Sprawling development
costs all of us a bundle

Although sprawling development patterns are destructive and wasteful in countless ways, they are heavily subsidized. This article by Kevin Kasowski, formerly of the National Growth Management Leadership Project (now the Growth Management Leadership Alliance), explains these economic incentives which promote sprawl. Some of the economic concepts are technical. But it's worth the effort to understand themand to imagine how they might be changed.

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How much does sprawl cost? A recent study by the Center for Urban Studies at Rutgers University says sprawl is costing us a bundle.

The Rutgers study pegged capital costs attributable to sprawl development patterns in New Jersey at $1.3 billion over 20 years for roads, water, sewer and school facilities. Additional operating and maintenance costs of $400 million annually were also linked to sprawl development. Capitalized at current borrowing rates, these annual operation and maintenance costs translate into an additional $7-8 billion price tag for sprawl over 20 years. The study was conducted by a team of 20 researchers and economists at the request of the New Jersey Legislature to evaluate economic impacts of the newly adopted state plan which advocates more compact patterns of development.

The Rutgers study suggests that if 500,000 new residents arrive in New Jersey in the next two decades, each homeowner will pay $12,000- $15,000 more for a house because of sprawl development than they would if development patterns were more compact. This supports earlier research on significant sprawl-related costs. In fact, some estimates are even higher.

In a 1989 monograph for the Urban Land Institute, James Frank, associate professor of urban and regional planning at Florida State University, estimated a $48,000-per-house sprawl "premium" for providing services to a three-unit-per-acre development located 10 miles from central facilities and employment centers. The same costs for a home in a 12-unit-per-acre development located closer to facilities, with an equal mix of townhouses, garden apartments and single family homes, would be 50 percent lower.

Development costs vary with lot sizes, distance to central facilities, proximity to existing development, community demographics, existing service capacity and the requirements of local codes and standards. Yet numerous studies dating back to 1955 all point toward a similar conclusion: sprawl is a significant burden on both homebuyers and taxpayers.

Who pays for growth?

While "on-site" development costs (sidewalks, sewer laterals) are passed on to buyers by developers as part of the price of a home, sprawl-related costs that are "off-site" (trunk sewers, water mains, schools, fire stations, treatment plants, widening roads) are another story. While some governments are now charging impact fees to developers for hooking up to this community infrastructure, it is frequently the case that the full costs of off-site infrastructure go unpaid. As a result, everybody paysindirectly.

"We haven't kept pace," says Jim Nicholas, professor of urban planning and an economist at the University of Florida. "Our roads, for example, are financed with fixed-base assessments. That doesn't keep up with inflation, let alone with growth. Every time we grow, every time the inflation clock clicks, we get a bigger and bigger gap."

Nicholas notes, for instance, that the average combined federal-state gasoline tax today is 29 cents. If this tax had been held constant for inflation over the years, it would now be 90 cents per gallon. The obvious result of this subsidy is heavy reliance on single-occupant vehicle commuting, which clogs roads and creates traffic tangles of frustrating proportions. "When you subsidize commuting, is it any wonder that people do it?" asks Nicholas.

He says that the faster growing statesCalifornia and Florida, for examplewere the first to be drawn into the dilemma of how to pay for growth. In fact, the tax revolts that began with Proposition 13 in California, and continue to this day, are an indirect acknowledgment that current patterns and rates of development are simply not sustainable. As federal subsidies for interstate highways, sewer works and other public infrastructure that made sprawl possible disappeared over the past two decades (without any apparent cut in federal taxes), the public was simply not willing to see those costs shifted to state and local government budgets. As a result, government's ability to cope with growth pressures is often paralyzed. "We have now effectively neutralized government's ability to raise money." says Nicholas.

A question of fairness

To add to the complexity of the issue, the costs of sprawl are not distributed evenly. When new developments are built far from water or sewer treatment plants or schools, it creates higher incremental or "marginal" costs for adding new sewer system capacity or operating school buses. By contrast, the marginal cost of new development closer to existing services or facilities is lower.

However, because costs currently are evenly distributed among all users by average-cost pricing, those who live farther away pay proportionately less. As a result, some users subsidize other users.

FSU's Frank says the result is "an enormous price subsidy." He estimates that the true marginal costs of providing sewer service to a new home can range from $2,738 to $26,263far higher than most existing impact fees. And since newer homes tend to be most affordable to higher-income individuals, this inequity often translates into a subsidy of the rich by the poor, Frank notes.

"There is a tremendous equity issue here," says Nicholas. "What we've evolved is capitalism for the poor and socialism for the rich. So many problems we have today can be related to that."

One visible impact of this subsidy is sprawl. Why? As with subsidies for the automobile, subsidies for sprawl simply encourage more development in costly-to-serve locations, because developers are allowed to pass off some of their costs to the general public.

