Inclusionary Zoning-A Lesson for the Left

About a year ago the city of Madison enacted an Inclusionary Zoning (IZ) ordinance. This is not about IZ, which as part of a balanced housing program can be an effective resource to provide economic integration and raise the quality of public education.

This is about how a combination of decisions can lead to a series of events culminating in the economic decline of a city.  All it takes is a few bad decisions, a lack of credibility and public officials who do not understand the externalities of their decisions. This is about unintended, but foreseen consequences.

The American city has been under relentless pressure to maintain its economic and environmental viability since World War II.  The automobile which allowed the suburbs to flourish even more than the commuter train, the GI Bill which allowed a generation gain the economic wherewithal to move to the suburbs, and state and federal legislation redistributing resources away from cities, all contributed to this problem.

Sometime during the past fifty years every American city has faced the pressure.  Simply put, it is an endless battle to maintain investments, both residential and commercial in the urban core. Historically, cities have always had to shelter, feed, and treat the poorest of Americans.  In the post WW II era, social demands were answered, as cities, sometimes with state assistance, provided for these needs.

As the cost of providing for the neediest Americans increased, investors, in a free market economy, discovered the advantages of the suburbs.  Wealth fled the cities.  This left a smaller and smaller base, mostly middle class, as a tax base to cover mounting costs.

On a national basis, it was recognized that housing was an issue that the federal government needed to address. Beginning with major efforts by he Truman Administration, it was acknowledged that cities could not provide adequate housing to the more mobile, poor, Americans.

Some cities maintained their viability but at considerable expense.  Manhattan has its residential neighborhoods, but it is more a city of the very rich and the poor.  There are few middle class families with children.  Milwaukee, despite the best efforts of Henry Maier, saw considerable middle class flight, leaving it the most segregated city in America. 

The flight to the suburbs was not white flight, it was middle class flight.  It was just that most of the folks who could flee were white.  Those middle class black families that could afford suburban life joined the migration in the 1970's.

With the jobs and the middle class, many cities made valiant efforts to revitalize their core, sometimes with success but always at a price.  The cost to the tax basis for renewal was considerable and it was accompanied by gentrification, sometimes unavoidable.

Madison, Wisconsin faced these problems during the same time period.  Every city administration from the 1960's through 1996, regardless of political view, fought to maintain the economic base and to ensure the growth of the city so that it would not be physically contained.

Through a number of strategies which included strong annexation policies, the imaginative use of Community Development Block Grant (CDBG) funds, the formation of community development corporations, the use of TIF funds, and the creation of numerous revolving housing loan programs, Madison continued to participate in the economic growth that made Dane County the fastest growing county in Wisconsin over the past twenty-five years. 

The city growth could not match the county growth but at least the city got its fair share.   The success of this work in its formative years is recognized in David Rusk's Cities Without Suburbs:

There are success stories to be learned, for example, from Madison, Wisconsin,...

As we close out 2005, for the first time in the sixty years since the end of WW II, Madison's future is bleak. I say that despite the record construction boom in what is sometimes referred to as 'crane city.' Keep in mind that development is staged over decades, not years. Madison will be fine for anther few years, but by 2010, serious problems will overwhelm the city's economic capacity.

From 1997-2003, the city entered a period of benign neglect.  For the first time the city failed to annex aggressively, it retreated on several land use plans with neighboring communities, and even went so far as to establish a 'foreign aid policy.' The city actually funded economic development programs outside its boundaries.

In 2003 something else happened and it was not just the formulation of a flawed IZ plan.

As every civics student knows, there are four major levels of government in the nation- the federal, the state, and the city and the county. 

There is no fast and hard truth as to which level is best to tax, spend and deliver specific services, but certain standards have evolved. State highways are maintained by the state government, even when they run through cities. Counties administer social services. Cities provide basic police and fire protection. 

In every instance two questions must be asked: is this the correct level of government to provide the service? Which level of government should pay for the service?  The answer is not always the same.

Cities are in an unusual position.  They can often enact laws, the value of which are indisputable on the surface, but because of a mobile society and because cities cannot control what is beyond their borders, the decisions may have horrible unintended consequences.

