How to spot municipal efficiency — or costly dysfunction
When you buy a home, you’re also investing in the community, so it’s important to know whether it's a well-run municipality or a city on the decline.
Local governments, in addition to being among the nation’s largest collective employers, are also among their region’s top revenue generators, according to National Bureau of Economic Research data. Los Angeles’ annual revenue tops each of the roughly 55 public companies headquartered there. New York’s revenue is close to some of the largest financial services firms in the world, including Goldman Sachs and Citigroup. And Denver’s revenues are close to Molson-Coors, the second largest U.S. brewer.
More relevant to Denverites than Molson-Coors’ latest brew is how well their city spends on the services: libraries, parks, garbage pick-up, police, roads, public transit. Is the city investing in these community building blocks or making cuts? Is it spending more than it collects? What’s its fiscal outlook? All of these factors help tell you how well a city is run and, by extension, whether such services will enhance a house’s value, or detract from it.
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I’ll walk you through two examples — Denver and Sacramento — to show how you can research your own city.
Population growth — and whether new jobs are high- or low-paying — affects the rate of increase in city expenses and in revenue. If personal income growth outpaces population growth, that’s good for the local government’s financial health. On the other hand, smaller, poorer cities tend to see their expenses grow faster than revenue.
Denver’s increased 21% over the last decade, Sacramento’s 10%, according to the U.S. Census; the agency’s tools, linked here, allow easy comparison of cities. Household income in Denver grew by 24%, while Sacramento’s grew by 16%.
Using the Fiscally Standardized Cities database, we’ll create a downloadable spreadsheet selecting for: both cities, years 2010 and 2017, their total revenue, all the available spending categories, adjusted for inflation. Given the income and population growth trends, we should expect both cities to be in decent financial shape. But that’s not what we find.
Sacramento’s revenue has been stagnant, and it has cut spending by about 15%. Libraries, transportation and parks and recreation have all been cut by more than half. Cuts to these quality-of-life services have ramifications. One good source for assessing this is the National Community Survey, an ongoing citizen survey run by the National Resource Council. Participating cities receive reports on what their residents think is going well and what’s not.
Sacramento’s latest citizen survey tells us the city ranks poorly and lower than the national average on things like recreation programs and facilities, parking, streets/sidewalks, public transportation and affordable housing. Despite the cuts to libraries and parks, those two still rate fairly well.
Denver’s numbers are more what we’d expect. Revenue increased by 25% over seven years, while spending grew by 12%. The city cut library spending but increased spending on things like transportation, parks and rec, and housing and community development. Denver residents rate the city’s livability highly and better than other cities in recreation, open space, ease of walking and cultural activities. It ranks low in cost of living, affordable housing and traffic congestion.
Another budget strain is debt. Denver’s annual interest payments on debt have fallen, while Sacramento’s more than doubled. Scrolling through local headlines tells us that Sacramento’s annual debt payments are poised to take a larger and larger bite out of the city budget in the coming years. In other words, more city spending is going toward paying for past investments (or expenses) rather than generating new growth.
Putting this all together, we get a picture of how local government spending has a direct impact on residents’ quality of life and the overall economy. A reduction in services usually means budget pressure, so it’s also worth investigating whether property taxes — Denver’s are unusually low — and other levies and fees have been rising, or if that’s being considered.
If you’re looking to buy a house, chances are you’ve set a budget and spent countless hours researching the possibilities. Set aside a little of that time to make sure your chosen community is also an investment you’re willing to make. Be mindful, too, that the value of your home in the future will be highly dependent on the local supply of housing.
If you’re considering relocating, my colleague Dee Gill’s three-part series on moving for happiness can help organize your thinking.
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