Click for next page ( 45


The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement



Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.

OCR for page 44
44 URBAN CHANGE AND POVERTY initiatives by diversifying their revenue sources and aggressively pro- moting economic development projects. At the same time, they have continued to incorporate new groups into local politics. Although these moves toward greater self-sufficiency by local governments are positive, some potential problems remain. Some older city services, such as primary and secondary education, are vitally linked to a city's capacity for economic growth. Fear of crime is still a major factor in locational decisions of new businesses. These older problems are not necessarily going to be solved by successful economic development. In fact, high crime rates, a poorly educated work force, and other social problems may inhibit economic devel- opment. In addition, the bargaining between public officials and the private sector that is required in public-private ventures creates more opportunities for corruption. Not all cities are equally endowed with entrepreneurial opportu- nities. Long-term structural economic shifts work to the advantage of cities in the South and West over those in the Midwest and North- east, regardless of entrepreneurial strategies or efforts. At the same time, there is little evidence that the efforts of cities to attract de- velopment projects have any real effect in the locational decisions of firms. And even if they did, the result of such efforts may be just to deny jobs to other places rather than to create new ones (see the discussions in Judd and Ready, 1986:21~218; and Leonard, 1986:Ch. 5~. Finally, local economic growth does not necessarily reduce pover- ty. Most economic development projects that are encouraged by city officials are aimed at increasing downtown business activities. These activities tend to involve white-colIar service and information-pro- cessing jobs and not entry-level jobs for low-skilled poor residents of central cities. Urban Infrastructure Public infrastructure has been suffering for many years from problems of deterioration, technological obsolescence, and insuffi- cient capacity to serve future growth, although the nature and ex- tent of these problems vary widely among types of infrastructure and across states and localities (Congressional Budget Office, 1983; G. Peterson et al., 1984~. Only a few years ago a series of studies docu- mented declining public investment in infrastructure; those studies,

OCR for page 44
COM:MITTEE REPORT 45 together with some highly publicized infrastructure failures such as the collapsed Mianus River Bridge on the Connecticut Turnpike that killed three motorists, and the broken water main in New York's garment district that interrupted power to businesses there for a week~reated the impression that there is an infrastructure "crisis" of enormous proportions. Estimates of the costs of bringing the na- tion's infrastructure up to date have ranged an high as $3 trillion. The 1982 national urban policy report, also noting the downward trend in read state and local infrastructure spending, expressed con- cern about "signs of erosion in the condition and performance of the urban capital plant . . . especially in the oldest urban areas" (U.S. Department of Housing and Urban Development, 1982:3-11~. The sense of crisis, however, disappeared as it became obvi- ous that the nation's infrastructure wan not in a state of imminent collapse although it is deteriorating. The 1984 national urban pol- icy report reviewed recent studies that indicated that the infra- structure problem was manageable (U.S. Department of Housing and Urban Development, 1984:68-69~. These studies included a sur- vey of mayors and city managers by the National League of Cities and United States Conference of Mayors (1983) and a report of the Advisory Commission on Intergovernmental Relations (1984~. Concern about the condition of public infrastructure has con- tinued among affected groups, and in 1984 Congress established the National Council on Public Works Improvement to study the prob- lem. The council is issuing a series of three reports by 1988 on the state of the nation's infrastructure; the first report has already been published (National Council on Public Works Improvement, 1986~. The Public Sector Advisory Council for Financing Public Infrastruc- ture also has been set up by private sector groups to report to the Senate Finance Committee. Urban infrastructure is important for economic development, and it is not being replaced at a fast enough rate to prevent its continued deterioration. Mudge and Rubin (in this volume:308) point out that infrastructure projects are not ends in themselves: Rather, their importance to the economy and to society as a whole derives from the services they offer: the opportunity to improve productivity or reduce costs. Although most easily thought of in a physical form a bridge, a wastewater treatment plant, a subway train the real output of infrastructure is service: the movement of people and goods; the provision of adequate clean water.

