Transit Value Capture: Institutional Pitfalls and Potential Reforms

One thing that Congress, the new administration and urban leaders agree on (at least abstractly) is a desire to invest in American infrastructure. For President Trump securing infrastructure funding is as easy as “leveraging new revenues and work with financing authorities, public-private partnerships, and other prudent funding opportunities”. Value Capture – or the use of geographically constrained taxation districts that leverage value created from public investments to fund those investments – is an example of an infrastructure funding mechanism that has risen in prominence for urban transport over the last decade and whose use might be facilitated under the new DOT leadership (its also the source of funding for the proposed BQX streetcar in NYC) . There is a rich literature on the theory of value capture (for a broader, classic take see Hagman and Misczynski 1977; for a contemporary overview see  Zhao, Z. et al. (2012)) but there is a lack of work examining the potential unintended consequences that occur when value capture financing schemes interact with existing patterns and policies of American cities. This blog post – and my larger dissertation research – works within this gap by considering Value Capture more holistically and critically.    

The text and visuals below were presented at the Past is Prologue: Planning’s Critical Approach to 100 years of Zoning conference held at Columbia University in December 2016. The presentation (to a non-transportation audience) attempts to draw conceptual and empirical bridges between prominent issues in land regulation and transport provision and remains a “work in progress”. For a polished take on these issues, please see Chapter 7 (Value Capture: Why We Might be Disappointed) in Improving Urban Access (Sclar et al. 2016).

All mistakes and comments are my own and do not necessarily reflect the opinions of CCTS members. For more details please email me directly at laf2153@columbia.edu. Enjoy!  – Lauren Ames Fischer

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The integration of land use and transportation has been an aim of urban policy for over two decades but achieving success has been problematic in many American cities as low-density land use and automobile-based development continue to dominate. The iterative relationship between land use and transit presents a “chicken and egg” issue. Local governments are unwilling – or politically unable – to alter land regulations in favor of density without guarantee that regional transit agencies will provide robust transit services. Likewise, transit agencies are not willing to spend their limited resources increasing service to areas whose land use characteristics do not encourage transit ridership. Dan Chatman has argued that transit can be a Trojan Horse for changes in land use regulations (Chatman 2013) but for this causal relationship to work successfully, planning, governance and financing institutions must approach the problem from an integrated perspective.

Since the mid-1980s funding sources for transportation investments (and transit more specifically) have been decentralizing, shifting from the federal government to state and increasingly local sources. To a certain extent, this decentralized funding mirrors the financial arrangements used to build our nation’s earliest urban transit investments – streetcars and elevated rail lines built at the turn of the 20th century were almost exclusively paid for by local revenue sources and had strong private-sector participation as real estate speculators constructed and operated transit systems to move urban residents from new housing developments to existing employment centers. Although, importantly, these early systems were rarely in good financial condition and often relied on substantial public assistance to remain solvent (Jones 1985). Urban rail investments facilitated a shift from “the walking city” to the “tracked/rail city” and supported more dispersed development patterns in urban areas that would serve as a precursor to the low-density development that would emerge with the automobile (Schaeffer and Sclar 1980). Public sector involvement in transit was a secondary movement – an option exercised only after privately operated systems fell into financial despair and bankruptcy. By the late 1960s and early 1970s almost all of the urban transit systems in US cities were publicly operated, and receiving federal subsidies for capital and operational expenses not covered by fare box revenue.

How are urban transit systems funded today?

In 2008, User fees – or “system generated revenue” – covered a little more than a quarter of revenue spent on public transit. User fees – i.e. fares – for transit remain low compared to the cost of operating and maintaining services due to a strong public interest in keeping fares affordable for transit dependent populations and as a way to heighten the attractiveness of collective modes of travel compared to the private automobile.

 

As a result, public transit relies more heavily on specialized and general taxes than does highway and road funding which receive more than 60% of their revenue from gasoline and other car-related taxes.

 

The decentralization of transit funding over the past three decades has coincided with an increased recognition of the environmental and economic disadvantages that sprawling, auto-dependent development brings to urban regions. So although funds for transit are becoming increasingly scarce, the desire to build urban transit systems has increased considerably, particularly in mid-size cities and non-coastal areas that abandoned mass transit in favor of the automobile during the middle of the 20th century. This map shows cities that are considering and building new fixed rail streetcar systems with the aim of transforming land use (and stimulating economic activity) as much as transforming travel behavior (King and Fischer 2016). Streetcars – small scale rail investments that operate on existing roadways, in mixed traffic – are being pursued as a “first phase” of what supporters hope will be more extensive regional systems that provide a viable alternative to highway driving while also stimulating real estate development in the areas they serve. These streetcars cities have made the calculation that the key to integrating land use and transportation is to focus on a small “starter” area, and to use pre-existing regulatory and incentive tools to alter land use patterns.

