Studying Our Way to a New Subsidy Scheme, pt. 3

Confirmation of my earlier posts here .... I was part of a stakeholder meeting with Raftelis today and it was a mixed bag. As a consulting firm, they seem interested in looking at all of the relevant issues. On the other hand, they are explicitly NOT charged with making sure new real estate development pays its own way. Here's the note I just sent to City Council about it:

"Dear Councilmembers,

I just got back from the stakeholders' meeting with Raftelis. It was heartening to a limited extent - they seem to understand marginal cost pricing and one of the 'deliverables' is the maximum fees/taxes allowable by OK law (which is as close to marginal cost pricing as we will get).

On the I-told-you-so front, the Raftelis guys seem to understand their charge as exactly what I suggested in the email below [the one in "Studying Our Way to a New Subsidy Scheme"]: (1) the Wastewater Systems Masterplan is being superseded; (2) the are explicitly NOT operating on the assumption that new real estate development should pay its own way. With regard to (2), they made it clear that they will be raising considerations to the contrary to represent the development community's position. I hope they will raise the counter arguments too, but we will see.

I hope that we can at least be explicit now about the contours of the debate about the Wastewater System Development Excise Tax & the water/sewage Connection Fee: while there are numbers that need to be firmed up, the crux of the issue is whether we will be asking new real estate development to pay its own way or whether we will be subsidizing it.

Steve Ellis

Ward 4"

At least now that the framework of the debate is clear, let's talk about the principle of new real estate development paying its own way.

Studying Our Way to New Subsidy Schemes, pt. 2

Getting really weird feedback on the previous post - informal, of course, because no one wants to put themselves on the record for anything. 

- 'Don't worry - the developers hate this proposal too ....' 

Maybe, but no one has really provided the evidence yet. 

I suppose if I were a developer and I had (1) just wrangled a water subsidy out of the City that very few people recognized as such and (2) pretty good reason to think that this City Council wasn't going to raise either the Wastewater Excise Tax or the Water Connection Fees anyway, I might prefer to let sleeping dogs lie. This doesn't change the fact that the Raftelis contract is an open admission on part of the City that it no longer takes seriously either the Watewater Master Plan or the principle that new real estate development should pay its own way.

Just a guess, but maybe the development community doesn't want the City to so explicitly reject the Wastewater Master Plan. After all, if the cost allocation from that document is toast, why think we should follow it with regard to something like the North Wastewater Treatment Plant?

- 'Read Resolution R-1314-39 - it spells out what the contract is really about ....' 

I mean, we have the actual contract, so what is this supposed to add? 

At any rate, R-1314-39 is the problem! Section 15 says: "That in evaluating future funding strategies, the study shall assess the impact of the Wastewater Excise Tax on growth and development in the City of Norman, take into account existing fee structures, and be compared to both (a) surrounding and (b) comparable cities to ensure reasonableness, consistency and feasibility."

 

That was pretty much the beginning of the end for the WWMP split .... I'm not sure what R-1314-39 enthusiasts think there is to be proud of here .... Here's the link, so you tell me: https://norman.legistar.com/LegislationDetail.aspx?ID=1474743&GUID=CF08E7F2-DEE0-4E93-9518-F42A1485F27B&Options=&Search=.

Am I missing something here? If so, what?

Studying Our Way to New Subsidy Schemes

On May 12, 2015, the Norman City Council will be considering (and almost certainly approving) a contract with Raftelis Financial Consultants to study wastewater and water development taxes and fees (primarily the Water Water Excise Tax and Water Connection fees). The explicit mandate is to consider these fees with respect to how they influence the market for new real estate development, so this clearly is an attempt to keep development charges low. This strikes me as a mistake, of course, because if you don't charge full price, you are encouraged to keep performing activities even after they have become a bad idea. 