It is about the externalities.

Starting in 2003 the city of Madison enacted three new laws, all admirable, all with lofty social goals, and all reflecting the values of its residents:

• The already stiff smoking ban ordinance was expanded to cover all public places including taverns.
• The city enacted a city minimum wage ordinance.
• The city enacted an IZ ordinance.

While not enacted, there is also in development at one stage or another, city sick leave and health insurance proposals.

There are specifics that are problematic with the IZ ordinance, but as a group these ordinances resulted in a sharp blow to the business community. While I am not fond of anecdotes to support an argument, I find the following occurring:

• Retailers, particularly restaurants are developing in commercial areas outside of Madison in record numbers.
• Commercial tenants, who are not tied down geographically, are moving out of the city as their leases expire, costing the city jobs, contributing to sprawl, and lowering the value of property within the city.
• Real estate developers have shifted their land banking resources out of the city.
• Developers who originally acquired land to develop with the intention of annexing to Madison, are now looking at other alternatives.
• The only major developments that continue in Madison are 'prisoners.'  These are developments where the land was already acquired or where the owner had no alternative as to where to develop.  Some highlights:
  • Hospital additions that could be built nowhere else.
  • All of the IZ participants were already committed financially to the site.
  • Developers with future plans that have no choice-for example, the owners of University Plaza own that property; it is half vacant and they have no choice but to proceed with their plans.

The consequences of all this will not be seen for a few more years but the impact will be devastating:

• The proportion of new housing construction in Madison as a part of Dane County housing permits will drop at an accelerated rate.
• With reduced housing opportunities, housing cost will rise as shortages worsen, but taxes will go up.
• The proportion of children in the public school system from low income families will grow at an even higher rate, resulting in lower academic results for all students.
• Middle class families with school age children will abandon the Madison Metropolitan School District by either moving or putting their children in private schools.
• The net result is a city with more poor and wealthy families.
• The value of real estate in Madison will either decline or languish; in either case it means the mill rate for all owners will go up.  A greater cost for government services will be shared by a shrinking tax base.

All of this is a result of a series of decisions that isolate Madison economically. I know there are already two responses to this analysis.  Both are excuses and while they may make the proponent of the excuse feel absolved of responsibility, it does not change the reality. 

Excuse number one: The developers are doing this.  Maybe they are, but there is no law that requires them to invest their money in Madison. 

Excuse number two: The business people are doing this:  the realtors won't sell the IZ units, the restaurants won't market a smoke free environment, and the business owners haven't tried to live under our sick leave/health care proposals.  True, but let me paraphrase what more than one business owner in Madison says:

I rent my office space. My ten year lease expires soon. I am going to Middleton. I pay health insurance, my workers get sick leave, we were a smoke free environment before the city enacted any ordinance.  I just don't trust them, I cannot live with the fear of what they might do next.  It is one thing for the state to do it, then we all play by the same rules.

I don't quarrel with the notion that the city can enact its own laws.  I am proud of some of the most pioneering legislation that any city ever enacted. But every time something like this is done, the benefit gained must be weighed against a judgment as to the most appropriate level of government to carry out the act.

I have not touched on the details of Madison's IZ ordinance.  We need only remember:

• that every unit built was for a development under way before the ordinance was enacted.
• that none of the 13 completed units have been sold.
• that developers who have a choice have stopped planning housing in Madison.
• that the cost of the units come from city taxpayers - Madison is solving a national problem with local resources (TIF is not 'free' money).

The irony is that cities like Madison, under assault from some of the most reactionary forces in this country, have survived and prospered. Cities like Madison, whose residents pay far more in property in taxes to the state and county than they will ever get back in services, remain viable because of sound progressive public planning, investment in infrastructure and enormous resources of human capital.

Now progressives, absent a fundamental understanding of the role of different levels of government, and unintended consequences they never contemplated, are destroying what they love.

Comments

[Tim Morrissey]

Paul, this post is absolutely brilliant. It should be required reading for every city council member, every city official, and anyone who cares about the city and its future. You have a phenomemal vision....and your skill at analyzing things like IZ to put it into a meaningful perspective is uncanny.

