Memorandum

To:           Mayor and City Council

CC:          City Administrator, City Solicitor, Comptroller, Community Development Director, Engineering Director

From:     Terry Rephann, City Councilman

Date:      5/21/2001

Re:          50 Strikes: The Case Against the Combs Petition

The list below describes some of the problems I see with the Combs Development Rights and Responsibilities Agreement that will be discussed at our Tuesday work session.  I have divided my comments into 11 categories: Financial Issues, Legal Issues, Decision-making Criteria, Planning, Professional Opinions and Contemporary Practice, Market Performance, Fairness/Equity, Municipal Government Role/Mission, Alternative Uses/Budget Priorities, Local Housing Market Characteristics, and Other.

 

Financial Issues

 

(1) My quick and dirty fiscal impact analysis shows a negative impact (memos dated 8/28/00 and 3/27/01 and included as attachments).  This project is a clear loss maker for the City because (1) the infrastructure costs are high, (2) the city participation ratio (50%) is high, (3) one must include the marginal costs of municipal services, and (4) new housing construction has a depressing effect on local housing prices.

 

(2) One might actually argue that the results I presented in previous memos are even more negative than presented.  For instance, I credit “intergovernmental transfers” for each resident (2X300), but in fact not all of these residents will be new to Cumberland.  They may simply have moved from elsewhere.  In addition, many of these intergovernmental revenues are awarded not on the basis of population (per capita) but on other criteria.  Lastly, I estimated the value of the developed land/housing at $135k.  Jeff (5/17/01 memo) places it closer to $130k.

 

(3) Adopting a new tax rate by removing trash collection and reducing taxes by $.03-$.05 the next fiscal year will affect the financial analysis, reducing the fiscal impact even further.

 

(4) If taxes will be reduced in the future, these reductions will further affect the financial analysis of this project.  If additional tax reductions are planned, they should be worked into the evaluation of this project.

 

(5) Our revenues come mostly from intergovernmental transfers and various types of fees.  Our budget shows that the revenue generated by property taxes is pretty small and is likely to grow smaller in the decades ahead.

 

(6) It has been suggested that the marginal costs of some municipal services are equal to zero?  Public safety: Why then do we pay overtime in both fire and police departments (that does not suggest excess capacity)?  Public works: Do extra streets mean less work for public works.  Also, residents may have decreased in the past 20 years, but automobile ownership has increased. 

 

(7) If the home construction is staggered over several years, rather than introduced at once it will further reduce the benefit of the project.  My analysis of Jeff’s 5/17/01 memo shows that by staggering the home construction over 10 years, the payback would only be $56,550 not counting the land value and $69,907 counting the land and home value.  Both figures are less than $83,282, so that the project would flunk the 10-year rule (a rule, by the way, that I think is inadequate).

 

(8) The burden of proof rests with those who advocate a change from the status quo—to show or argue that it will provide tangible benefits to the City.  But, there has been no solid financial analysis of the proposal.  The evaluation is ad-hoc and incomplete.

 

(9) There needs to be a systematic evaluation of the particulars of this program.  Perhaps, the City should employ a professional consultant (e.g., Tischler Associates, Hammer, Siler, and George Associates) to determine if the project is financially feasible and under what circumstances. 

 

(10) The request that the project be ‘fiscally neutral’ is the weakest evaluation criterion imaginable.  It does not address the issue of where funds would have the biggest effect.

 

Legal Issues

 

(11) Developmental Rights and Responsibilities Agreements may be open to a legal challenge because the methods to determine city participation are rather murky.  Impact fees, for instance, are sometimes challenged in court.  Therefore, the decision criteria must be formally presented and logically derived.  The evaluation framework used in Jeff’s memo is ad-hoc and would not hold up under close scrutiny.

 

Decision-making Criteria

 

(12) This change in policy could introduce high level of complexity into decision-making that the average person is not equipped to understand.  Most of the important parameters in determining whether the policy will lead to positive fiscal impacts are highly speculative.