A less visible impact of sprawl subsidies is the ongoing fiscal distress of many growing communities. Frank believes that charging average-cost pricing "systematically underfunds" public services. Actual marginal costs are often higher than assessed costs, creating an ever-widening fiscal deficit for local and state governments.

Recapturing the costs of sprawl

What can be done to fully account for the costs of development and eliminate inequities in the current system? With taxpayers already pushed to the limit, and many governments facing huge deficits, is there hope of changing course?

Communities increasingly are charging impact fees for schools, roads and sewers. These fees can be as high as $50,000 on a single-family home in some parts of country; in other places, impact fees are nonexistent. The average impact fee for a single-family home is $l0,000, but is growing at a rate of 20 percent per year.

Like bills for water and sewer services, most impact fees are assessed on an average-cost basis. The impact fees on new homes located 10 miles from a treatment plant tend to be the same as those levied on homes two miles away, even though the actual costs of providing services to the former may be much higher.

To address this equity issue, some jurisdictions, such as Tallahassee, FIorida, and DuPage County, Illinois, have begun to move toward geographically variable fees, a variation of marginal-cost pricing. Other jurisdictions in Florida and California are selling "pre-paid subscriptions" to landowners and developers who plan on hooking into public service systems within the next 20 years.

Many local governments now have the analytical capacity to create more sophisticated marginal pricing systems. Yet acceptance of marginal cost pricing by local governments has been slow. The problem? "Politicians don't like to charge some voters one rate and others a different one," notes Frank. In addition, average-cost pricing has been used because it's simpler and easier to defend in court, appearing to be faireven if it really isn't.

Nicholas believes that the shift toward marginal cost pricing can happen only if impact fees are already an accepted reality in a given jurisdiction and a good history of case law exists regarding their constitutionality and methodology. Frank suggests that one way to build support for a more equitable pricing system may be to build coalitions of people in low-cost locations who are willing to complain that sewer rates are far too high because high-cost locations are not being charged for full cost. The difficulty with building coalitions, however, is that a clear geographic break may not actually exist in terms of land ownership patterns.

Melding markets and law

The larger question, according to Nicholas, is whether full cost/marginal cost pricing would really influence development at all. He notes that a $7,500 surcharge is a minor portion of the cost of $200,000-$400,000 homes.

"If the issue is trying to affect development patterns, don't hook your cart to this horse [full-cost pricing]," warns Nicholas. "It is certainly a component of a solution. But would sprawl go away if development picked up all these costs? I think the answer is no."

Nicholas observes that "law sets the parameters of the marketplace. If we don't like the results of the marketplace, then we need to go back to those laws and either restructure them or somehow modify them to get the results we want." One strategy he recommends is tailoring planning incentives to reduce road impact fees if a developer agrees to promote vanpooling or mass transit, as is done in Montgomery County, Maryland. Similar incentives could be created to encourage compact development, affordable housing and other desirable outcomes.

Least-cost development

Another intriguing way to use market and regulatory strategies together to contain sprawlparticularly in an era of tight moneymay be the idea of "least-cost" development. The electric power industry is now using the least-cost principle as a way of investing in conservation instead of new plant capacity. Since conservation can free up supply by lowering demand, it can be an equally cost-effective way of generating "new" power.

In the Northwest, utilities are now permitted to include the cost of providing conservation tools (low-energy bulbs, insulation) to consumers in their rate bases, much as the cost of new power plants have been included. The result is a new source of funding for investments in energy-efficient infrastructure.

Can the same concept be applied to create more efficient, compact and conservation-minded development patterns? Henry Richmond, former executive director of 1000 Friends of Oregon, which has promoted innovative growth-management strategies in that state, thinks it might.

As the recent Rutgers study in New Jersey indicates, the cost of building in more compact development patterns is much lower than our current "business as usual" approach of allowing inefficient sprawl. Can we allocate those cost savings from fewer miles of roads and water and sewer lines to the rate bases of various public service providers (school, road and sewer districts) and use that money as a way to fund new investments in transit, housing and efficient development patterns?

"The idea of least-cost planning has been a tremendous positive step for the utility industry," Richmond says, "It only makes sense that we should now examine how the least-cost principle could also be applied to planning for land uses and new development."

The National Growth Management Leadership Project, a network of conservation and planning organizations around the nation, was started at 1000 Friends of Oregon. For more information, contact the project at 534 SW Third Ave., #716, Portland, OR 97204, (503/228-9462).

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The cost of building in more compact development patterns is much lower than our current "business as usual" approach of allowing inefficient sprawl. Can we allocate those cost savings from fewer miles of roads and water and sewer lines to the rate bases of various public service providers (school, road and sewer districts) and use that money as a way to fund new investments in transit, housing and efficient development patterns?