OCR for page 44
46 URBAN CHANGE AND POVERTY Infrastructure projects also promote additional economic develop- ment through a multiplier effect. If infrastructure is not adequatebecause it is deteriorated, oh solete, or too small it imposes costs on users, and it may ultimately constrain the economic development of the locality, the region, or even the nation. Although there is agreement that infrastructure is a critical factor in economic development, the relationship is com- plex, and empirical studies have had mixed findings (McGuire, 1986~. New construction, which Is needed in fast-growing areas, may be too small, too distant, or lacking altogether and thus hurt the competi- tiveness of the area. Existing capital stock, especially in older areas, may become obsolete and reduce economic activity. Maintenance of existing capital stock may be inadequate or deferred in times of fiscal stress practices that increase lifetime costs, impose costs on private users, and even threaten safety (Advisory Commission on Intergovernmental Relations, 1984:8-9~. The committee considered several aspects of the urban infra- structure issue, which are detailed in the sections that follow. It clid not examine other important local infrastructure questions, such as the possible overcapitalization of projects induced by federal sum sidles, creating higher than necessary operating costs for localities; the cost-effectiveness of some types of projects (such as rail transit) that are federally financed; or the effects of infrastructure policies on urban growth patterns. NATIONAL EXPENDITURE TRENDS Although federal, state, and local capital outlays nearly quadru- pled from 1960 to 1984 to $40 billion a year (in 1984 dollars), this investment was actually a decline when measured on a per capita ba- sis or as a fraction of GNP (Mudge and Rubin, in this volume:Figures 1 and 2~. Capital spending declined from 2.3 percent of GNP in 1960 to 1.1 percent in 1984. Capital investment on a per capita basis peaked in 1967 at $260 (in 1984 dollars) and declined to $160 in 1982 before rising slowly to $170 in 1984. The picture looks very different when spending for infrastructure maintenance and operations is added to capital investment. Main- tenance and operations spending has increased steadily from $800 million in 1960 to $55 billion in 1984 (in 1984 doliars3, surpassing capital spending after 1977 (Apogee Research, 19863. In fact, oper- ating outlays have outgrown population growth and remained fairly

OCR for page 44
COMMITTEE REPORT 47 steady as a percentage of GNP at about 1.4 percent. Infrastructure operations are relatively labor intensive, and public sector wages have historically increased faster than the consumer price index. To- tal infrastructure spending capital and operating has been about $400 per capita (in 1984 dollars) since the mid-1960s (Mudge and Rubin, in this volume:Figures 1 and 2~. While overall infrastructure expenditures were rising steadily, the composition of the projects involved has changed dramatically over time, primarily due to demographic trends and federal priorities (Mudge and Rubin, in this volume:Table 3~. In the 1960s highway spending was predominant, accounting for 60 percent of all spend- ing. In the 1970s highway spending began to fall and wastewater treatment and water supply projects began to increase. By 1980 the interstate highway system was 97 percent complete, and high- way spending had dropped to 45 percent of all spending; spending on wastewater treatment and water supply continued to grow, and mass transit spending doubled. The three programs accounted for 41 percent of all government infrastructure spending. An analysis by the Advisory Commission on Intergovernmental Relations (1984:Table 1) of the growth rates of state and local capital outlays (including federal aid but not maintenance and operations) shows that new investment in school buildings was highest in the early 1950s; highway spending also grew quickly in the 1950s and continued in the 1960s. Although spending for these functions fell greatly after 1970, spending for conservation and development projects and water supply expanded rapidly in the early 1960s and again in the late 1970s. Sewer investment expanded in the early 1970s in response to federal clean water mandates and federal grants for wastewater treatment. The federal ant] state contributions to infrastructure spending have been about $22 billion per year since 1960 (in 1984 dollars). It is the increase in local spending, from about $25 billion in 1960 to $48 billion in 1984, that has been responsible for overall growth (Apogee Research, 1986~. Federal spending on public works increased from 27 percent of the total in 1970 to 32 percent in 1980 but then declined to 27 percent again in 1984. State spending fell from 32 percent of total public infrastructure spending in 1970 to 24 percent in 1980 and 23 percent in 1984, reflecting large cutbacks in highway spending. Local spending increased from 41 percent of the total in 1970 to 44 percent in 1980 and 50 percent in 1984 (Mudge and Rubin, in this volume: Table 4~.

OCR for page 44
48 URBAN CHANGE AND POVERTY The 30 large cities studied by Dearborn (in this volume) were not spending as much on capital improvements in 1984 as in previ- ous years. Capital expenditures as a percentage of total operating expenditures fell from 11.6 percent in 1981 to 7.6 percent in 1984. This decline probably resulted from cuts in federal capital grants (state capital grants were steady during this period) and reductions in bond sales as a result of high interest rates. Capital-fund revenues, which consist mostly of federal and state capital grants, fell from 7.6 percent of operating revenues in 1981 to 3.9 percent in 1984. Debt service costs as a percentage of operating expenditures went from 7.8 percent in 1981 to 8.8 percent in 1984 (Dearborn, in this volume). INFRASTRUCTURE CONDITION There is evidence that many infrastructure facilities are aging and have reached or surpassed the end of their design life. Some are deteriorating for lack of maintenance (Congressional Budget Office, 1983:~8, 21-22, 39, 55-56; see also Advisory Commission on In- tergovernmental Relations, 1984:12-15~. In a 1980 Urban Institute study of 62 cities, 32 of which were large (populations of more than 250,000), G. Peterson et al. (1984:3) summarized their findings as follows: 1. Federal condition ratings for urban roads and highways over the 1970s have a declining trend . . . few cities replaced or resurfaced their street networks at a sufficient rate to avoid deterioration. 2.... federal condition ratings show two divergent patterns: (a) a concentration of structurally deficient bridges in the Northeast and North Central regions and in fiscally stressed, large, and declining cities and (b) a concentration of functionally obsolescent bridges in the South and North Central regions and in growing cities. 3.... a downward trend in the number of miles traveled by vehicles between breakdowns, despite the fact that on average bus fleets are younger because of the replacement of older vehicles. 4. Overall measures of condition for water and sewer systems have not been developed, but specific indicators of condition and main- tenance practices suggest that the cities most vulnerable to problems are doing the least to correct them. The Urban Institute data revealed some regional patterns (G. Peterson et al., 1984:3~. For example: Cities in the Northeast have higher rates of unaccounted-for water, have a greater number of deficient bridges, and appear to have deferred the largest amount of street maintenance. Cities in the South and West have capital needs more associated with growth, such as narrow