I will return to the subsidy theme later, of course, but first things first. One of the biggest worries about these sorts of proposals is the political obfuscation they spawn. To try to head that off, I sent the following letter to the City Council tonight:

"Dear Councilmembers,

I wanted to drop you a line about Item 50 on the May 12, City Council Agenda (K-1415-132). It is on the consent docket, so I am under no illusion as to whether it will pass. I do think it is important, however, to be very clear about the implications of conducting this study and even seriously considering its results.

1) The contract with Raftelis Financial Consultants is an explicit rejection of the Wastewater Systems Master Plan.

(a) The Wastewater Systems Master Plan (http://www.ci.norman.ok.us/sites/default/files/WebFM/Norman/Utilities/MasterPlan.pdf) includes a cost allocation (pp. 4-9 to 4-11). This allocation requires the part of the population to whom Norman had contractual obligations as of 2001 to pay for 13.9 Million Gallons per Day (MGD) of sewage capacity; post-2001 development is supposed to pay for 7.6 MGD additional capacity at ‘full build out’. The only mechanism Norman has to allocate costs to the post-2001 population was/is the Wastewater System New Development Excise Tax.  The recent wastewater capacity increase from 12 MGD to 17 MGD made it clear, however, that the excise tax hasn’t collected enough moneyfor post-2001 development.  The most anyone even claims is that the excise tax (current & future collections) is sufficient to pay for the 3.1 MGD that post-2001 development is responsible for in the most sewer system upgrade.  The last 4.5 MGD required for ‘full build out’ (planned for the North wastewater treatment plant) are (1) the responsibility of post 2001 development and (2) completely unfunded.

(b) K-1415-132 explicitly repudiates the cost allocation in the Wastewater Systems Master Plan. It is concerned with the exact same projects - "the next phase of planned wastewater infrastructure including, but not limited to construction of the new North Water Reclamation Facility (WRF) ..." (Text file K-1415-132) - but it calls for the development of a new funding model - "Recommend how wastewater user charge revenues and wastewater excise tax revenues should be used to fund future capacity, maintenance obligations and infrastructure improvement costs" (Text file K-1415-132).

2) The contract with Raftelis Financial Consultants is an explicit rejection of the principle that new real estate growth should pay it’s own way. This is actually a corollary of the first point, but it can be established independently as well.

(a) Historically, Norman has approached the problem of paying for the costs on the City imposed by new real estate development by way of “[t]he incremental cost method” in that it has “focuse[d] on the cost of adding additional facilities to serve new customers that can be tied to an approved capital improvements plan (CIP), infrastructure improvements plan (IIP), or master plan” (http://www.raftelis.com/services/#rfc_services_1).

(b) K-1415-132 rejects this approach, however, because it is focused on non-cost information about wastewater treatment capacity - it will “[a]ssess the impact of the wastewater excise tax on City development based on a comparison to both surrounding and comparable communities” (Text file K-1415-132) - as well as non-cost information about new water capacity - “establishing water connection charges in relation to actual system capacity and the total development fees charged by surrounding communities" (Text file K-1415-132).

There are, no doubt, a host of things to be said about the advisability of sticking with the Wastewater Systems Master Plan or repudiating the new-development-should-pay-its-own-way principle. It would be disingenuous to claim, however, that either the Master Plan or the pay-you-own-way idea survives when we are asking for incompatible replacements.

Stephen Ellis

Ward 4"

My Academic Paper on Norman's Water Subsidy

I wrote an academic paper on Norman's Water Subsidy that should be appearing soon on ShareOK, a joint open-access platform set up by OU and OSU. Like anything else involving the OU Library system, things are taking fair bit of time .... Since I am interested in having people in-the-know look at it, I decided to link to it from here in the hope that it would garner some reviews.

Here's the link: https://shareok.org/handle/11244/14639

Griffin Memorial Hospital site redevelopment

Waterpolicy talk to resume shortly .... I have an academic paper on Norman's water capacity subsidy ready to go up on ShareOK and I will link as soon as it does.  

In the meantime, I went to see the Urban Land Institute report on plans for the Griffin Memorial Hospital complex this morning at City Hall. Here are some observations ....  