Given the move toward decentralized funding and the increasing financial pressures faced by local governments, how are cities funding these new transit investments? An increasingly common policy tool – one that is strongly promoted by transport experts and academics – is an arrangement called Value Capture. Value Capture is a package of pre-existing policy tools – most commonly Tax Increment Financing, and Special Assessment Districts – that are used to “capture” the increased value of real estate that comes from public sector transit investments in order to fund those investments. Traditionally, two groups have been targeted to pay for transit investments – users who pay for the system via the fare box and the general public that pays for the system through general taxes (local, state or federal). Value capture policies take aim at a group of benefactors that have not directly paid for investments in the past – property owners and developers who see increases in the value of their real estate holdings due to public sector transit investments. In Value capture’s causal cycle, transport investments lead to increased land values by virtue of their ability to increase accessibility and decrease travel times to a given area.

Promoters of Value capture emphasize how these tools uphold the Benefits principle, which states that the cost of a transport investment to a contributor should be proportional to the benefits received and maintains that transit systems are more efficient if their costs and benefits are related to one another (Istrate and Levinson 2012). While the theoretical arguments for value capture are strong, there has not been enough focus on the potential distortionary impacts value capture may have on urban development patterns and on the planning process more generally.

More specifically, there are several potential pitfalls of using value capture to provide public transport investments intended to shape land use and travel behavior in urban areas:

  • Taxation Schemes Employed
  • Generational Equity concerns
  • Tax Incidence
  • Impacts on the Planning Process

Equity in Taxation

Value capture schemes largely ignore issues of Vertical Equity, whose driving principle is the notion that those who are more able to pay higher taxes should contribute more than those who are not but that this funding arrangement should not influence decisions about how to spend public monies. When the benefits principle becomes the dominate concern in sitting and investment decisions – as it seems to be in mid-size cities embracing value capture – it can preclude the provision of services and investments in less wealthy areas of the city. In defense, local implementers adhere to a “trickle down” theory of ED based on the notion that improvements to one area of the city will result in higher tax revenues that can be redistributed to fund services and investments in poorer areas of the city, although there is limited historical evidence that this occurs.

Of course, the details of implementation matter greatly. As this chart shows, there are different taxation and revenue raising mechanisms that fall under the value capture umbrella. Policies that target existing property owners (land-value taxes, Tax Increment Financing, Special Assessment Districts, and transportation utility fees) tend to be slightly regressive (although this can be mitigated by using grants and tax abatement to assist lower-income residents and small businesses) while policies that involve imposing charges on new development are more likely to be neutral to progressive (depending on characteristics of end users and assumptions about patterns of incidence). In practice, however, TIF and SAD are the most commonly utilized revenue-collection schemes for transit value capture in American cities because they (1) produce the greatest amount of revenue, (2) are easiest to implement since the enabling legislation is usually pre-existing for non-transport uses and (3) often do not require extensive cooperation from higher levels of government or private sector actors as do Negotiated Extractions and Joint Development (both of which tend to be more progressive as revenue raising tools).

Notice also the tools used for value capture schemes are largely the purview of local governments. Although transit functions best at the regional level, the competencies that matter for value capture schemes remain with local governments, an arrangement that supports fracturing of the reginal transport planning process in favor of hyper-localized planning and investment.

Generational Equity and Risk

A second concern with value capture is risk and generational equity. Land is considered a stable revenue source because it is a captured asset that cannot relocate to other jurisdictions and historically land values have increased over time. As the 2008 real estate crisis showed, however, land value and real estate in general is far from a stable source of ongoing asset value and cash flow in today’s globalized economy; Pushes and pulls of larger national and international forces can have immediate impacts on fortunes tied up in locational values. The stability of land values is even more pronounced in slow or no-growth cities – like Detroit – that have struggled to attract private sector investment and growth in recent decades. These are the very cities that are increasingly relying on value capture schemes for transit investments in order to stimulate redevelopment.

While value capture schemes increase horizontal equity, they introduce new types of risk due to their reliance on relatively small geographical units to raise revenue to pay for public sector bonds. Here are maps of two value capture schemes – Kansas City, MO on the left illustrates how little of the cities land (the area in Red) is being used to fund the streetcar; Minneapolis is relying on land value increases around even smaller geographical units of land to fund their streetcar system. Value capture schemes are forced to rely on small geographical areas in order to adhere to the benefit principle (those who benefit from increased land value must be in close proximity to the transit investment) and to secure political support for new investments.

