10th anniversary post: Is a baseball complex a (merit) good?

 

Source: Google Maps

In the summer of 2014, I wrote a reaction to news of state and local government contributions to a new baseball complex outside of Marion. At the time, the state had provided a $1.266 million grant, the City of Marion $750,000, and Linn County had donated the land. Ultimately, according to the operation's webpage, Prospect Meadows secured $5.5 million in public funding, about half the startup cost of the project ("Our Story" n.d.).

At the time I was less impressed by the audacious scope of the project than by the very ordinariness of the public-private transaction. There hadn't seemed to be a lot of controversy or even discussion about the governments donating to the creation of a private business. Yet, in a world (Earth) where government budgets at all levels are stressed, and in which market efficiency is praised as an alternative to governmental inefficiency, this was a lot of money to spend without examining the very basis of the expenditure. I quoted Adam Smith on public works, which are necessary but properly...

can be made only where that commerce requires them, and consequently where it is proper to make them (Wealth of Nations, V.i.iii, Art.1)

and Strong Towns on providing existing businesses with technical assistance rather than handouts to selected ventures, which would include baseball complexes and our current obsession, data centers:

[B]y the way, we'll still be bringing jobs and new businesses in from outside the community. The only difference will be that we won't be paying them to come--they will want to be here. If we are successful--and we will be--they will be paying us to come here. (Marohn 2012: pt.2)

Prospect Meadows began operation in 2019, right before the onset of the coronavirus pandemic--certainly not the most auspicious year for any business, though it did receive over $2.6 million in American Rescue Plan Act money (King 2024: 7A).

Now comes word that the firm is asking governments for additional money to pay off debts. Projections of future revenue remain optimistic, but they have not been hitting their targets, and the well-connected, well-funded management of Prospect Meadows have reached out again. In September, the Linn County Board of Supervisors approved a $250,000 grant contingent on additional funding being raised by the firm. The City of Cedar Rapids, whose city limits are about 10 miles from this complex on the other side of the City of Marion, will consider advancing $300,000 that would eventually go to Prospect Meadows from the city's hotel-motel tax fund (King 2024: 1A). 

Local governments are stuck in an unenviable position, because the risk in this venture has already been socialized. As Linn County Supervisor Louis Zumbach points out, "If it isn't a ball field, what does it become? Any other use is going to cost more money" (King 2024: 7A).

The Lingering Question: Is Government Support for Prospect Meadows Responding to a Market Failure?

In a mostly-market system such as America's, government's role is to act when the private market is not meeting some need. This contingency is known as market failure, which admittedly [a] has a certain pejorative sound to it, unintended, but there it is; and [b] is a vague and plastic concept. You will see market failure where I don't, and vice versa. Not wrong, just different. 

Market failures come in a variety of forms but fall into two broad types. Sometimes the conditions for a market don't exist for a good, like clean air (not excludable) or food safety (buyers have insufficient information) or some monopoly (insufficient competition). Other times all of those conditions exist, but the outcomes are politically unacceptable, like recessions (very unpleasant and scary) or access to parks (everyone deserves this regardless of ability to pay). Market transactions can have externalities, effects that fall on people other than the buyer or seller; these can be negative (pollution) or positive (better educated people in your community). There's much more to this, of course, but we are busy people; if you want to know more, take a course in economics.

Prospect Meadows has been making two market failure arguments for public support. One is based on services they can provide to people who would otherwise lack those opportunities. The Kiwanis Miracle League provides baseball games, equipment and uniforms to physically or mentally disabled young people. The Optimist League of Dreams serves 2nd-5th graders whose families were displaced by the 2008 flood.

The second argument is that players and their families traveling to baseball showcases bring an infusion of money into the local economy through hotel stays and restaurant meals. This is the rationale for financial contributions to Prospect Meadows from distant Cedar Rapids. Board chair Tim Strellner claims Prospect Meadows created over $11 million in local economic impact in 2022, resulting in $1 million in tax payments to local governments (King 2024: 7A). That's out of a gross domestic product for Linn County of nearly $20 billion (FRED).

Allowing for some exaggeration, would that economic activity not have occurred but for the showcases offered by Prospect Meadows? Would the several dozen children been inactive but for the opportunities of their programming? Probably no to both questions, but that's the justification for massive government support for this venture.

Conclusions

Government support for Prospect Meadows over the last decade, and continuing into the next one, likely owes more to personal connections, and the tendency of policy makers to be impressed by big splashy plans. I wish we could be more principled: no government money unless a market failure is conclusively demonstrated. I wish the public would be more allergic to situations where profits are private but risk is socialized. 

