Let me ask another way: Which project does the best project manager want to work on? What project does the least influential project manager get stuck with?
Project #1 is going to attract the highest performers. Project #2 is going to appeal to those who aspire to climb the organizational hierarchy, but need the experience or resume to shift into that top tier. In a three-person competition, the mundane task without the accolades goes to the lowest performer.
That might work in a private company where management takes calculated risks each day, but what if we’re in the public sector? And what if, in the infinite game cities are playing, failure on the mundane project means damage to property, dislocation of people, expensive emergency repairs, and potentially even loss of human life? Or what if it merely means the slow decline of the systems the community has built or the ongoing denuding of the community’s wealth and prosperity? We need our best people leading the charge on maintenance.
None of this is to suggest that there aren’t smart people currently working on maintenance but more of an observation that these people toil in the trenches in obscurity with little appreciation – let alone acclaim – for their efforts. That is, until something goes wrong.
This is a systematic problem. I worked with someone who maintained sewage pumps for a city. He consistently received high marks from the state oversight organization and numerous “Operator of the Year” awards. The problem is, he completely faked the data he submitted – he wasn’t doing the work – something anyone could have figured out with five minutes on a spreadsheet (I had). He was managing a critical system, the failure of which was not only costly but could have had serious environmental impacts. The job was mundane, a low priority despite its importance, so it was given to someone willing to work cheap and given little real oversight.
Can cities find a way to elevate the people who do these tasks day in and day out, whose seriousness over the long-term threats of failure are not dulled by their infrequent occurrence? I’m not sure, but at the city level, we need to get these people out of the obscure back rooms and make them part of our day-to-day conversations. We need to have them at the table so their voices are not passed through the filter of people with other ambitions and priorities. We need to celebrate the people who do maintenance, pay them more, and give their positions more prestige within our cultural conversation.
Every local government has systems that fall into one of three categories:
Critical: Something goes bad and it takes the whole thing down.
Redundant: Critical systems that have backups and alternatives in place.
Noncritical: Something goes bad and only a small area is impacted.
These systems can further be categorized as maintenance intensive or low maintenance.
Every city should have a list of critical systems. The odds are, any critical system with lots of required maintenance is already getting attention. It’s likely the highest-performing people are already assigned to them and given some degree of prestige. There are probably even efforts to find ways to add redundancies so the systems are not critical. That’s great management.
It’s the “critical–low maintenance” systems that come to our attention at the wrong time. This is the seawall in New Orleans, the spillway at the Oroville dam, the main lift pump on the city’s sewage collection system. We need them to work – they’re critical – but we can go decades, or even lifetimes, without suffering any consequence for their neglect. Local leadership needs to be intentional about making these systems front and center, and not allowing them to become an afterthought. This is where management – top administration and elected officials – need to shower their attention and overcome the natural tendency to have these systems fade into the background.
Considering a new set of priorities for building wealth, cities also need to give fresh evaluation of what is critical and what is not. For example, it snows a lot where I live in Minnesota. We’ve culturally prioritized clearing the snow from the streets and consider that a critical function of government. We don’t worry about most sidewalks for 48 hours and, even then, it’s an enforcement matter; the city expects private homeowners to clear the sidewalks.
If we’re trying to increase the financial productivity of our neighborhoods, get private capital off the sidelines, and work to incrementally build wealth, we need to recognize that sidewalk maintenance is critical for many people. Many have one way of getting around – walking – and if clearing the sidewalk is a distant, subordinate, maintenance objective to having every street cleared for automobile traffic, it’s not going to create the needed level of confidence in the neighborhood.
If maintenance is the priority – and it must be the priority – then the people who perform maintenance must be a priority. That’s a different culture, one where the maintenance worker is a value-adding artisan, not the lowest-cost cog in a bigger system.
Recognizing Our Confirmation Bias
During World War II, islands in the South Pacific that had little prior contact with Japanese or American/European explorers were subjected to a series of war-related occupations. Troops would come in and set up landing strips along with all the other associated infrastructure – barracks, offices, control towers, and so on – and, in the process, share some of their stores with the natives on the island. In many cases, the stuff that was shared proved lavish for people who had been used to lives of privation.
Then the war ended, the troops left, and, of course, the materials ceased coming. How would the residents of these islands restore the level of abundance they had experienced? You can imagine a local leader and their Make Melanesia Great Again campaign. All we need to do – or so it goes – is to do what was done before and we’ll get the same results. It’s so obvious, it’s hardly even debatable.
The Pacific Islanders set about recreating the conditions that they witnessed bringing about the largess. They cleared straight paths through the forest for airplanes to land on. They built model airplanes out of grass and sticks and parked them near the runway. They erected control towers and placed people in them to sit for hours with mock-headphones they had carved out of wood. They dressed like soldiers, paraded around, and even sat in mock meetings. They believed that if they did these things – the things they had witnessed others do – the planes full of cargo would start landing again.