 

 

 

 

 

 

If dedicated revenue streams – from sales taxes or land-based financing schemes – are used to support public sector debt then issues of generational equity are raised. Future taxpayers must pay down debts incurred by present ones. Generational equity concerns increase when the nature of the revenue stream becomes more speculative and the reliability of future returns becomes questionable. Borrowing based upon assumptions about the size of future revenue streams may hinder the functionality of the public sector in the future.

There is evidence that cities are not good at making realistic projections of land value increases. From 2000 – 2004 actual revenues of Kansas City, MO TIF plans accounted for only 23% of projected revenues for the same period (Kelsay 2007). The Value Capture literature emphasizes that realistic projections are necessary to devise stable and reliable funding schemes but predicting the future is difficult, especially in areas without a strong history of recent growth. Many cities using value capture hire consultants to produce revenue projections; these consultants often rely on misguided assumptions, including that streetcar investments in slow or no growth cities will see the same level of development as streetcar systems in the growing areas of Portland OR or Seattle, WA, or that relatively small transit investments will be enough to substantially change accessibility and travel times in ways that stimulate higher land values.

The combination of public bonding authority with overly optimistic assumptions about future revenues have caused problems for transit providers in the past. As a result of the Los Angeles Metropolitan Transportation Authority’s extensive use of bonds, its debt service payments accounted for 30% of its budget in 1999. Spending such a large proportion of future revenue on bond repayment prevents the public sector from addressing immediate transportation needs or addressing the maintenance needs of aging systems.

Tax Incidence

A third equity issue with value capture is related to Tax Incidence. Tax incidence refers to the group that ultimately bears the burden of, or ultimately has to pay, the tax in question. Value capture promoters claim that tax incidence is not an issue since the people paying into the value capture schemes are exactly those that will benefit. To understand the total tax incidence paid by any one property, however, we need to look at the package of taxes and incentives that govern a particular property. Here is a map of the Value Capture scheme (in red outline) being used in Kansas City, MO and the myriad tax incentive programs that overlap the Value Capture district.

In value capture schemes, the new value capture taxes are placed over existing schemes of taxes and incentives – so while one property may not pay property taxes (due to being in a Planned Industrial Expansion Authority), and may be exempt from non-property taxes (due to a Urban Redevelopment 353), they are still responsible for paying into the value capture scheme, essentially funding public activities that benefit them directly but not paying into the larger general funds for schools, roads or other public activities spread throughout the city. This is not an uncommon occurrence, as struggling urban areas tend to put their eggs in one basket by concentrating public investments and incentive programs in a single area (i.e. downtown) that has the most potential to produce substantial tax revenue once incentives expire. The more the land tax systems in this area use TIF, SAD and tax abatement tools the less these “profitable” and “invested” areas are able to spread their wealth to other parts of the city where most of the population (and the majority of the neediest populations) live.

Impacts on the Planning Process

The final equity dimension of value capture schemes I will discuss is how these new funding tools may augment the planning process in a negative way with respect to the values of holistic planning and a planning framework that addresses the needs of the most vulnerable. More specifically, the small geographical nature of value capture schemes (necessary to adhere to the ‘narrow’ range of benefits assumed by the benefits principle) means that transportation planning is not happening at a regional level or even at a level that considers the city as a whole. Furthermore, the questions and analysis guiding transport decisions in many value capture cities are different than those used in the past.

A simplified schematic of the transportation planning process on top and my (preliminary) sketch of how planning occurs in many streetcar cities. The focus moves squarely to “what can we finance” rather than being concerned with goals, policies and targets or “what do we need given values X, Y and Z”. Governing schemes utilized to plan and implement streetcars are increasingly happening outside of the city government – non-profit organizations with varying levels of government affiliation are planning and operating streetcars in Kansas City, Detroit and Atlanta; these projects have varying levels of public sector oversite but rely heavily on public sector financing support in the form of Value Capture taxes and public sector bonds. To be sure, other cities – like Portland and Seattle – have integrated streetcar investments paid for with value capture schemes into their regional transportation and local planning processes but there are clear geographical trends – that do not necessarily favor Midwestern cities – in this ability to integrate value capture into regional planning processes.

There are also key questions about how investment decisions are being made. Many states have passed legislation in the past few decades that require public referendum on any new taxes (In MO this is called the Hancock Amendment). When combined with geographically constrained funding tools, these referendum create incentives for public officials to reduce the number of people that formally participate in decision making, and project approval. In Kansas City, 551 voters (8.5% of eligible voters in the Value Capture district; and .2% of eligible voters in the city) committed the city to a 120 million dollar bond for the 2.1 mile downtown streetcar and to permanent responsibility for operating and maintenance expenses. In the Kansas City case, revenue from the value capture scheme is expected to cover operating and maintenance expenses but this arrangement assumes that the expected real estate development materializes (as it seems to be).

