analysis

How Do We Pay for Growth?

When determining the costs and benefits of growth, it is important to separate the initial cost of the capital improvement (or the actual infrastructure construction) from the ongoing operation and maintenance (O & M) of the system. There are three good reasons for this approach: (1) The developer is responsible for paying for the on site construction and the new residents become responsible for all future costs. (2) The method of paying for each phase is different. The capital improvement is usually a one-time cost and the O & M phase is paid for through some kind of ongoing rate or tax. (3) Even the voter approval process is very different for increasing funding for each category. Capital improvement projects require a vote for a general obligation bond that is paid back over a long term of up to 30 years. The operation and maintenance voter approval process requires a serial levy that exists for a shorter period of three to five years.

General government (general fund). Local government property taxes, franchise fees and user fees usually pay for the ongoing operation and maintenance of services like police, fire, library, park maintenance, urban renewal, development regulation and a municipal pool. Ballot measure 50 took effect on July 1, 1997 and presents cities with a unique opportunity to establish a financial baseline by which to measure their future revenue needs. Most cities budgeted for the more devastating cuts that were mandated by the earlier Ballot Measure 47. Instead Ballot Measure 50 passed, and replaced Measure 47. In most cases, Measure 50 actually provided more revenue than initially expected. It is important to use July 1, 1997 as a baseline because: (1) it is the first year of the new 'rate-based' taxing system. Under Measure 50 this dollar amount is what cities will continue to receive (plus up to 3 percent per year) unless they experience a change in assessments due to new development and growth. (2) It generally represents the minimum level of service most cities can presently provide.

General fund expenditures. There is a relatively simply method to determine if new growth will generate sufficient property tax revenues to cover the ongoing new General Fund expenditures. If a city has all of its non-general fund expenses on a user-pay basis (i.e., planning, engineering, building) or a rate-based utility approach (i.e., water, sewer, storm), then what remains is paid for by the General Fund through property taxes. To determine your operation and maintenance baseline you need to determine the amount of acreage within the existing city limits today and net out all the non-taxable properties (i.e., street right-of-way, parks, schools, government facilities, state owned waterways), and then divide the total property tax revenue by the net acreage number. This will provides the dollars per acre baseline that it takes to provide the minimum level of service. The table below uses the City of Oregon City, in Clackamas County, as the model:

The same calculation can be done for a general fund and acreage amount from an earlier fiscal year than 1997-98. However, this is only recommended this if the 1997-98 fiscal year is too low and does not represent your basic minimum level of service.

One explanation for this considerable disparity is that new development is simply worth more (assessed higher) than existing development, and there is undeveloped and undervalued land within the city limits. However, this does not change the fundamental finding that on a per acre basis a city is actual getting a better return on investment for property annexed though growth.

General fund revenues. Ballot Measure 50 revenue calculations reveal that new development will permanently generate about $2,776 per acre per year for newly annexed land. So for the example given, growth in Oregon City is paying more than 1-1/2 times or 51 percent more than the $1,840 per acre being generated by existing properties in the city today (see Table). By deducting the actual urban renewal tax increment, which will eventually end, the amount is nearly double the $1,510 per acre that would have been collected.

The policy discussion about General Fund services should focus on what is the minimum acceptable level of service (LOS). Increases in funding services means asking voters to increase their property tax rate.

Municipal utility. Water supply, sanitary sewer, and storm water runoff are usually paid for through a rate. A good business practice is to pass through all cost increases -- such as new regulation or inflation -- to the rate payer. New development is anticipated and built into the rate so theoretically growth always pays its way.

School District. In Oregon today about 70 percent of school funding comes from state and about 30 percent comes from local funds. The local property taxes available to all school entities are limited under Ballot Measure five to $5 per $1,000 of assessed value. Any analysis of financing not only needs to separate capital improvements from the ongoing operation and maintenance, but it also needs to address the split funding sources. In terms of property taxes the issue of growth has the same answer as general government. Using the same type of Ballot Measure 50 calculation used earlier produces the same result that growth pays more than 1-_ times more taxes than existing properties. Using the same Oregon City example, the total combined tax rate -- for the Oregon City School District, Clackamas County ESD and Clackamas Community College -- is $5.89. The result is that new development generates $2,790 per acre in taxes per year.

It is worth pointing out that the 70 percent of state proceeds comes from income taxes and lottery proceeds that are paid by all Oregonians -- including home owners, home buyers, home builders and developers. For this reason, at least 70 percent of all capital improvement and operational needs related to growth should not even be allocated though local development.

What Does Growth Cost?

