Tomorrow, the City Council will be holding a study session with Public Works and the Finance Department to go over the Staff’s proposed Capital Improvement Program (CIP) for the 2024-2025 fiscal year. On the surface, all seems well. The Agenda Report proudly touts that the FY 2024-2025 proposed CIP budget “is approximately $47.9 million, across all funding sources, approximately $16.8 million more than the previous fiscal year.” Wowza, that’s a huge increase year-over-year. But let’s dig a bit deeper.

Did we actually increase CIP spending by almost 54%?!?!

Not exactly. Staff is proposing $20 million in bond financing to finance three big facilities projects, and that funding is driving more than the ~$16.8 million difference in CIP spend from last year. So year over year, our CIP spending absent these bond issuances will tick slightly down, rather than up. In fact, the difference is even greater given that last year’s CIP budget doesn’t account for the $4-6 million in budget surplus the City Council allocated last Fall, almost all to various capital projects.

That said, it looks like we are spending a LOT on active transportation. Are we?

The Agenda Report’s dominant narrative is that we are all-in on our active transportation program. Followers of this blog know that I am a huge fan of active transportation and I think our city is about 15-20 years behind where it should be on this front, so I welcome the budgetary focus on this area. But…

If you back out the bonds to be issued this year, our CIP budget for 2024-2025 is about $27.9 million. Of this amount, $10,990,100 is going towards transportation projects, most of which are active transportation projects (that’s almost 40%!). In addition to this, we are also spending $9,240,000 on streets projects, which involve repaving and other repairs (another ~33%). And we are spending another $915,000 on parkways and medians, which in effect is even more street spending. So all told, our streets are going to cost us $21,145,100, or almost 76% of our CIP budget after backing out the bond issuance.

That feels like a lot. But I think there is even more to unpack.

First, a lot of active transportation projects are actually stealth street rehabilitation projects. For example, last year’s W. 19th Street and Placentia Avenue active transportation improvements — the ones that saw green bollards and paint installed on both streets — you’ll see that a huge chunk of the spending was actually on pavement rehabilitation. Obviously rehabbing pavement in the middle of the car lanes is more of a car improvement than a bicycle or pedestrian improvement. And there aren’t any active transportation projects in the additional ~$9.2 million we’re spending on “streets” projects — those are all car infrastructure. So don’t let the active transportation narrative fool you: most of our CIP transportation/street spend is still on improvements for cars.

It should shock you, however, to see how amazingly expensive this car infrastructure is to maintain. Charles Marohn of Strong Towns has devoted his life to relentlessly pointing out how overbuilding car infrastructure is bankrupting cities. And once you see it, it’s hard to unsee it.

But our overall budget is going up, right? Or is it?

Second, as I’ve discussed here on this blog, the active transportation division of our Public Works department has been working overtime to grab all kinds of state and federal grants. So while about $10.1 million in spending on transportation sounds huge, most of that — $6,342,090 of it — is coming from outside grant funding, not the City’s general fund. Back out those funds, and we are spending closer to $21.6 million of our revenues on CIP projects.

Now what is troubling is that number is almost exactly what we budgeted for CIP projects in FY 2019-2020, if adjusted for subsequent inflation. Our total CIP budget in FY 2019-2020 was $15,597,366; and adjusted for inflation that would be equivalent to $21,498,416 in today’s dollars. In terms of capital improvement spending from our regular budget, we are standing still. At best, you can say that we’ve recovered since the pandemic. But we certainly haven’t improved.

And that’s odd, because it’s clear that our revenues are up. Adjusting for inflation, our overall revenues from all funding sources were about $172 million in FY 2019-2020 (in 2023 dollars), and our revenues last year were just over $180 million. So we’re definitely making more money. So why isn’t our internal CIP going up, too?

My guess is that, to the extent we are expanding our capital improvement program, we are doing so through “external” sources (bond financing and grants) rather than “internal” ones (from unleveraged city revenues). But why? And what are the consequences?

Why our internal CIP spend might be stalled: staffing

At the end of the day, there are only so many people who work in the Public Works department. The ongoing CIP list, which lists all the projects that are underway, has over 100 projects on it. We allocate all of the money we want, but if we don’t have staff to execute on those projects, it doesn’t really matter. Given that I’m sure Staff is well aware of this limitation it is not surprising they are not recommending a substantial increase to what I’m calling the “internal” CIP budget. And it’s not like the “externally” funded projects execute themselves.