Best for '06.

/tjm

[Pete Lansing]

Wow, Paul, I guess I better get the heck out of here before, as you said, this happens:

"housing cost will rise as shortages worsen" while somehow "the value of real estate in Madison will either decline or languish."

I found it interesting that, in your account, everything started to go to hell right around the time a certain mayor left office. Hmm. Curious. Is this that certain mayor who needs to bash and distance himself from his liberal town to achieve higher office?...

All in all, I'd say: weak. Especially since the only two things you teamed with IZ to achieve this disasterous effect are 1) a smoking ban that is more and more the worldwide standard and 2) a minimum wage law that was quickly preempted by the state and came to no effect here.

[Paul]

If you look at cities like Milwaukee in the period from 1970-1990 you will see several things happening at once, depending upon the neighborhood.

Overall Milwaukee property values declined significantly relative to the rest of the state. There were areas of Milwaukee, comparable to the city of Madison where homes cost $20,000-30,000 in the 1960's. By 1990 those properties in Madison were in the $100,000 range, in Milwaukee they were in the $15,000-30,000 range.

Commercial property in Milwaukee was not as bad off but it was similar as companies fled to the suburbs.

Meantime, there were areas of Milwaukee, mostly white and upper-income that appreciated because of the shortage of good housing.

In 1970 the total value of all property in Milwaukee was more than three times the value of all property in Madison. By the mid-1990's the total value of all property in Milwaukee was less than twice the value of all property in Madison (And none of this includes the state owned property in Madison).

Pete, I am sorry you miss the point. It is not just the specifics of IZ, or smoking bans, or minimum wages ordinances. It is the cumulative effect of isolating Madison economically from the rest of Dane County. Repeal is not the issue.

Rather than getting personal with me, why not address the issue: the long term effect of this is to create disinvestment in Madison. This does not happen overnight. It will take awhile, but unless there is some change, it will happen-fewer people paying bigger bills for less service.

[Pete Lansing]

I don't know, Paul. Maybe I am missing your point. Because I don't see how an affordable housing law that guides residential development has a lot of bearing on whether major employers want their plants and offices here. If anything, if the law were effective, it seems as if it would be a draw for "investment."

And I don't see how Madison's left is going to effect the same change on their city that the decline in U.S. manufacturing had in Milwaukee. Are they really that powerful? To me, it seems like the city's leadership is more moderate than it's been in quite a long time.

From my point of view, the real lesson in IZ is for the city to toughen up and keep its end of the bargain. That is: give developers who are trying to comply with the law some real incentives in terms of density and height allowances. That's where the city seems to be failing -- they aren't willing to build affordable housing if it draws any objections from neighborhood associations.

By the way, to get personal again on you Paul, I really like your blog. This last post just seemed off and nasty. And it continued your habit of sounding like someone who just got his hands on an Econ 101 textbook, with all your talk of understanding what an "externality" is. What's next? "The left just doesn't understand the concept of a Sunk Cost!"

[Ben Brothers]

Is Madison in fact economically isolated from the rest of Dane County? I'd like to see some statistics to support the claim. The surrounding towns and cities don't seem to be engaging in a race to the bottom, at least in terms of tax rates. Maybe things are negotiated differently with large companies and developers on an individual level, in order to attract them to small towns, but the situation seems better in Dane County than almost anywhere else.

The 2004 property tax rates for Dane County show Madison to be firmly in the middle of the pack ($22.25), and substanially lower than near neighbors like Fitchburg ($30.12) and Verona ($23.73). [*]

It also seems to me that a business which already has a smoke-free building, and provides sick-leave and health care to its employees, will gain a competitive advantage over its competition when and if those competitors are forced to offer those benefits as well. I don't see them complaining per your paraphrased anecdote. The case is different with respect to local non-Madison competition, and certainly rules and regulations need to be made prudently and with some forethought, but the particular danger from such laws as the smoking ban is overstated.

I think your Doomsday scenario, while obviously something for local government to be aware of and look out for, is not justified by the facts on the ground today.

