Friday, March 6, 2009

Thinking Globally, Acting Locally: Part II

Our local economy has been pretty sensitive to growth pressures in recent years, which has in turn, mainly served to increase City revenues.
Now, that our local growth has flattened, and even gone somewhat negative in areas, the City is now having difficulty in making ends meet.

While slower growth may please some folks, this revenue reduction reality does present the other side of the growth and prosperity coin, which is also not so easy to deal with.
Finding the proper balance between the two growth extremes is a trick our society has not yet mastered despite, futile attempts to find a silver bullet.
And, don't forget the role that growth does play in local job creation, as well as its impact on the prosperity of local businesses!

In accommodating reasonable growth, as with most investments, a certain amount of capital must be risked up front.
For the City this investment takes several forms;

• For 'brownfield' or redevelopment sites, like our waterfront, substantial investment in clean up costs, new infrastructure and planning is required, but over time this is expected to pay large dividends.

• In the Urban Growth Areas similar investment is required, much of which will hopefully prior to the time that these areas are actually annexed into the City. These investments include roads, streets, parks & trails, plus the commitment to provide for police, fire and other public services forever.

• Within the City limits, most of these infrastructure improvements and services are already available, which should make the cost of development somewhat cheaper for the City. That is part of the rationale behind emphasizing in-fill, because it more efficiently uses the existing available land supply.

In practice, a combination of these basic growth scenarios is generally followed, depending upon land supply and developer economics.
This section will focus upon growth in the UGA.

One example of how growth can impact our local economy can be seen from what happens in our Urban Growth Areas.
UGAs are actually a part of the County's jurisdiction, but are intended to be the next areas in which to focus urban levels of growth before being annexed into a city.

The concept of annexation is not one that seems well understood by many, yet it can be an important tool for managing growth properly.
Annexation really means two things; which jurisdiction will a) provide services and set the rules and regulations, and which will b) receive the main revenues derived from development in the annexed area.

[For those interested, an earlier blog was devoted to this subject, and can be found at:]

When the County sets the rules & regulations, these may not be compatible or comparable with city rules & regulations.
Likewise, the level of services for law enforcement, firefighters and similar services is significantly lower in the County.
But revenues derived, even from just residential development, are usually more than enough to compensate the County for its costs of administration.

In other words, building in the UGA is a cash cow for the County, and this explains why the County hasn't been so keen on having Bellingham annex its UGAs regularly.
The County would just rather continue to eat the City's lunch -and collect more in taxes and fees than it must spend- to put it bluntly.

For years, Bellingham has been extraordinarily lax in NOT systematically annexing portions of its UGA, largely because it merely allowed extension of services without requiring it.
Why this has been allowed to happen is unclear, because other Washington cities seem to be much more aware of the benefits of timely and systematic annexation - as a REQUIREMENT for extending water & sewer utilities and thereby facilitating urban levels of density.

Until a few years ago, Bellingham routinely granted extensions of it utilities into the UGA, under the condition that a 50% surcharge was added to its rates.
That practice created the expectation that the City would continue to do the same thing every time a developer requested it.
It also created a somewhat artificial revenue stream for Public Works that it began to rely upon, so that the true basis for setting water and sewer rates was masked and therefore also somewhat artificial, and unfair.
Public Works actually began to see itself a LOSING REVENUE every time an annexation was proposed or considered!
What is wrong with that picture?

Suffice to say that as long as the practice of extending of utilities for the asking persisted, there was no incentive for developers in the UGA to coordinate their plans with the City, pay City fees or willingly offer to annex UGA areas into the City.
This frequently has resulted in discontinuous -or absent- streets and sidewalks and no provision for parks and other amenities that could become park of the City's system.
If annexation then later occurred, the City became the recipient of a piecemeal development that often missed necessary connecting parts, all of which had to be fixed -after the fact- at City expense.
Doesn't seem fair, or smart, does it?