$300,000 is admittedly a small part of the city's FY25 budget of nearly $900 million. It's only worth mentioning as one probably common case of expenditure that socializes what should be private risk. Collectively these expenditures have opportunity costs, because money spent thusly can't go to street repair or housing assistance or park equipment. None of those will gin up business for our hotels, but that shouldn't be the business of government. They would enable the daily lives of residents, and that should be the business of government.

NEW SOURCE: Grace King, "Prospect Meadows Complex Seeks Public Aid," Cedar Rapids Gazette, 18 September 2024, 1A, 7A

FY25 budget

President Biden released the Budget of the United States this week, directly on his State of the Union address last week. The Budget has been a presidential responsibility since 1921, when Congress essentially threw up its collective hands and delegated it to President Warren G. Harding in the Budget Act. Presidents got a significant staffing upgrade relative to this task in 1970, when another Budget Act created the Office of Management and Budget directly responsible to the chief executive.

This edition of the budget is for fiscal year 2025, which begins this coming October 1. It comes somewhat later in the calendar than usual, but otherwise is pretty typical for a budget. It's mostly a continuation of past government financing, with some policy recommendations that would if adopted have some impact on the bottom line numbers. It has no policy authority of its own; actual government financing requires appropriations by Congress, which given its divided and polarized condition tends even more towards the incremental. Still, it's as good a statement as any of the financial shape and direction of the U.S.

Biden's budget projects a country returning to normal over its 10-year time perspective, following the dislocations of the coronavirus pandemic shutdowns--dislocations that were profound but seem to have been mercifully short-lived. Real GDP growth is expected to be in the low 2 percents through fiscal 2034 (Table S-9, p. 173). (It is a real temptation for presidents to forecast exceptional economic growth, because it makes the bottom line look better. Trump did this; Biden hasn't, to his credit.) Inflation is projected to be down to 2.3 percent in 2025 and in the low 2 percents after that. Entitlement ("mandatory") spending is predicted to be stable at 15-16 percent of gross domestic product, with interest payments rising to 3.5 percent of GDP over this period (Table S-5, p. 142).

Government revenues have averaged about 18 percent of GDP since the 1970s, though they dropped sharply during the 2008-10 recession and the pandemic. FY25 revenues are estimated to be 18.7 percent, with gradual rises after that to 20+ percent beginning in FY31 (Table S-1, p. 137). Biden proposes tax increases on "the wealthiest Americans and big corporations" totaling $5 trillion over this period, not to mention allowing most of the 2017 tax cuts to expire when they sunset in 2025.

Government spending has averaged about 21 percent of GDP since the 1970s, running higher during the recession and then surging over 30 percent at the height of the pandemic. FY25 spending is estimated at 24.8 percent, remaining between 24 and 25 percent for the rest of the period (Table S-1, p. 137). It will top $7 trillion for the first time, and reaching $10 trillion in FY33--consistent with growth in the size of the economy, but staggering numbers for someone who remembers Jimmy Carter getting static for proposing the first $500 billion budget. (Now the defense budget alone is more than half-again larger!) There are a few new spending programs included, such as "investments" in health care and expanding access to child care and early childhood education. More notably, the budget projects no cuts in Social Security or Medicare, the two largest and fastest-growing government programs, and declining demands on the defense budget.

The FY25 budget projects a FY25 deficit of $1.781 trillion, 6.1 percent of GDP, optimistically assuming adoption of his proposals and seemingly peace in the Middle East and Ukraine. Otherwise the deficit remains over 5 percent of GDP (Table S-2, p. 138), or gets higher if the 2017 tax cuts are extended. I understand that you don't want to be so aggressive about the deficit that you blow up the economy, and that none of the most-feared negative effects--crowding the private sector out of lending markets, vulnerability in a crisis, vulnerability to international creditors--has come to pass after 40 years of high borrowing. 

 But neither am I sanguine about our financial future. Maybe I'm too Newtonian but the lack of urgency shown by either party when they're in power seems less than resilient. But on the other hand, is rationalizing the budget more urgent than cleaning up forever chemicals or burying interstates or getting the health insurance system on a sound footing?

SEE ALSO:

James Capretta, "The Biden Administration's 2025 Budget," AEIdeas, 12 March 2024

Anna Malinovskaya and Louise Sheiner, "The Hutchins Center Explains: Federal Budget Basics," Brookings Institution, 13 December 2018 [lots of good if out-of-date charts here]

Michael E. O'Hanlon and Alejandra Rocha, "What's in Biden's $850-Billion Defense Budget Proposal?," Brookings Institution, 15 March 2024

Alan Rappeport, "Biden Budget Lays Out Economic Battle Lines with Trump," New York Times, 12 March 2024

Strong Towns' Bottom-Up Revolution (IV)

Response to chapters 1 & 2 is here. Response to chapters 3 & 4 is here. Response to chapters 5-7 is here.

