Building on Stable Investments for Future Generations

Building on Stable Investments for Future Generations

In late March, the Brookings Institute released a study measuring two important indicators of how immediately cities would feel the impacts of economic shutdowns.

The first revealed cities reliant on elastic sources of tax revenue—like sales and income—are anticipated to experience the most immediate and substantial impacts. Cities more reliant on property taxes, and other less immediately impacted sources of revenue, are expected to experience fewer effects. Brookings also measured regional industry bases, uncovering that areas with a large amount of employment in high-risk industries—such as mining/oil and gas, transportation, employment services, travel arrangements, and leisure and hospitality (including reliance on subsequent income and sales taxes)—are expected to feel more immediate fiscal impacts.

The study concluded Missouri’s three largest cities—Kansas City, St. Louis, and Springfield—will be among those more immediately impacted by the Covid-19 induced economic shutdowns. In Kansas City, 52% of general fund revenues in 2019 came from elastic sources and 16% of metro employment was based in high-risk industries.

These indicators, as discussed on a recent episode of Upzoned, imply that Kansas City could be looking at a serious revenue gap in the coming year. Our leadership would be wise to plan accordingly.

Can Kansas City Take a Hit?

Like many cities across the United States, Kansas City was facing budget challenges long before Covid-19 became a global pandemic. One of the most prominent challenges is derived from development pattern.

The post-modern era presented every incentive imaginable for (mostly white) Kansas Citians to spread out. Today, Kansas City proper spans over four times the land area it did in 1950—without corresponding population growth—and has 6,450 lane miles of streets the taxpayers are responsible for maintaining.  

Costs far exceed resources and Kansas City’s Department of Public Works reported most streets are either poor or failing, requiring $166M/year for the next five years of preservation.

Unfortunately, despite continued public outcry over inadequate streets and a dangerous public realm, the city only adopted $11M for street preservation—fifteen times less than the amount needed.

This story is not unique to Kansas City. Many cities with infrastructure that has outlived its first lifecycle are scrambling for ways to manage liabilities, many relying on suburban expansion to fund outstanding maintenance needs. (Strong Towns calls this the Growth Ponzi Scheme). The real question is: how are we going to fix it?

Rethinking Revenues

Before I started my career as an urban planning consultant, I worked as a restaurant server. My income relied on the amount of money people spent and the percentage they were willing to tip. (Twenty percent is the norm, FYI.)

During this time, it was important that I learned never to assume consistent business. If the restaurant was booming at the beginning of the month and I spent my money under the assumption that this trend would continue, I put myself in a compromising position at the end of the month when bills came due. As an 18-year-old, I made this mistake more than once. By assuming that a certain financial spending trend will continue—and budgeting and spending accordingly—the municipality of Kansas City is making the same mistake I did as an 18-year-old waitress.

A municipal corporation is not an 18-year-old learning financial management; it has an obligation to protect taxpayer investments by avoiding risky assumptions about future revenue. It isn’t responsible, or stable, to generate funds for critical infrastructure and public safety services by relying on taxes on future spending and an assumption of income growth. Kansas City’s most recent budget indicated that critical needs—like infrastructure and public safety—are funded primarily by elastic revenue sources, which are a less stable form of revenue during a recession. The primary revenue stream supporting the next five years of street preservation, for example, is sales tax.

Given recent shutdowns and the future economic forecast, it’s concerning that our public safety funds are reliant on sales and income taxes. In fact, one third of Kansas City’s revenue relies on the earnings tax, sales tax, and convention and tourism taxes.

Building on Stable Investments

The financial obligations of most American cities are overwhelming and our growing reliance on less stable forms of revenue, like sales tax, will eventually force us into a compromising position when consumer spending slows. Even as cities begin to open again, people will be discouraged from attending events, frequenting crowded restaurants, and traveling for business and leisure.  

According to a presentation given by Kansas City’s Finance Department in early May 2020, property taxes are expected to be the least impacted revenue source if a great recession were to happen. Sales, earnings, and convention/tourism taxes are expecting greater levels of volatility.

There is another option for maintaining our general municipal fund—and it involves building smarter. Property taxes aren’t as immediately connected to the market (i.e., whether or not consumers are making purchases) and the process of changing property taxes is much longer, thus yielding a more stable revenue source for our city. They comprise less than 10% of the revenue budget but produce about $170M for the city, nearing the estimated annual amount of $166M needed for street preservation.

We have experienced decades of suppressed volatility and Kansas Citians would be wise to rethink revenues moving forward to more directly link critical government functions with more stable tax sources. Unfortunately, our current budget does just the opposite, and Kansas City has become over-reliant on volatile revenue sources. Today, our leadership is presented with the opportunity to rethink how we connect revenues to services in a more rational way for which future generations may thank them.

Listen to Abby Kinney and Chuck Marohn discuss this topic on a recent episode of Upzoned.

Abby is an urban design and planning consultant at the Gould Evans Studio for City Design, where she works to advance bottom-up strategies that enhance private development and the public realm. She is also the co-host of the popular podcast Upzoned and facilitates the ad-hoc Kansas City chapter of the Incremental Development Alliance.