Of course, since we understand manufacturing, industrial agriculture, metal working, supply chains, and the logistics of shipping, we grasp the simplicity of their understanding. We call these people primitive, even backward, in their logic. Yet this behavior is something we mimic.
It’s hard to even estimate how many cities I’ve been in where, in a meeting with local leaders, a dignitary, or some advocacy group, a plan is put forth for action based on the simple observations of what worked in another place. For example, we witness a city with a vibrant downtown, notice they have decorative lighting, and so we fixate on the logical solution to our struggling downtown being decorative lighting. Or another place where a senior apartment building met the needs of the mayor’s elderly parent, so now we need a senior apartment building. In these instances, we mimic the Pacific Islanders and simplify vast complexity down to something we can understand and act upon.
This isn’t a problem – in fact, it’s often quite helpful – if our capacity to act on our insights is limited. We can be laughably wrong, but if we can only act on that knowledge incrementally, we’ll discover our folly before we do great harm to others. The crisis comes about when our confirmation bias is fueled by large budgets, tremendous debt capacity, and a culture that rewards bold action. Then we can, and often do, confidently pursue our foolishness to great destruction.
The Pacific Islanders who built airport runways may have been simple, but they were not stupid. The same impulses that drove their brains are active in ours. We are just as likely to attribute random success to our own genius as we are to assign blame for our failures to an unforeseen event. T
hat’s illogical – they are both a byproduct of our efforts as well as a degree of randomness – but human reasoning is anything but logical.
In modern America, a local government has a dangerous capacity to blow itself up. Stripped by the state of many basic tools for managing their own affairs, cities are nevertheless allowed to take on unpayable levels of debt, unmanageable levels of infrastructure liability, and give away a generation’s worth of the community’s wealth. Combine this capacity with the human predilection to have unwarranted faith in our own rationality and it creates a volatile asymmetry, where decision-makers have some benefit from large public gambles, but the public is disproportionately exposed to the downside.
The Russian-roulette equation – a reasonable chance of success with a nonnegligible risk of total failure – makes no sense in an infinite game. Prudent people don’t risk what they have and need for something they don’t have but could live without.
And like the Pacific Islanders, the big project mentality has it backward. The Coliseum was not built in anticipation of Rome. The Eiffel Tower wasn’t built before Paris. The Brooklyn Bridge was not built before decades of development in Manhattan and Brooklyn. These investments are not the catalyst for success; they are the culmination of success, a celebration of who we are and the work we have done. Table 9.2 suggests more appropriate ways of thinking when it comes to building better cities.
Table 9.2 Replacing Conventional Thinking with Strong Towns Thinking
Conventional Thinking Strong Towns Thinking
Build it and they will come. Get them to come so you can afford to build it.
Major projects are a catalyst for growth. Major projects are made possible by productive growth.
Major projects create jobs. Jobs are the natural byproduct of a productive place.
Finance major projects with debt to speculate on future growth. Finance major projects only with a secure and stable tax base.
Future maintenance liabilities are the responsibility of future generations. A project is only viable if it builds wealth for future generations, not unfunded obligations.
It is easier to work with simple or complicated systems than complex ones. It’s easier to live in a world we pretend to understand than one where we purposefully struggle with the unknown. It is easier to design a city using our own limited vision than it is to accommodate the hopes and dreams of thousands of people we will never even meet.
This is not going to be easy. That is the burden of knowing. Accept it.
Understanding Debt
Cities that take on debt are bringing future spending into the present while obligating future residents to pay for that spending. Unlike for the federal government, where some concepts of credit cycles suggest that it’s acceptable to borrow money without planning to pay it back, there are no theories of finance that allow a city to avoid a hard reckoning with its debts and obligations. For a local government, taking on debt is a serious matter.
There are legitimate ways for a local government to use debt, but like most areas of modern society where debt has become a routine matter of making ends meet, cities have become blasé about it. Local leaders who use general obligation debt to cover routine budget gaps are acting immorally, avoiding discomfort today by inviting greater pain tomorrow. Those who use revenue bonds to finance speculative private development – and then use the developer fees for cash flow – are likewise suspect. Easy credit has culturally legitimized many actions that prior generations would rightfully have considered obscene.
Local governments taking on debt to make an investment must ensure three things. First, the expenditure must have the potential to improve the city’s financial position. Taking on debt for a project that provides some quality-of-life benefit today – for example, improving the flow of traffic – can only be justified when all maintenance obligations are accounted for, there is no debt, and the community broadly supports repaying the obligation in short order. You don’t put in a swimming pool when your roof is leaking.