[*] - http://www.madison.com/features/bob/pdf/bob031.pdf

[Madison voter]

THIS is why I didn't vote for you in 2003, and will never, ever vote for you again. You are every young progressive's worst nightmare: That we'll grow up into an old, cranky Republican with a bad moustache and worse logic.

[anonymous]

You may be wrong on this one, but don't let them give you shit about that fantastic cookie duster!!!!!(!!!!)

[Stu Levitan]

Paul
Are you available to discuss this on citychannel 12's Access:City Hall on January 25 at 7-8pm? You and Brenda would make a fine hour of public affairs broadcasting. Lemme know. Stu

[Rudy McCormick]

I just don't understand how so many people can miss the entire point of your article. Great insight.

It would seem to me that business, large business, are using the system to get what they want, and the city government doesn't have the ability to say "NO".

If the business that grows a city ( through the creation of the middle class within) does not have the desire, ability, and INTENT of helping the community grow properly. They should leave our area and go screw up someone else's town.

[Scott Norton]

Paul, I could not argree with you more, however Madison has a long way to go before doomsday arrives, but they have set into motion a set of circumstances where the laws of unintended consequences could create a bad situation in the future. Paul, I now live in Fitchburg and I am on City Council. I see Fitchburg making some of the same poor decisions on planning and policy making that Madison has made. I plan to come to hear you speak in Fitchburg, but I wonder if you would have time to get together with me and give me some of your thoughts on the challenges Fitchburg is facing?

[Carl Wogsland]

Paul,
Many good points even though I don't see the so called 'Doomsday senario' taking place. My view comes from someone who is in the lower economic strata and has looked at the ordinance from a possible property purchasers side. The rules, restrictions and limits on equity return make this law helpful to only the most financially challenged buyers who would have no hope of ever qualifying to purchase anything new or in good condition. I cannot justify investing my money for the gain of the city, when I would still have substantial restrictions to deal with in trying to live and improve that property. The 'equity timetable' may be the most frightening part of the ordinance. I am in disbelief that a single alder voted for a rule that has the city telling someone when they should move from the IZ property or else the equity the receive back from that property will be reduced? How can any potential homeowner know the situation that they will be in five, ten or more years in the future? What if that homeowner decides to try to sell at the 11 equity return peak, but they happen to be in a neighborhood that is undergoing construction due to city projects? Since I live in the Union Corners neighborhood now I know that the next several years will be difficult to deal with the variety of construction and traffic problems here.
One facet of the IZ issue I do not know about is what about developers who wish to undertake projects of modest sized and priced housing which would entirely be within the purchasing ability of those who qualify to be an IZ property purchaser. Will 15% of those units still only be available to sold through the IZ program? Will the developers then have to overprice the remaining 85% of the units to ensure their return, or build a false interest in the units that listed as being in the IZ program?
The city council would do better to spend their time making sure the condition of current homes, buildings and neighborhoods as a whole are kept well maintained. Instead, we have projects going that leave a neighborhood like my Union Corners area without a grocery store for 3 years at this point, it will be 7 to 8 years by the time the McGrath project is finished and businesses, like a planned grocery store, are reintroduced to the area. Those of us living in that area without vehicles can only hope that a company will be willing to pay the price the developers will require to get back their investment in the project costs. Not to mention getting something in place a little quicker than the several additional years that the west side waited for some cmpany to commit to serve their neighborhood at the former Ken Kopps site. Now the same Union Corners neighborhhod that will have almost 15 acres of buildings razed will be undergoing a major street renovation at the same time with the E Wash project in the summer of '07.
For all the problems that my neighborhood may endure in the near future, I am hopeful about the final results of the Union Corners project. I will be interested to see how the additional hoops that the McGrath staff will be required to jump through will effect their offerings among the estimated 500 units being put up in this project. I have also looked into the Capital-West project and found nothing in the IZ units that I could live with (if I did decide to use my IZ income qualifying status) and nothing that I could come close to affording that is not an IZ unit.

BTW Paul, congrats to your Sox!
Hurry Spring, this could be the Cubs year!
Stop laughing...