We hear this maxim quite a bit: “we need to run cities like they're a business." But what do we mean when we say it? Does this mean anything significant to the way cities actually operate? I typically hear this from citizens frustrated with how cities manage their budgets, specifically paying for services and infrastructure maintenance. They say, “If we could run this city more like a business we wouldn’t have all these wasted resources.” Cities generate revenue and allocate that revenue to cover costs. In this sense cities already operate like a business. So, what do we mean when we say, “we need to run a city more like a business?” First though, we need to have a common understanding of what a city is. People make a city. Business talk often boils down to money, but money (like our emotions) is often a lagging indicator of a passing reality. Money is a tool for analysis and planning, like population; it is not and never should be the goal. When people congregate for mutual benefit, cities emerge. If we can agree that form generally follows function, then good city form should mean the best physical setting for all kinds of people to congregate for common benefit. If people build an environment that creates an inescapable benefit for everyone, then it will attract more and more people. As long as those people maintain good form then the return on their investment should grow exponentially as the population grows.
Businesses generate revenue to cover costs and generate profits. However, most private businesses bear some burden of managing that money well, primarily staying in business. If a business mismanages its assets, theoretically, it goes out of business. The "market" acts as the arbiter of good and bad business. That's not always accurate, but I think it’s what people are getting at when they use the phrase "run a city like a business.” They want some kind of accountability for cities and how they manage assets, especially property tax revenue.
It's an American pastime to hate taxes, they inspire us to throw things into the harbor. But, if cities operate like a business, then we need to reach some level of comfort with public entities generating revenue, and hopefully making a profit. Yes, you want your city to operate at a profit. A good business charges enough for its services or products to cover all of its maintenance and operation expenses (M&O), and build revenue to pay for capital expenses. If a business only ever breaks even, then it will need to take on debt to pay for capital expenses.
Cities have a wide range of revenue generating options, including taxing authority (property, sales, hotel & motel), service fees, and special revenue districts. They also have a wide range of costs to cover: police, fire, streets, libraries, economic development, parks, water, wastewater, stormwater, solid waste, and administration. Good businesses understand the relationship between their revenue generating power and covering their costs. Citizens, elected officials, and city staff often struggle to grasp that relationship.
In my experience I've seen cities develop land use plans that can accommodate 250,000 people, yet they're only projecting their population to increase by 50,000 people. That leaves a wide range of possible development patterns to accommodate those 50,000 people. Some of those patterns would economically boost that city, while others would cripple it. Property taxes generate revenue based primarily on improvement value, but most cities have no idea which development patterns generate more revenue than they generate in costs. Anecdotally, cities have some awareness evident in their love for commercial development, which generally has a higher improvement value than residential and generates retail sales tax, a win-win. However, I've seen cities with 20% to 40% of their land designated for commercial development, but they have no idea how much commercial development their population can realistically support or what kind of commercial development produces the most bang for the buck.
Alarmingly, many taxing jurisdictions execute capital improvement programs (CIP)—citizen approval to take on debt for capital improvements—where they report an enormous need for infrastructure improvement yet propose or project funding to cover only a small portion of the need. For instance, TxDOTs 2030 Texas Transportation Needs Summary, published in 2009 reports a total need of $315 Billion, while also reporting that the current funding trend only provides $70 Billion. Many cities today find themselves in a similar situation, taking on debt through CIPs to pay for M&O issues such as repaving an existing road.
That's bad business. Borrowing money to pay monthly expenses should set off alarms for any responsible manager. However, cities and states have been funding M&O with debt for a while now. Cities in the U.S. have started going bankrupt. They either do not generate enough revenue, have mismanaged that revenue, or some combination of both. It's a bad-business problem, but fixable with good-business solutions.
We cannot fix flaws in the human heart, such as fear, pride, and avarice, which might scuttle any good city. However, we can do much better work identifying good city form. Good business and good city form should walk hand in hand. They both grow from the same root: people working together for common benefit. “Good business” is a powerful but underutilized lens through which to view, analyze, plan, and build good cities. In coming articles we will discuss in more detail how cities operate like a business, what current business problems cities face, and how to translate good business practices to city operations.