1) Wow, there were sure a lot of buzzwords flying around! Honestly, the content-to-word ratio was so low that it was almost incomprehensible. Almost ...  

2) Getting past the BS-word-cloud, there was some substance to the discussion. 

A. The Good 

There were a lot of cool ideas for what to do to redevelop the Griffin area. It was suggested that the cool Admin and Chapel buildings be repurposed, that a big hunk of the land be used for a park/streamway, that there be a lot of mixed-use, higher density development, etc. Lots of cool plans. This is a place where we want to develop b/c it wouldn't be expensive sprawl  lots of infrastructure; close enough to town to not require lots of driving, etc. 

B. The Bad 

This is being designed as a so-called 'Public Private Partnership' from the word "go" and that is regrettable. The citizens of Norman, the local development community, and the City government (esp. the staff) all have distinct interests in this matter and the whole ULI presentation was designed to obsfucate that very real fact. The proposal as it stands contemplates very vague goals that will, in practice, be specified 'on the fly' by the people who will take the most time to push their influence. In practice, that will tend to be the development community. The whole PPP model allows (and is probably designed to facilitate) the development community to take control of the process. The important thing to see, however, is that this isn't the only path  see below. 

C. The Ugly 

Even at this stage of the game, the development community has its hand out for a subsidy. The talk about how to finance development in the Griffin area was very vague and did not distinguish between financing public improvements and financing private investments. The subsidyask is already in place, however. ULI made it clear that Economic Development funds* will be asked for and that a Tax Increment Finance area** is in the works. The concluding remarks from the ULI team suggested that the local government needed to lead the way in taking monetary risks; not only is that inaccurate (see below) but it presages government givealways to the already welltodo.  

3) We should be able to get the Good part without the Bad and Ugly parts. We learned that path from the Center City Visioning process (led by the National Charrette Institute): set up a paintbynumbers process and only allow development that fits those parameters. More specifically, here are the steps: 

A. Zone the area strictly, with a form-based code. This requires that Norman be its own "Master Developer," but we should set up things the way we want. This won't be easy  we will need to think hard about what we want and what is feasible, but let's get the demand right before we bring in the suppliers. 

B. Open the area for development and steer new development there. The City will need to invest some in infrastructure, but that is no issue if our fee structures make sure that development pays its own way (we have some work to do on this front). A key part of getting businesses to develop where we want them to develop is to not open up new, alternative locations. If we want to get development at Griffin, we should make sure that it isn't easy to develop out on the fringe instead. (This would require a lot more discipline from the City Council than we usually see, but no more discipline than adopting a longterm PPP.) 

C. As the ULI suggests, we should look for interim uses of the Griffin area to show how attractive it is and to keep it productive while the development happens. 

The National Charrette Institute showed us that we don't need to let the development community take the lead when it comes to Norman's future  let's follow their advice.  

__________ 

* I.e., private entities will be asking for government money without offering any compensation in return. 

** This would be a misuse of the TIF mechanism, since they are designed to change the location of economic activity, not increase aggregate activity. The Griffin area is not a poverty stricken area that we need to underwrite by cannibalizing other parts of town. 

My dinner with Basco - a parable

My friend, Basco, and I were really hungry, so we went to eat chicken nuggets (tasty and cheap!). We decided to buy them together to keep the wait time low - after all, a nugget is a nugget. I offered to put $3 into the nugget fund; Basco countered that he would pay $0.12 for each nugget he wanted. I noted that nuggets usually cost more than $0.12 a pop, but Basco assured me that he paid $0.12 per nugget the last time he bought some - 2006 - and that the price of nuggets was uncertain because of an ongoing price war.* I was really hungry and didn’t want to wait (or, frankly, to think too hard about it), so I agreed.