Another reason our internal CIP spend might be stalled: no development, no development impact fees

Though revenue is definitely up, I think it’s likely we’re not bringing in as much revenue as we should. Take a look at the chart below to see the revenue going into our park development fees fund over the last several years. It is hard to generate park development fees when you aren’t building any projects eligible to pay park development fees. And that problem unfortunately goes for many other capital projects that are funded by development fees, including our transportation program. So once again, Measure Y just crushed our town’s funding strategy for capital projects, and we’ve still not fully reconciled ourselves to that fact. If we don’t have development fees, we aren’t going to have capital improvement projects unless we rethink the way we fund them. It’s pretty much that simple.

The unintended consequences of “external” CIP funding

The biggest issue with increasing our reliance on bonds and outside grant money is that they both impose pressure to spend the money as quickly as possible. No one wants to pay for capital we aren’t using and often grants “explode” if they aren’t quickly deployed. This pushes these kinds of projects up to the front of the queue, even if they don’t perfectly align with City Council goals or objectives.

This problem was neatly illustrated last year when the Public Works department admitted it didn’t have sufficient staff to fully execute on every project budgeted and had to create “tiers” of projects to prioritize them. Unsurprisingly Staff wanted to push several very large grant-funded projects to the top of the list. If we didn’t move on these projects soon, Staff reasoned, the outside grants funding them were at risk of expiring and we could lose the money all together. However, that of course meant that internally funded projects would get de-prioritized. This didn’t sit well with neighbors of Brentwood Park who had been trying to get a rehabilitation project for that park off the ground for decades. Armed with a platoon of cranky toddlers, the “Brentwood moms” successfully lobbied their way into the top “tier” of projects.

But not every neighborhood park has a small army of motivated moms ready to advocate for it. In fact, it seems obvious to me that the biggest losers in our CIP budget are the mundane but necessary projects that must compete with these bigger, sexier projects for staff’s attention and prioritization. These projects also aren’t eligible for flashy grants either because they are too small or they are not connected to some grand priority (I don’t see state or federal grants to help City Hall replace its carpets coming any time soon). And worse, by neglecting these projects for a long time, they’re now becoming nasty deferred maintenance problems. City Hall’s information technology, for example, is in pretty rough shape, and a full overhaul would cost a fortune. And our neighborhood parks have been neglected for decades. Our five-year CIP list for parks — really, our “wish list” of projects we want to check off in the medium term — totals over $56 million. That’s a lot of backlog.

And here’s another unintended consequence: it’s really hard to justify adding permanent spending in the form of full time employees when you are relying on one-time spending in the form of grants and bonds. Without ongoing revenue going towards these projects, why expand the department? Many, including yours truly, have occasionally encouraged the city to outsource the work as needed, as hiring consultants can give the city extra capacity without having to shoulder their long term expenses (or take the morale hit if we need to downsize). But even I have to admit this isn’t a great solution. Consultants aren’t invested in our community, and they are very expensive in the short term.

Are there solutions to this problem? Well, more money — or to put a finer point on it, more consistent and reliable increases in revenues year over year — would help. Our building program under Measure K might help with that. But in the short term, I don’t have a good solution. It’s a tricky and persistent problem. But awareness of the problem is probably the first step.

A word about Californian municipal finance, generally

There is a deep irony buried in here about the way California has approached municipal revenue, and how this city has done so specifically. Because cities are limited in what they can raise in taxes by Prop 13 and other restrictions, they are more reliant on churning fees (mostly from development) and state funding sources than cities in states without these restrictions. But since state funding is fickle, only steady development — which both grows the tax base and churns fees — can justify the permanent expansion of municipal services. And when you turn that tap off, as we did with Measure Y, cities end up in at an impasse: even though cost of living/demand for services will continue to increase, they can’t really justify expanding the city workforce or municipal capacity, and they also can’t fund necessary but mundane city priorities with external grants. And it makes cities even more reliant on outside, private consultants to fill public gaps on a temporary basis, even as routine city business suffers as existing staff is stretched thin.

I’m guessing that’s not what the proponents of Measure Y had in mind.