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Tag Archives: municipal finance

Do cities need more “big data?” NYC’s sewer story provides an answer.

NYC had a clogged sewer problem. To solve it, officials had to find the restaurants that were pouring grease down their drains. Because the city’s Office of Policy and Strategic Planning collects huge quantities of statistics ranging from the number of pedestrians on a certain street between 4 and 7 pm to the zip code with the most 311 calls (the “whine district”), they had a solution. Just identify the eating establishments that had reported compliance with the city’s grease carting mandate. Because non-complying firms were more likely to be pouring used cooking oil down their drains, the city could target the suspects. “Big data” let them replace the old method of catching a busboy dumping oil down the drain with a more effective technological detective. Less money could be spent on the sewage system and on regulatory compliance.

Our bottom line? Cities will certainly need the technological innovation that will make municipal finance more efficient. Advocated by Brookings researchers, governments at all levels need to implement technological collaboration and innovation.

Should we be concerned, though, that cities  like New York have considerable fiscal potential while others like Detroit are struggling? With more affluent municipalities investing in technological innovation, will we have a larger gap between have and have not municipalities? And finally, don’t we also have the opportunity cost of privacy?

Sources and Resources: Describing NYC’s Big Data, this NY Times article had some good stories and lots of detail. Much more scholarly, this Brookings Institute report complemented it as did this Business Insider article.

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BMW had to apologize for bad weather.  It all began when their advertising agency decided to buy naming rights to a high-pressure area. Like hurricanes are named alphabetically in the U.S., high- and low-pressure weather areas that approach Central Europe have human names. Here, though, rather than a meteorologist, you can decide what the weather will be called. You just have to buy a letter from a German weather institute.

It cost BMW $394 to get “C.”  Hoping to remind people of their Mini Cooper, they selected Cooper. However, instead of cool, crisp wintry weather, the “Cooper front” was disastrous. With hazardous conditions, extreme cold, and temperatures sinking way below zero, more than 100 people died. BMW even had to issue a statement explaining, “It was not intentional, and you cannot tell in advance what a weather system will do.”

Responsible for naming weather areas since 1954, the Berlin Institute for Meteorology created its “Adopt a Vortex” program in 2002 when it needed funding for a student weather observation program. You can look here to see the letters that are still available for 2012. High-pressure systems cost more than lows because they last longer.

Similarly, U.S. municipalities are using naming opportunities to fund their depleted coffers. In Philadelphia you can board the subway at an AT&T stop and in Brooklyn, NY, Nestle named the Juicy Juice Park.

The Economic Lesson

An economic lens takes us to the opportunity cost for a municipality when evaluating naming rights. The opportunity cost of a decision is the next best alternative. It is the alternative that is sacrificed.

On an opportunity cost chart, the alternative choices for a train stop could be “The Broad Street Stop” or the “Pizza Hut Stop.” The benefit of Broad Street is locational information. The benefit of the Pizza Hut name is municipal revenue. Which are you willing to sacrifice?

An Economic Question: As a municipal official, what naming rights might generate the most revenue?

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  • It is good to pay fire fighters and police officers generously.
  • It is good not to raise taxes.
  • It is good to give voters what they want and get re-elected.

As Michael Lewis describes in Vanity Fair, San Jose, California did everything that was “good.” As a result, libraries are closed several days each week, parks offer fewer services, a civic center cannot open and less money is available for education. Still though, soaring employee obligations are engulfing municipal finance.

Similarly, the state of California is spending 65% more on employee pay and benefits than 10 years ago. But its higher education outlays are 5% less, state pension funds are not getting the 8% return they expected, health plans are underfunded and tax revenue and federal funds have decreased. Meanwhile, University of California tuition has soared from $776 in 1980 to more than $13,000. ($776 in 1980 is equal to $2133.48 in 2011.)

Commenting on his financial plight, the mayor of San Jose said, “We’re not as bad as Greece, I don’t think.”

More econlife info here and here on California’s financial challenges.

The Economic Lesson

Called the tragedy of the commons, when a resource is shared by many rather than privately owned, it tends to be “misused” or “overused”. For a pasture, “misuse” is over grazing; in the ocean, fish populations are depleted; in the air, factories pollute. And, with municipal finance too much money is spent.

An Economic Question: After checking here, discuss whether your state has a finance problem. 

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The year is 1996. The place is Hamilton County, Ohio. You are standing in a voting booth deciding whether to approve a .5% sales tax increase to help build and maintain 2 new sports stadiums. Although the spending will exceed $500 million, you have been assured that property taxes will fall, school funding will rise, the Bengals will stay, and economic activity will soar. Convinced, you vote yes. Described by the WSJ, so, too, do a majority of Hamilton County’s voters.

That was only the first step. Completed in 2000, the Reds’ stadium cost taxpayers $314 million. 3 years later, for the Bengals’ home, $408 million. Totaling close to $1 billion, municipal bond issues have paid the bills.  But bonds mature. Bonds require interest payments. And that is the problem.

But not the only problem. This year, 16.4% of the Hamilton County municipal budget is paying for stadium obligations. New jobs and spending and even winning teams have not materialized. Public programs have been cut. According to this academic study, the one and perhaps only predictable benefit of new stadiums is psychosocial pleasure.

The Economic Lesson

The tragedy of the commons relates to stadium public finance. When a pool of public funds is created, initially, no one individually bears the cost–except perhaps the politician who might not be re-elected if he/she votes no. So, the pool is abused, overused, and later all of us pay.

We also could cite cost and benefit. Here, the psychosocial benefit is short- and long- term. However, the cost is long term, paid in the future.

Finally, fiscal policy is directly involved. Stadiums can be privately or publicly financed or paid for through a combination of the 2 approaches. You can see recent stadium financing decisions for the NFL in this graphic. In this research paper, you can see the history of stadium finance during the past century.

An Economic Question: Many economists say human beings are rational thinkers. Why do we continue to build sports stadiums?

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Hearing Beethoven’s Fur Elise, a Taiwan resident knows the garbage truck is near. As described by a Washington Post writer, entire neighborhoods assemble with their garbage as the truck approaches. Called pay-as-you-throw (PAYT), through unit-pricing, people are charged for their garbage removal.

A Freakonomics podcast explained that certain U.S. municipalities were less successful. Perceiving the payment as just another tax or costing too much time, residents of Sanford, Maine eliminated PAYT after 4 months. Elsewhere, to lower their garbage expense, people threw garbage in the woods or flushed it down the toilet (which created plumbing problems).

How then, whether looking at PAYT, buying local, or recycling, can green initiatives ensure their goals?

The Economic Lesson

When people support PAYT, the amount of garbage decreases by 17%. (A sociologist quoted this statistic in the Freakonomics podcast.) Facing a heretofore non-existing cost, people recycled, they mulched, they gave items away.

Others, opposing the approach, tried to circumvent it. They threw trash in the woods or tried to get the policy repealed.

This takes us to the heart of economics. Incentives shape our behavior. The obvious response to a greater cost for garbage removal is to throw out less. We can see though, that new incentives might instead create unintended consequences. We then need to ask whether the benefit still outweighs the cost.

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