OCR for page 44
COMMITTEE REPORT bridges and roads that are inadequate to meet increased traffic levels and water and sewer systems that need expansion. 49 Certain kinds of infrastructure problems, such as water and sewer system breaks, were more prevalent in younger, growing cities in the South and West. In fact, Peterson and colleagues found that city or system age was not a good indicator of system condition, especially of transit systems and water and sewer pipelines. Other factors, including local maintenance practices, were more important. By the 1970s the major postwar investment for an expanding population schoob, streets, water and sewer services, and the in- terstate highway system was nearly complete except in fast-growing areas of the South and West. Wastewater treatment facilities and mass transit systems were largely completed in the 1970s. These projects have a long life, which helps to explain the trends in financ- ing toward declining capital investment and increased spending on operations and maintenance. Also in keeping with the maturation of the public infrastructure system, the overall depreciated value of pub kc infrastructure, which increased steadily in the 1950s and 1960s, has remained stable since the late 1970s. In fact, it has declined slightly since its peak in 1979 (by 0.8 percent for 1979-1982), consis- tent with a situation in which depreciation is outpacing investment (Advisory Commission on Intergovernmental Relations, 1984:Graph 3~. Data on the average age of state and local capital stock also indicate that new construction ~ not offsetting the aging of existing facilities. The average age of capital stock, which dropped from more than 21 years to under 19 years during 195~1970, has increased steadily since 1970 to nearly 22 years in 1985 (Mud ge and Rubin, in this volume:Figure 10~. TAX-EXEMPT BOND MARKETS Trends in the bond market have affected infrastructure financ- ing (Advisory Commission on Intergovernmental Relations, 1984:~ 7; Petersen and Hough, 1983:13-17; Government Finance Research Center, 1983:Ch. 3~. Traditionally, state and local governments have financed more than half of their capital investments by issuing long- term bonds (which mature in 20 or 30 years). Tax-exempt interest rates have been cyclical, with high points occurring in 1974-1975 and 1980-1982; in 1970 they averaged 6.2 percent, and in January

OCR for page 44
50 URBAN CHANGE AND POVERTY 1982 they reached more than 13 percent. As a result, long-term bor- rowing by state and local governments almost dried up in 1980 and 1981 when long-term borrowing accounted only for 18 percent and 24 percent, respectively, of total capital investment (G. Peterson, 1984:Table 3-3~. More recently, long-term debt has accounted for about 40 percent of total state and local public works expenditures (National Council on Public Works Improvement, 1986:65~. This reduced reliance of state and local governments on long- term bonds was reinforced by several other trends. The difference between taxable and tax-exempt rates has narrowed, making it less advantageous and more costly for state and local governments to use tax-exempt bonds. The increase in interest rates on tax-exempt bonds from 6 percent to 13 percent between 1978 and 1982 was an increase from 66 percent to 81 percent of the rates for taxable bonds. Although the increase in tax-exempt rates allows lower-income tax- payers to take advantage of tax-exempt bonds, the wastefulness of the federal tax subsidy has increased accordingly (Leonard, 1986:1593. There has also been increased competition in the municipal bond market from nontraditional borrowers; by 1981 between 25 and 50 percent (depending on the definition used) of all long-term bonds were for private purposes for example, industrial and commercial development, hospitals, housing mortgages, and student loans (Pe- tersen and Hough, 1983:17~. The situation has also led to the use of a wide variety of so-called "creative financing techniques that may or may not be sound practices. It is too early to determine the effects of recent tax law changes that tighten requirements for private-use tax-exempt bonds and lower tax rates. It will probably be harder to finance private-purpose projects, but some of them may be financed by general obligation bonds. If this happens, such projects may be cheaper initially, but the increased demand for financing may push interest rates up in the longer run. Also, because general obligation bonds are backed by state or local tax revenues, taxpayers will be assuming greater risks. SUMMARY Contrary to fears at the beginning of the decade, the urban in- frastructure is not collapsing, but it is wearing out. The problems vary by system and by region and locality. They are particularly severe in older, fiscally stressed cities in the Northeast and Midwest