Towards the end of Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity (Wiley, 2020), author and Strong Towns founder Charles Marohn suggests a number of approaches cities can use to cope with their precarious financial situations. There are many thought-provoking ideas herein; I'll address three.

Little bets are "small investments throughout a neighborhood, all aimed at improving the quality of life" (p. 155). The idea is to respond to the struggles of people already living there with "the next smallest thing that can be done today," intending "to nudge private capital off the sidelines by giving people confidence in the direction of the neighborhood. He cites the projects of Tactical Urbanism and Better Block as inspirations. Small projects like outdoor seating, crosswalks, and parklets don't cost very much, yet can bring neighbors out and together, and (in keeping with Marohn's financial theme) can convince property owners to make improvements because they're likely to pay off.

The advantage of little bets is a city can try something new where failure is not catastrophic, or likely to saddle the town with a long-term financial drag. I don't know how much the city has spent on bike lanes, but the first wave downtown cost about $3 million, which is a rounding error in a city budget of $500+ million, and you're not stuck with them if they don't work because the streets have to be repainted sooner or later anyway.

Under construction, 2013

A game-changer of a hotel/convention center, on the other hand, is a big bet, with long-term obligations if no one buys it, and they've had a poor track record in other cities, even if they do bring Lady Antebellum to town (see esp. Sanders 2014). The key question every official should ask is, "What if it fails?" If the answer is, we're out a small amount of money and self-esteem, then go ahead. If the answer is, we're screwed, don't do it.

Neighborhood evolution is what happens when change is not prohibited by zoning and other boards, environmental regulations, or empowered hostile neighbors. Neighborhoods that are frozen in time "damage the entire community," in part because they prevent the city from adapting to, well, anything, but particularly financial realities. They also exclude or burden a lot of people: "When city regulations demand that everything be built at a large scale and to a finished state, we not only price out much of society but we ensure that many of those who do own a home will struggle with that investment" (p. 163). So,

It is critical that every neighborhood in America be allowed, by right, to evolve to the next level of development intensity. That means empty spaces need to be allowed starter homes, even small houses, on footprints that can be expanded over time. It also means that single-family homes must be allowed to add accessory apartments, or convert to a duplex, without any special permitting, approval of neighbors, or added conditions. To become more financially productive, we need our neighborhoods to thicken up. (p. 163)

 He reminds us that "mixed use" is what all neighborhoods were until recently. And those traditional neighborhoods continue to be the most financially productive, even in decline.

Three blocks from my house is a small apartment building, one of several in the Wellington Heights neighborhood. It's bigger than the houses around it, of course, but not outlandishly so. It adds to the density and affordability of this core neighborhood without making a spectacle of itself. Why can't we do more of that? Because property values, I know. And parking, and noise, which are the usual complaints dragged out when neighbors want to stop a project. Maybe if more people in the city knew what a dangerous game we've been playing all these years, it would help tip the balance in favor of better housing.

Subsidiarity is a pliable concept but usually associated with local control of policy making. He quotes the definition from Wikipedia, for pity's sake; I'll step up to the Catholic Encyclopedia: "a community of a higher order should not interfere in the internal life of a community of a lower order, depriving the latter of its functions, but rather should support it in case of need and help to co- ordinate its activity with the activities of the rest of society, always with a view to the common good." (The Catholic Encyclopedia had a particular fondness for the Tea Party movement, which got a lot of Republicans elected to statewide offices who thereupon preempted local decision-making with at least as much vigor as Democrats ever did, but let it pass.) Marohn argues that local governments with restored decision-making power could make more rational decisions, and wouldn't have to rely for needed revenue on sprawl (or business subsidies, or game-changing projects, ...).

It's hard to be against subsidiarity, because all it's saying is everything should be done at the correct level, whatever you think that level is (unless you favor one-world socialist government, maybe). But state sovereignty has been abused everywhere, not least in states like Iowa run by people who hate the national government but also hate cities. (Recall Governor Kim Reynolds's comments about Des Moines and Iowa City not being the real Iowa, as she signed a bill preempting sanctuary cities.) You'd like to see cities given a real chance to chart their own courses. 