When we got to the fast food place, it turned out that nuggets cost $0.20 apiece. Basco said he wanted 12 nuggets, so I totaled up our nugget fund: my $3 plus Basco’s $1.44 (=$0.12*12) would allow us to buy 22 nuggets ($4.44/$0.20 per). After I put in our order, it dawned on me what a poor deal I had made: Basco got 12 nuggets at $0.12 each; I got 10 nuggets at $0.30 each; Basco paid for less than a third of the tab and got more than half of the nuggets; Basco bought nuggets at 60% of their actual cost, while I paid 150% of the actual cost.**

The moral of the story: don’t split the bill while you are distracted by hunger.

(I will return to the usual wonkery soon ....)

__________

* http://www.businessweek.com/articles/2015-01-15/burger-wars-the-cheap-chicken-nuggets-phase

** Suppose nuggets would have been $0.15 per. The nugget fund would still have been $4.44, but that would have gotten us 29 nuggets. Basco would get his 12 nuggets at $0.12 apiece; I would get 17 nuggets at $0.18 apiece. 17 nuggets is probably more than I should eat at a sitting.

Vote NO on Tuesday!

I am going to vote NO in the Jan. 13 water rate election. I hope this blog persuades at least some of you to do the same.

The proposed water rates are part of a ongoing subsidy deal for new development. The City says it will cost $12 million to get 2 million gallons per day (GpD) in new water capacity - $6/GpD. The water rates proposed include $9 million for up to 1.5 million GpD for current ratepayers, which works out to be at least $6/GpD for new capacity. The price for new development, on the other hand, was set by ordinance at $3.14/GpD in 2015 and $3.92/GpD in 2016 (and potentially beyond) without any quantity limits. If new development buys $3 million worth of new water capacity at these prices, they will end up with 835,655 GpD capacity.* $3 million from new development and $9 million from customers still only buys 2 million GpD, however, so current customers only get 1,164,345 GpD, for an effective price of $7.73/GpD. Higher or lower actual well costs don't help current customers - at best, we get 1.5 million GpD a for $9 million. New development pays less than full cost for new water capacity; current water customers make up the difference.

This water-capacity subsidy is a problem, not only as a matter of principle, but also as a matter of practice and precedent. Norman has very limited access to new potable water. Subsidizing new development leads to overuse by the most resource-intensive users - at least until the water is gone. New development needs to pay its own way, both as a matter of fairness and as a matter of providing appropriate incentives for conservation. The water rate election is a crucial test of this principle. Norman is at a point where new development is increasingly costly. According to the 2060 Strategic Water Supply Plan, new well water capacity will be $13/GpD if the EPA adopts proposed Chromium 6 regulations. Further, it calculates that new development will be responsible for well over half of the $415 million cost of supplying water in the future. Drinking water isn't the only issue either - wastewater and stormwater issues are on the horizon. If we can't hold new development accountable for its costs with the power of an election behind us, we will be unlikely to do better without any direct influence on the outcome.

Rejecting this water rate proposal is not to reject any rate increase. Water rates will need to go up in order to pay for legally mandated improvements for current users. The Jan. 13 election is, however, a crucial opportunity for citizens to negotiate a better deal for both this set of water system improvements and future cases where developers try to leverage a subsidy. The City Council can end the water-capacity subsidy at any time by raising water connection fees for new development, so there is no reason why we can't get a better deal quickly.** Or we could adopt a real 'trigger mechanism' that raises the connection fee as soon as costs are known. Or we could vote on the mandated water treatment issues as soon as possible and leave the contentious capacity issues for a later vote. The smart vote on Tuesday is NO until the water capacity subsidy ends. If we can't get new development to pay its own way in this case, we will have little chance to influence the inevitable subsidy fights of the future.

__________

* Assumes no acceleration in new connections to take advantage of 2015 prices.

** The City has already certified that $3 million is a legally appropriate cost for 500,000 GpD capacity in Section 10 of Resolution R-1415-60 adopted on Nov. 25, 2014 (https://norman.legistar.com/View.ashx?M=F&ID=3383535&GUID=4F934AAC-E43B-4242-9383-215FBCEB4C4A).