 

(13) The adoption of Developmental Rights and Responsibilities Agreement might result in a less transparency in decision-making.  Although hearings are required as part of the process, most of the negotiations and deal-making will take place behind closed doors.

 

(14) The adoption of Developmental Rights and Responsibilities agreements may lead to inconsistencies with respect to treatment of major subdivision developers if they are excluded.

 

Planning

 

(15) One of the reasons given for subsidizing upper-income housing is to increase the area as a desirable industrial location.  But, housing quality and availability is ranked at the bottom (if it is even ranked at all) of factors considered by firms in academic industrial location studies.  If housing were a serious bottleneck, there would be no such things as boomtowns where residential housing is so scarce that many workers live in temporary housing.

 

(16) The Combs project is not mentioned in any of our plans.  It is not in the Comprehensive Plan.  It is not in our Master Streets Plan.  It leapfrogs over all other projects without our giving a clear reason why.  Technical and professional judgment that guides other City investments is replaced with “political” judgment.

 

(17) The Comprehensive Plan (p. 63) says: “These two objectives—stabilizing existing residential neighborhoods and encouraging new housing construction—are potentially in conflict if the City’s population continues to decline or remains flat.”  The City’s population continues to decline and our strategy now is to attempt to stabilize existing residential neighborhoods.  Therefore, the adoption of a Developmental Rights and Responsibilities Agreement would be counterproductive for neighborhood stabilization efforts.

 

(18) Who should initiate housing policy?  The City or a lone individual?  Is the Combs proposal developed for the City’s best interests or was it simply fashioned to meet an individual’s needs?

 

Professional Opinions and Contemporary Practice

 

(19) Calvert County and New Market, Maryland both have Developmental Rights and Responsibilities Ordinances but they are directed at commercial/industrial only.  When I contacted the planning official in Calvert County, he said that “you can’t make any revenue by subsidizing residential housing.”

 

(20) Planners (Howard County, Calvert County, Maryland Office of Planning) and economists I have spoken to during the past several months recommend that we not implement a Developmental Rights and Responsibilities agreements for residential construction.

 

(21) City staff (City Administrator, City Solicitor, City Engineer, Community Development Director) have at various points advised that we not proceed.

 

(22) Although fairly common several decades ago, no municipalities currently offer subdivision municipal infrastructure assistance programs like the one proposed here.  Why not?

 

(23) If the program proposed here is desirable, why hasn’t the County offered to participate in some manner as well?

 

Market Performance

 

(24) Can Mr. Combs make a profit building houses with the necessary infrastructure?  If so, why subsidize?  If not, why not?  Are we obligated to subsidize other unprofitable ventures?

 

(25) Where is the market failure (i.e., external costs/benefits, monopoly, public goods, information asymmetries)?  If there is a ‘shortage’ of market-rate housing then whose fault is it?  Is the city government responsible for providing market rate housing?

 

(26) We need to address the reasons (e.g., high tax rates, red-tape building codes, etc.) why people don’t build in the City rather than subsidizing that construction.  The latter is a highly visible, attempted quick-fix of a very complex problem.

 

Fairness/Equity

 

(27) I wonder if it is fair to subsidize the housing costs of the more affluent.  If we were petitioned by the poor to provide funds for their housing needs from general revenues, would we be as eager?.

 

(28) This agreement is unfair in that previous subdivision developers received no such benefit or treatment.  It could potentially alienate previous developers.

 

(29) The increase in housing supply will drive down housing prices, and existing homeowners will see housing equity eroded as a result of this agreement. 

 

(30) The part of the petition calling for reimbursement of previously incurred expenses is unconventional and unfair.

 

(31) The ability of M&CC to enter into Developmental Rights and Responsibilities Agreements might lead to potential bias/favoritism in project selection.

 

(32) Making bad policy has a detrimental effect on how we are viewed by others.  It undermines confidence in city government.  It makes people outside the community, perhaps, wonder about the fairness, equity, and transparency of our decision-making process. 

