Chapter 4.2

Who's Paying Cost of Growth. Service deterioration may mean some costs not being paid at all.
(The Oregonian, August 30, 1998)

By Richard Carson

As Oregon's communities experience rapid population increases, citizens start asking public officials about the costs of growth. Their main concern is whether the public costs are being completely paid for by the developers or being subsidized by the taxpayers. Andy Kerr, former head of the litigious Oregon Natural Resources Council and now point man for the no-growth movement, stated in a recent opinion article in The Oregonian that a "typical urban development costs taxpayers about $25,000 in infrastructure costs..." and that this cost "is not covered by development fees or paid back by the household in taxes." This would be a stunning revelation if it were true. However, it's not.

A number of studies have been done in recent years about the costs of growth, but they all have one inherent weakness. They have focused only on the cost of growth, but the question is not solely about costs. The municipal budgeting question is, "Are the costs being paid for?" This question can now be answered in Oregon.

Two separate studies done in Oregon indicate that the public cost of developing a single-family residence is between $23,013 and $24,502. One of these studies also estimated how the costs are actually being paid. Approximately 59 percent of these costs, or $13,526, is currently being paid for by developers and in turn passed on to the new home buyers. The developer-paid costs include $7,178 for the on-site improvements (i.e., street, sidewalks, utilities) and $6,348 through system development charges.

In Oregon, a municipality may charge for off-site system costs through the use of system development charges. The Legislature has allowed such charges for streets, water service, sanitary sewer, stormwater runoff and parks. However, local governments are expressly prohibited from collecting such charges for schools and for general government activities such as the library, police and fire, and the municipal pool.

But who is or should be paying the remaining $9,485? The answer is that the unpaid costs of growth are either being paid by the taxpayers and ratepayers, or are not being paid at all because we are letting our government infrastructure deteriorate.

In Oregon, seven out of 10 school dollars now come from state corporate and personal income taxes, and the lottery. This means that of the 19 percent unpaid costs of growth attributable to schools, fully 13 percent should be paid by the state and only 6 percent should be paid locally. There is also 7 percent of the costs of growth for streets and utilities that either is being collected now through a utility rate or could be collected. And finally, there is about 15 percent that is not being collected for general government functions. The unfunded cost of growth that should be paid locally is $4,679 or about 20 percent of the total.

If development is not paying for these costs now, then who is? There are two possible answers. The local taxpayers and utility ratepayers could be paying some of the costs. Is this unfair? Not necessarily. It has been standard practice of public utilities to pay for major capital improvements through the use of general obligation bonds repaid by utility rates or taxes. However, it is just as likely that no one is paying for these costs of growth. This is especially true for schools and general government functions.

The issue of school costs is tricky because school facility needs are not directly related to population growth. School growth is more sensitive to population demographic changes such as the baby boomers once having children, but now aging without children. For example, in the state's fastest-growing city, Oregon City, the population rise from 1990 to 1996 was 38.9 percent. However, the net school enrollment increase for the same period was 2.5 percent.

The real fiscal problem is paying for the general government function costs of growth, which amount to $3,385. These activities, which cannot be fully paid for through a rate or user-fee structure, include the library, municipal pool, fire and police departments, planning and other government functions. These activities have a direct relationship to population growth. If there is not adequate funding, then the level of service declines.

Both schools and general government have traditionally compensated for revenue shortfalls through the use of both voter-approved general obligation bonds for capital improvements, or voter-approved serial levies for operation and maintenance.

There is an argument for continuing this practice. An acre of newly developed land permanently generates about twice the property taxes per year of an acre of existing property within a city, and actually subsidizes the existing taxpayers. But is it fair that the existing residents pay for any of these costs? People move from community to community. We pay federal, state and local taxes at our last residences and pay them at our new residences. So why not just continue to pay our fair share of taxes?

The cost of growth paradox is that if local government puts the burden on the developer, then the developer passes the costs onto the home buyer, and this drives up the price of housing for all Oregonians. All four of Oregon's metropolitan areas are now in the top 13 (or 7 percent) most expensive housing markets in the nation. Why? Part of the problem is we are doing a great job of making the home buyer pay the costs of growth. The irony is that the people who will suffer most will be our children. For 30 percent of the growth in Oregon comes not from people moving into the state, but from our own children being born here.

A recent report to the Governor's Task Force on Growth stated: "The problem for local government is not a lack of tools for managing growth. It is an inability to forge a clear consensus among voters and policy makers about which to use." This is true, but there are a few financing tools we should consider making available to local governments.

First, we could expand the use of system development charges to include schools and general government functions. Second, we could lift the legislative moratorium on the use of the real estate transfer tax. This tax, currently in use in Washington County, is truly a growth tax. Third, we could place a hefty charge on all land annexed into the urban growth boundary and to cities. The value of land increases more than nine-fold through the urbanization process. Much of this added value is created by the legislative act of converting land from rural to urban. This amounts to nothing short of a windfall to the property owner who achieves the conversion.

The no-growth movement wants Oregonians to believe that developers are cheating the taxpayers. However, the developer will never pay for the cost of growth. Developers provide us a product and take a profit. We are the ultimate consumers and we will pay for the cost of growth, as will our children. It is as the comic strip character Pogo said, "We have met the enemy and he is us!"

Richard H. Carson is an urban planner, free-lance journalist and author of "Paying for Our Growth in Oregon" (The POGO Report). He is presenting his report at the Oregon Planning Institute in Eugene this September.

(Editor's note: The same presentation was made at the National APA conference in Seattle in 1999 and is available as part of the "Approaching the New Millenium" proceedings.)

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Common Sense
by Richard H. Carson