Two caveats: 

1. Unlike Americans in the age of Alexis de Tocqueville, we live in a national/global economy, and it's hard to imagine economic policy being made entirely on a local scale. As we in Cedar Rapids saw after the 2008 flood, when an overwhelming disaster occurs, it's nice when the nation has your back. In a perverse way, President Trump's failure of leadership in the face of the coronavirus pandemic highlighted the need for a functioning national government. But we shouldn't rely on or defer to the national government on matters of local competence. 
2. As Peter Calthorpe and William Fulton have articulated (The Regional City: Planning for the End of Sprawl, Island Press, 2001), most cities are part of a more complex metropolitan area that frustrates rational decision making. We need effective metropolitan governance.

But allowing for a federal role where appropriate, and effective metropolitan policy cooperation rather than rivalry and poaching, empowering local governments needs to happen.

Strong Towns' Bottom-Up Revolution (III)

Marion IA Wal-Mart, Black Friday morning 2019

Response to chapters 1 & 2 is here. Response to chapters 3 & 4 is here.

Chapter 7 of Charles Marohn's new book, Strong Towns: A Bottom-Up Revolution to Restore American Prosperity (Wiley, 2020) introduces the concept of measuring a place's productivity by calculating taxable value-per-acre, a concept to which he was introduced by Joe Minicozzi of Urban 3 LLC, but which they were both astonished to find was a standard planning tool 100+ years ago before it got forgotten. "It is lost wisdom, abandoned with so many of our ancestors' hard-gained insights" (p. 141).

It might be counter-intuitive, but the most productive blocks in any city tend to be older commercial and residential areas. Marohn includes an analysis he did in 2011 of two commercial blocks in his hometown that will be familiar to Strong Towns followers: the "old and blighted block" with 11 unattractive properties outperformed the block consisting of a brand new Taco John's Restaurant by 41 percent, $1.136 million to $803,000. Minicozzi's compared a downtown redevelopment area in his home of Asheville, North Carolina, and found it produced nearly 10 times the property tax per acre as the new Wal-Mart on the edge of town, as well as 1.76 times the sales tax per acre and a dozen times the jobs per acre (Table 7.1, p. 139). Yet city governments continue to push for the shiny and new, supporting them with tax incentives and wasteful infrastructure. "Across North America, our poor neighborhoods tend to subsidize our wealthy neighborhoods" (p. 141).

This is simple analysis that can be done as long as you have access to tax records, which are open records, or should be. (In researching a 2018 piece on big box stores in the Chicago area I found much of Cook County's tax records to be inaccessible.) Fancier analysis can include the cost of public infrastructure involved in serving the place, but acreage is a reasonable quick-and-dirty substitute. If anything properties closer to the center of the town should get a bonus because their streets, sewer pipes, and such are shared by the entire town, while infrastructure at the edge is used only by the specific property (pp. 114-115).

In Cedar Rapids, between my own calculations and those by my Corridor Urbanism co-founder Ben Kaplan, we find results consistent with those found in Lafayette, Louisiana, and other places by Urban 3:

• Great America Building (2016) $13,999,048

• Bever Block (2017) $2,153,423

• 1420 1st Av NE (2018) $1,740,695

• SW Wal-Mart (2016) $501,557

• NE Wal-Mart (2016) $456,917

The Bever Block and 1420 1st Av NE have been demolished and replaced at some taxpayer expense with nicer buildings that have more parking. They still probably outperform the big box stores, which conjecture can be explored in future analysis. And maybe this summer I can play with some residential property tax numbers.

The moral of the math is, of course, that the more towns expand in a way that doesn't pay for itself in the long run, the deeper the hole they're digging for themselves, and the harder it will go for them on the day of reckoning. "The merciless nature of the math suggests this will be resolved in time" (p. 144). 

That is a scary prospect, one that's explored in chapters 5 and 6, mostly with math and logic. (For a starker picture of the smash to come, see the works of James Howard Kunstler, like The Long Emergency (Grove/Atlantic, 2005)). If we understand enough to pivot to "a chaotic but smart approach to evolving our cities" (p. 123), well and good, but if we can't afford to maintain what we have--and Marohn argues persuasively that we can't--some of our built environment is going to have to be abandoned. That is not going to be pretty or pleasant. And politics being what it is, the desirable approach that is locally-driven, rationally-based and community-minded is likely to be swamped by the parochial interests of those with wealth and political power who drove a lot of the expansion in the first place and don't feel now like they're getting subsidized. Those without means, who suffered from white flight and disinvestment, and now are suffering from gentrification, are going to take it in the teeth again, aren't they?

Happily, beginning with chapter 8, Marohn has some more hopeful ideas about managing the future.