A number of studies have been done on the cost of growth. Most of these studies have focused on the cost differential between planned development and sprawl. This report uses the costs associated with planned development. These studies basically show a total price tag of somewhere between $10,401 and $34,314 in municipal infrastructure costs for a single-family dwelling.

The two studies done of the cost of growth in Oregon reaches similar conclusions that the growth related costs per new single family residence is $23,013-$24,502. The study by Fodor concludes that, "It is reasonable to say that virtually every community in the United States subsidizes growth, most to a great extent." The problem with this statement is that there are no facts presented to support the contention. For example, the majority of this cost is paid for by the on-site infrastructure which is fully paid for by the developer. This fact is calculated into the work of Conder. Conder has identified both the on-site development costs and the broader community costs. This is important because it is impossible to make any judgement about subsidies unless we discuss municipal financing. It is financially irresponsible and fiscally imprudent to discuss "costs" or "subsidies" in a budgetary vacuum that ignores municipal revenues.

Other benefits of growth

• There are several other fiscal benefits the come with planned growth:
• The Rutgers University study notes that "Where growth is controlled as opposed to managed, housing costs are higher."
• Less controlled growth's "...contribution to diversity in choice is the massive amount of reasonable alternatives... that it offers the... consumer." In other words, greater choice in the market place is a positive result.
• Growth creates jobs, taxes, and fees to government, and income to local businesses.

The latter point is quantifiable per single family residence:

Allocation Analysis

Development is a Value Added Process

Traditional development practices and municipal financing structures assume that the property owner, developer and builder pay for all of the on-site capital improvement costs and guarantees the improvements for some period of time. When the residences or commercial buildings are sold and the new tenants (buyer/resident) take over the financial responsibility to pay for the private and public operation and maintenance of the infrastructure and services. Therefore, it makes sense to pay the costs of growth within the existing structures and practices.

The process of development is a value-added process. The Oregonian recently reported that property values can increase tenfold once inside the urban growth boundary through the land development process. Actually, it works out to be 9.25 time its original value ($154,350)$16,678=9.25). In the example in Table 6, the end product is a single-family dwelling built on an 8,000 square foot lot in an average subdivision. If there is a financial windfall, then it is the legislative act of annexing land to both the urban growth boundary and an incorporated city by itself that more than quadruples the land's value.

In the Portland metropolitan area an acre of land increases in value by about $53,332. This value is added with no improvements being made by the property owner. The only cost is the annexation process. The process of building the subdivision infrastructure (i.e., streets, water, sewer, storm water runoff, streetlights and trees, sidewalks) is expensive, as is adding the actual residence.

Who Pays for Growth?

Should those who benefit from new property development pay the associated infrastructure costs? The federal and state government once subsidized new property development by reallocating the state and federal revenues of all taxpayers (and developers) back to local governments to pay for the infrastructure. However, the level of subsidy is significantly less than in past years. It can be argued that since the developer and builder simply pass along such savings or added costs, that the new home buyer was the one being subsidized.

How much of the cost of growth should be covered by the new residents or the existing residents of the municipality? This question is made more difficult by the fact that some people within a city buy a new residence and sell existing residence to people from outside the city. Which is which now? Should the long-term resident, who remains in the city, pay for the new infrastructure? What if that resident moves out of the city and a new person buys their home? Has this new person created growth? It is, after all, the same residence.

Much of the research done to date on the costs of growth has one major flaw. The studies all focus on the costs of growth and prematurely lead the reader to the conclusion that none of these costs are paid for by the development industry. This report began with the premise that all costs (expenditures) require a source of revenue to pay for them. That is Oregon budget law. However, there are a number of groups responsible for paying for the cost of infrastructure in Oregon. The fiscal model presented here provides a rational methodology to answer the monetary question of how much is actually being paid and how much is not.

A more accurate reflection of the real fiscal answer to "How much is not being paid?" is shown below. Using the Oregon cost of growth and revenue data, developed by Conder, it is possible to identify where potential revenues may be needed per single family dwelling.

By using this financial framework, the debate can be focused on three costs of growth funding categories: funded growth, fundable growth, and unfunded growth.

Funded growth (developer). Most of the costs of growth for a single-family residence, which comes to 59% or $13,526, is paid for by the development industry. $7,178 is paid for as on-site improvements and $6,348 is paid for as off-site improvements through system development charges.

Fundable growth (local). The fundable costs of growth for streets and utilities come to $1,787, but may or may not be paid for. It is possible that these costs are already being paid for through a utility rate. The utility portion of these costs is up to $1,034 and can be paid through system development charges, or by amortizing such costs through a utility rate. This cost includes municipal utilities of water, sewer, and storm.