Second, the improvement in the city’s financial position must be measurable in terms of dollars. It’s not enough to measure saved time, reduced carbon emissions, or an improvement in happiness and equate that to dollars. An investment that justifies debt must have a real return.
Finally, cities must obsessively measure the return on investment, compare that return to the assumptions made for the project, and use that experience to inform subsequent investments. In this sense, doing projects with debt becomes an iterative learning process, part of developing a local culture of civic collaboration across generations. Cities that don’t track and publicly report the return on investment for debt-funded projects are signaling that they either don’t care or don’t want to know.
Local governments can also legitimately take on debt for cash flow, but this tends to be the most problematic use of leverage. Too often – in fact, almost always in the instances I’ve experienced – a local government confuses its insolvency for merely a cash-flow problem. That is disastrous because it allows the community to put off dealing with the underlying financial problems while continuing on as if everything is fine. When debt capacity is gone and the underlying insolvency is revealed, the problems are far worse and the responses more limited.
As a way to understand the deceptive nature of cash-flow debt, consider a city that has four streets. Each street lasts four years before it needs to be repaired. One street was built each year and so they are on a nice four-year maintenance rotation. If the city is solvent – if there is enough wealth in the community where the tax revenue can cover the city’s long-term obligations – then there should never be a need for debt. Each year, each street produces one-quarter of the tax revenue needed to fix the street (Figure 9.1). After four years, every street is fixed and the process starts over.
Figure 9.1 Debt Is Not Necessary because Cash Flow Is Sufficient to Fund Maintenance
Cities don’t generally have their maintenance obligations so nicely staggered. Typically, they come in bunches, an echo of the growth spurt in which they were originally built. Consider a scenario where all four streets in the example city were built in the first year. All would need maintenance at the same time four years later. In that case, the city could tax four times the normal amount the first year and nothing in the next three, something culturally difficult to pull off. Or, they could take on debt in the first year to fix all four streets and then pay that debt back over the next three years. That is a legitimate cash-flow problem that the local government can solve with a judicious use of debt (Figure 9.2). (Note: Obviously this is very simplified and so I’ve not bothered with realistic time frames or interest.)
Figure 9.2 Debt Is Used to Make Up for a Cash-Flow Shortfall but Revenue Is Sufficient to Pay Back the Debt before Another Round of Maintenance
Consider the second scenario again, but this time in a city where the tax revenue is only half of what is needed to maintain all four streets. The city is not collecting enough money from each street to cover the cost of maintenance. As in the second scenario, the city takes on debt in the first year to cover the surge in maintenance costs, but, at the end of the fourth year when the streets need to be fixed again, the first round of debt has not been paid off. Now the city has a maintenance obligation and debt, a reflection of the underlying insolvency (Figure 9.3).
Figure 9.3 Revenue Is Not Sufficient to Cover Ongoing Maintenance Expense, but That Fact Is Covered Up with Debt
The third scenario is a case of confusing insolvency with a cash-flow problem. The local government believes they have a cash-flow problem – they perceive that there’s plenty of wealth there, just not right now – but what they really have is an insolvency problem. They don’t have the money to maintain everything they’ve promised to maintain. By borrowing money, they are piling more obligations on top of the unfunded liabilities they already have. This is a recipe for disaster.
The scary thing is that all cities that take on debt for infrastr
ucture maintenance believe they have a cash-flow problem. They believe this despite not having done the analysis to determine whether this is true. The example I’ve given is ridiculously simplified: four streets over four years. Cities sometimes have hundreds of miles of streets with maintenance occurring over decades. A local government must be obsessively intentional, organized, and disciplined to discern its true financial status.
Most cities aren’t. They want to believe they have a cash-flow problem because it is convenient, because insolvency is too difficult to fathom, especially when everyone else appears to be doing the exact same thing. Could everyone be wrong? Could we all be insolvent? These two questions probably cost me a total of six years in the intellectual wilderness as I clung to the notion that what I was seeing and measuring could not possibly be true, that a wisdom greater than mine had to be at work that I hadn’t perceived.
I advocate giving local governments many more tools to work with than they have today, but I believe state governments have a responsibility to limit municipal debt. It’s not something that can be left up to local leaders, ratings agencies, and the fickle nature of bond markets.
I gave a presentation to a group of bond analysts from one of the large ratings agencies. I showed them how public balance sheets didn’t reflect the extent of municipal liability, that cities had unreported amounts of maintenance obligations totaling many times their reported pension shortfalls. The analysts were stunned, professed this was new to them, and asked a lot of good questions. Then they informed me that it wouldn’t change anything about how they rated bonds because cities don’t default on their debt – they have not defaulted en masse since the Great Depression – and that track record superseded all other considerations.
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