Supercenters: Prize or curse?

Wal-Mart Supercenter, Cicero, Illinois,
mere blocks from the Chicago city limits

Chuck Marohn's recent Q-and-A with Joe Minicozzi on the Strong Towns Podcast reminds me of a conversation I had recently had with some old friends from Illinois. One friend noted the recent effort by Wal-Mart to build a supercenter on the south side of Chicago. Put off by Chicago's higher minimum wage for big-box stores, Wal-Mart instead built three supercenters across the city limits, in Evergreen Park (2006), Cicero (2014) and Hammond, where they now no doubt attract a lot of customers from the city. My friend considered this a blunder by the City of Chicago, because of the loss of jobs and sales taxes. So does the Chicago Tribune, which reports the city has subsequently reached accommodations with the giant retailer.

I'm agnostic about requiring certain employers to pay a super-minimum wage, but have been wondering how great were Chicago's losses, if any.

Joe Minicozzi (Source: urban-three.com)

On the podcast, Minicozzi, a planner and principal of Urban 3 LLC, explained the origins and rationale behind his formula comparing buildings according to their property tax paid per acre. Most city services are funded through property taxes on business and residences. The city's core asset, after all, is land, for which it needs to be making the most productive and efficient use. Wal-Mart is notoriously awful on this dimension, despite the volume of sales at its stores, because its footprint is so huge. In Minicozzi's example, the big-box store in his town generates $6500 in property tax per acre on a 34 acre lot, while a downtown mixed use development generates $330,000 per acre. Watch his video... it's short (3:43). See also Marohn's own 2012 analysis of two blocks in Brainerd, Minnesota.

In 2016, I participated in Strong Towns' crowd-sourced database on taxable value per acre. Here are the results from Cedar Rapids:
SW Wal-Mart $501,557
NE Wal-Mart $456,917
Great America bldg $13,999,048
Geonetric bldg $1,926,308

In a 2017 post I calculated the value of the Bever Block in downtown Cedar Rapids, soon to be demolished, to be $2,153,423 per acre. My Corridor Urbanism colleague, Ben Kaplan, reports that 1420 1st Av NE, also about to be demolished in order to make room for a development with chain restaurants, comes in at $1,740,695.

The Cook County, Illinois property search page is not currently functioning, so we can't do a similar analysis of Chicago area Wal-Mart Supercenters, but looking at results from around the country we can hardly expect they'll prove productive uses of city land, either. And that goes without taking into account subsidies provided to the retailer (Loury 2009).

But what about sales tax? Does the gain in retail sales from a big-box store counterbalance its relatively low property tax generation? No, says Minocozzi. In most states, sales tax collections don't go directly to the city treasury. They go to the state, which to the extent it redistributes the money to municipalities, does so according to a complex formula. (My state of Iowa does this. A few years ago, the nearby town of Bertram voted down a local option sales tax increase. Bertram has no businesses, so it basically was turning down its share of whatever revenues the increase generated. Needless to say, they re-voted in a hurry.)

Minicozzi challenged us to check our city's budgets, and compare the proportion of revenue produced by property and sales taxes. For Cedar Rapids's FY19 budget, 22 percent of revenues come from property taxes, 4 percent from sales and hotel/motel taxes. For Chicago's FY18 budget, 19 percent come from property taxes, 6 percent from sales taxes. Evergreen Park's FY17 financial report credits 21.5 percent of revenues to property taxes, 6.3 percent to local sales taxes. Hammond's revenue information, four years out of date, lists only "taxes" without disaggregating them into types of tax. For Cicero, your best bet is to know someone in city government; a search on their website for "budget" turns up a tribute to the 2016 Chicago Cubs, and their "contact us" function only works for Illinois residents. But you get the idea: property taxes are several times more important to these towns than sales taxes.

City of Chicago revenue sources
More property than sales tax, more grants and fees than taxes overall
(Source: City of Chicago)

So did Chicago make the right call? Or did Cicero, Evergreen Park and Hammond? As far as I can tell, Chicago wasn't foregoing a lot of revenue by losing Wal-Mart, as long as it was able to find people to make more productive use of that land. The adjacent suburbs might get a short-term bump in sales tax revenue, but they're using an inordinate amount of land area to do it. Moreover, in 15-20 years--which Minicozzi, citing Charles Terrell, director of property tax for Wal-Mart, reminds us is the anticipated useful life of a big-box store building--they'll have to deal with the clean-up.

See Also: Rachel Quednau, "6 Surprising Perspectives on Big Box Stores," Strong Towns, 8 May 2018