After persistent effort to examine the annexation question more closely, the City eventually did so.
The initial findings were that Industrial development more than paid its way; that commercial also paid its way; that residential development doesn't come close to paying its way.

Unfortunately, the City simply had already chosen to simply 'cherry-pick' those developments that more than paid their way!
That decision explains the malls, big boxes and small business parks being annexed along arterials for their revenue, while residential areas were largely left alone to congeal into clumps of unattractive, disconnected pockets of mainly apartments that oddly remained outside the City.

Fortunately, this situation is now changing, but not without encountering other problems.
A large number of annexations were proposed recently, which in total, clearly exceeded the City's ability to deal with the additional services that would have been required.
That the City approved only those annexation proposals that made the most sense was wise.
Future annexations probably ought to be conditioned by some sort of quota system, so that a steadier flow of smaller parcels are proposed that can be more readily accommodated, pacman-like.

Another difficulty lies in estimating the cost of services the City must provide to UGAs that petition to be annexed.
When the City attempted to estimate the cost of annexing the entire UGA, some serious problems were encountered.
First, costs were prohibitively estimated at over $130 million, due primarily to 2 factors; the Level Of Service and cost of projected parks & trails, and the difficulty of replacing revenues from the loss of the 50% surcharge on Public Works water and sewer utilities.

Subsequently, these excessive costs have been reassessed, determined to have been over estimated, and their value greatly reduced.
The Parks Level of Service had been inadvertently set at an artificially high level, which has now been modified to a more realistic and affordable level.
Also, the new Parks Plan automatically includes ALL of the UGA, so much of the previously projected additional costs simply do not apply because they are already included.

The Public Works surcharges on water and sewer services in the UGA do disappear when annexation occurs, meaning lesser revenues for the City.
But, by recalculating the true cost basis for these utilities, and by charging the full System Development Charges and connection fees applicable in the City, these large disincentives to annexation also largely appear to be significantly overstated.

The bottom line is that it is NOT nearly as expensive for the City to annex than was initially thought, but there are still significant costs, particularly those of an ongoing nature, like police, fire and the like.

It is not that any of these estimated costs simply vanished, but that a more rational approach of seeing things as part of a whole gave new perspective to the problem.
A bigger City also has greater resources to pay for its services.
And, as long as we don't get greedy about too much annexation at one time, the balance between revenues and costs ought to remain fairly stable.

An example of old-fashioned stupidity:
A few years ago the City was petitioned by a developer to extend water & sewer services to a proposed 68-home development.
This development was in the UGA, but was bounded on two side by the City Limits, meaning it could easily have applied for annexation, which the developer was willing to do.
But, for reasons still unexplained to me, the City Council went ahead and approved extending water and sewer services -just like they had been doing for years- WITHOUT REQUIRING ANNEXATION!
Don't ask me why, but this did happen.

Of more interest to our local -CITY- economy is the fact that this one -relatively small- but hasty decision cost the City about $2 million in lost sales taxes alone!
Instead, those revenues mostly went to the County.

Question: Why would the City voluntarily give up such significant revenue when it didn't have to?
Answer: Habits established over time are hard to break. Then there is simple ignorance.
In the future, we need to think through every such decision -very carefully- before making it.
There is always some other entity waiting to eat our lunch if we aren't careful.

A large part of our task is to simply understand the economic forces at work in our region, then take full advantage of opportunities when they present themselves.
While there are usually significant added costs to the City with every annexation considered, this is a way of efficiently controlling growth within defined boundaries, which seems much preferable to every other option, with one exception - infill within existing City Limits.

To act locally in a responsible manner requires paying attention to the opportunities that present themselves.
And, it helps to have a reasonable growth management plan or Comprehensive Plan- as we do -that clearly spells out what is needed and planned in an internally consistent manner.
After that, all we need is eternal vigilance to follow the plan!

Part III on this topic will deal with a potentially large in-fill development project and attempt to estimate its pro forma and other potential economic impacts on the City.