The street portion of this cost is $753 and could also easily be paid for by increasing street system development charges. The fact is that many jurisdictions are unfunded by their own decision. It is important to note that less than 50 percent of the jurisdictions evaluated in this report (see Table D) actually levy all five legally allowed system development charges. In those cases where they are levied, there are substantial differentials. For example, the city of Beaverton charges $2,257 for streets. Some jurisdictions charge nothing. This difference alone would cover the estimated street shortfall for some jurisdictions.

Unfunded growth (state). Fully 70 percent of the school district money now comes from the state and not from local taxes. If the schools are not fully funded, then the state needs to reallocate personal and corporate income tax revenues. These are revenues generated by all Oregonians. To require that 70 percent be paid locally amounts to double taxation. For this reason, only 30 percent of any shortfall can be considered a local government or a developer cost.

There are three important caveats to keep in mind about school costs (1) Enrollment growth may not be directly related to development growth. School districts enrollment trends are more sensitive to demographic changes in populations, than in population growth. For example, the city of Oregon City is one of the fastest growing cities in the state. From 1990-1996 the population grew by 38.9 percent. However, school enrollment grew by only 2.5 percent. An Oregon City School District report says that, "Nationally and in Oregon, births declined in the early 1990s as the baby boomers aged out of their child-bearing years. Declining births foreshadow slower elementary growth in the future than in the recent past for most districts." (2) Local policies to restrict development for the purpose of slowing public school enrollment may actually increase the per pupil costs. Enrollment growth can result in the optimal use of school facilities through economies of scale. (3) The Oregon costs for schools estimated by Conder were $4,313 and is closer to the finding of a separate study which determined that the costs of education (K-12) in the western United States was $5,410.

Unfunded growth (local). That leaves $4,679 that is potentially an unfunded cost of growth that has very limited financial remedies. These are (1) $3,385 in general fund activities (General Government) such as parks, libraries, police and fire, and (2) $1,294 for the 30 percent of the potential school district costs. These costs cannot be amortized through a rate system, are prohibited by state statute from using system development charges, and are difficult to fund through the property tax system because of Ballot Measure 5 and 50 limitations.

Municipal facilities can be paid for through the use of a general obligation bond paid for by additional property taxes. Ballot Measure 50 requires a vote on such financing. The fact that new properties are paying 1-1/2 times the property taxes of existing properties should make this a more than equitable proposition to the existing residents of a municipality. The fact is that this is the only method that municipal governments currently have to fund general government capital improvements.

The recent U.S. Supreme Court decision, Dolan v. City of Tigard, provides a significant policy path. All on-site costs are paid for by the developer. However, any off-site requirements put on the developer need to demonstrate a reasonable relationship to the development's impact on the community. The best way to levy such off-site exactions is through the Capital Improvement Plan and the use of system development charges, and not directly on the individual developer.

Bibliography

Burchell, Robert, et al. The Costs of Sprawl Revisited: The Evidence of Sprawl's Negative and Positive Impacts-Revised Research Plan, New Brunswick: Rutgers University, Center for Urban Policy Research Center for Urban Policy Research, March 1998.

Conder, Sonny. Growth Driven Capital Cost Estimates, Portland: METRO, March 1997.

Duncan, James E. The Search for Efficient Urban Growth Patterns, Tallahassee: Department of Community Affairs, 1989.

Fodor, Eben. The Real Costs of Growth in Oregon, Eugene: Energy and Environmental Planning Associates, July 1996 (updated October 1997).

Frank, James E. The Costs of Alternative Development Patterns: A Review of the Literature, Washington, D.C.: Urban Land Institute, 1989.

Real Estate Research Corporation. The Costs of Sprawl: Environmental and Economic Costs of Alternative Residential Development Patterns at the Urban Fringe, Washington, D.C.: U.S. Government Printing Office, April 1974.

About the Author

Richard Carson has more than 25 years public and private experience working on land use planning, environmental and development issues. This includes working in city, county, regional and state government. Mr. Carson is currently the Director of Community Development for the Clark County, Washington where he oversees all planning, engineering, building inspection, code enforcement, and fire marshal. He was previously Community Development Director of Oregon City, the Director of Planning for Metro (the Portland metropolitan area's regional government), and a Senior Policy Analyst for the Oregon Economic Development Department. Mr. Carson is also the Managing Editor of the Oregon Planners' Journal which is published monthly, and has written more than 30 editorial articles for publications like The Business Journal, The Oregonian and Oregon Business Magazine. Mr. Carson has a Master of Public Administration degree from Lewis and Clark College and a Bachelor of Science degree from Portland State University. Mr. Carson can be reached by telephone at (503) 657-0891 or via the Internet at "richcarson@msn.co".