 

(33) The project would provide a huge financial windfall for the petitioner, funded by the taxpayers.

 

(34) If this agreement is concluded, then there is a need to ‘package’ the ‘program’ in a manner that it is available to everyone, the rules are known, and information is freely available.  Give the program a name and post it on the City website.  Moreover, it might be useful to create a special fund with money provided from a specific tax or fee.

 

(35) The City is already considering lowering construction fees.  This will reduce city revenues.  This is a more equitable impetus for new construction.  The effort should be towards reforming permitting rather than offering subsidies.

 

Municipal Government Role/Mission

 

(36) There is no clear constituency for it.  The Developmental Rights and Responsibilities agreement was fashioned at the insistence of one individual—Mr. Combs.  We were not approached by a builders group, trade union or anyone else for that matter to do this.

 

(37) It increases the size and scope of government. City government is already big enough.  We don’t need to be involved in another private sector activity. 

 

(38) Adoption of a Developmental Rights and Responsibilities Agreement would make the city a real estate market speculator (because neither future interest rates, property values, or participant reliability can be known with certainty).

 

(39) Is providing market rate housing consistent with the role of municipal government?  This area seems to be the domain of the private sector, state government, and federal government.   This issue distracts our attention from more important municipal issues.  There is no compelling public interest at stake here.

 

Alternative Uses/Budget Priorities

 

(40) The project is costly to the City.  It would require a tax increase of about 3 cents to finance.  Yet, this administration is committed to decreasing taxes (at least in appearance).  We told the Commissioners that we would hold the line on taxes—this program flies in the face of that ‘contract.’

 

(41) If dedicated grant funds (e.g., Community Legacy) were being used, I would not be as concerned.  But, clearly the funds are being used from General Revenues.  Such funds have better uses.

 

(42) Other investments (e.g., parks) have positive fiscal benefits.  Property prices appreciate in neighborhoods where streets and sidewalks are re-done and open space is created.

 

(43) There may be alternative, more lucrative opportunities for the city to provide infrastructure to existing lots and sell/market these lots at higher price.

 

(44) Even if the project yields a positive fiscal impact, the rate of return from the investment may be lower than what can be obtained by investing in short-term securities (e.g., money market, certificates of deposit).

 

(45) We need to better market our existing programs (50-50 Streets, Urban homestead, surplus property, etc.) before we create new ones (and new expenditures).  Rules should be transparent and opportunities available to everyone.

 

Local Housing Market Characteristics

 

(46) What are the statistics on local housing availability?  How many homes in the $100k range are for sale within City.  We need to have such real estate data at hand before making any decision.

 

(47) A new, comprehensive regional housing price index complied by the Office of Federal Housing Enterprise Oversight shows that Cumberland metro housing prices are tumbling.

 

1997 4 108.3
1998 1 106.1
1998 2 108.5
1998 3 106.5
1998 4 117.2
1999 1 107.7
1999 2 111.4
1999 3 112.3
1999 4 115.7
2000 1 112.9
2000 2 106.7
2000 3 104.9

The index measures the cost of single family homes holding quality constant (by looking at re-sales only). 1995 is the base year (index=100) and 2000 3 104.9 means that by the 3rd quarter, housing prices had grown only 4.9% (that is about 1% per year on an annualized basis). There is no need for us to subsidize additional housing.

 

Other

 

(48) The fifty-fifty contribution ratio was adopted from the Street Improvement Program.  But, these two issues (Combs development and Street Program) have totally different rationales.  There is no reason to adopt the fifty percent parameter used in the other program.

 

(49) Almost all of the other city streets are part of a street grid that provides travel convenience for people traveling from one end of town to the other.  The proposed Combs driveways have no such benefits.  They will be used only by the owners of the adjacent properties.

 

(50) Mr. Combs has no experience in subdivision development.  He is not a contractor.  We don’t know if he is capable of doing the work, the timeliness of the development, or what resources he has available to effect its completion.