Value capture schemes necessarily involve the somewhat arbitrary determination of which properties receive a disproportionate benefit and how the size of the benefit varies by location.  The need to get voter approval for any new tax (i.e. transit investment) impacts the policy proposals put forth by the city. A proposed expansion of the Kansas City streetcar line (which failed a citizen vote in 2014) illustrates this. On the left is a picture with the proposed expanded urban transit system in blue, orange and green lines, showing the proposed taxing district in Gray. On the right is a revised taxation district, which removes the Brookside neighborhood (one of the wealthiest and most pedestrian friendly residential areas in the city) from the taxing district to pay for the streetcar but does not change the proposed areas that would be served by the expanded system. This illustrates how in practice, value capture schemes might not actually adhere to the benefits principle and how political needs may trump the creation of taxing districts that are stable.

The failure of the Kansas City streetcar expansion plan illustrates another major issue with Value capture – it is a funding scheme that is rarely scalable. Value capture may work for limited areas of the urban core (where wealth is concentrated and there are less residents, hence less voters to object) but it cannot be used to expand the new system, to subsidize the existing transit system in poorer areas where people’s needs may be the greatest or to extended into areas that do not follow strong real estate corridors. So while value capture may secure a “starter line” investment, an entirely different funding and planning process is necessary for system expansion (which remains a goal of most streetcar cities).

Conclusion

By expanding the types of funding available for transit and by encouraging land use and transport integration, value capture clearly has some benefits but the devil is in the details. Institutional Capacity is sited repeatedly by the “best practices” value capture literature, but the actual implementation and how localities choose to fund and govern their value capture funded systems may paradoxically contribute to reducing institutional capacity.

Current trends in value capture implementation threaten to lead us away from more inclusive, diverse and equitable cities by failing to consider urban development issues holistically. A holistic perspective is challenged by the popular solution of vesting responsibility for new investments with new, increasingly localized organizations as well as existing incentives in public finance that encourage hyper-local solutions to regional problems. In many cities, value capture schemes interact with current development patterns, governance structures and existing fiscal policies in ways that (1) risk undermining the ability of cities to employ sustainable and stable financing schemes for public transport investment, (2) confine land use changes and public spending to isolated geographies and (3) exacerbate inequalities in urban areas. Changes in institutional arrangements can have positive impacts on how public sector land-use regulations and investments complement one another to create equitable outcomes but this requires planners and public sector actors to do the difficult work of institutional reform.

At a more abstract level, value capture tools for transit and real estate reflect a consumer model of urban governance and public finance. In this view urban residents are seen as public goods ‘consumer -beneficiaries’, not as ‘citizens’. The distinction is important. As citizens people are entitled to benefits as a matter of course and not their ability to pay directly for the public benefit received. A conception of the public as ‘consumer-beneficiaries’ favors decentralized governance and funding mechanisms as well as hyper-local planning processes. Although useful for implementing piecemeal solutions, such approaches undermine a holistic approach to city-building and the sustainable and equitable outcomes it seeks to foster. Institutional reform must be guided by a revitalized planning mindset that is willing to challenge ideas about the appropriate role of the public sector and to assert clear values with regard to social and economic equity. Integrating land use regulations with public transit investments is not enough – the institutions that we create to guide these structures must reflect the planning values we embrace.

Institutional arrangements reflect our values and priorities. We must look critically at the institutional structures that house the tools we use – like Value Capture – to regulate land use and provide transit. Are existing planning institutions properly structured (both internally and in relation to institutions with related competencies) to implement land regulation tools that result in sustainable and equitable outcomes? Are there unintended or undesirable impacts that result from existing decision making and financing arrangements employed for land regulation? In many American cities employing value capture schemes, the trends are troubling. Compared to international cities, US cities seem more likely to add additional layers of specialized governance and finance – ones that may have less accountability – rather than reform existing structures, leading to messy and sometimes counterproductive institutional arrangements that can be difficult to coordinate or steer in new directions. When land based taxes are restricted to being spent in the same geographical areas that the monies are raised (an arrangement which many view a “fair” method of financing), inequality is increased and desirable land use changes are confined to limited areas with selective populations.

Regional institutional structures with fiscal capacity to collect and redistribute land based taxes must be complimented by a comprehensive regulatory strategy for economic development, affordable housing and transit provision that also considers the distribution of economic development incentives and taxation schemes. Fractured governing and financing schemes may be fruitful for implementing piecemeal solutions but it is counterproductive for holistically planning equitable and sustainable cities.

 

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