Costs of Urban Sprawl: Research

Perhaps the most oft-quoted recent research attempting to estimate the relationship between sprawl and infrastructure costs was conducted by a team led by Professor Robert Burchell and funded under the auspices of the federal government's Transit Cooperative Research Program (TCRP). The project included two reports: Costs of Sprawl--2000 and The Costs of Sprawl--Revisited.3 The Costs of Sprawl--2000 projected that from 2000 to 2025, America would incur $227.4 billion in gross additional costs for what the study terms "uncontrolled growth" (less dense, more sprawling growth) versus "controlled growth" (more dense, less sprawling growth). This equates to approximately $9.1 billion in gross additional costs per year.

The figure of $227.4 billion may seem large.4 Yet in the context of 25 years and an average population of 115 million households, it is actually rather modest. The $227.4 billion would amount to only $80 per household annually, or $29 per capita. (See Table 1.) This includes:

• $4.41 per household (or $1.63 per capita) for additional sewer and water costs;
• $38.37 per household (or $14.16 per capita) for additional roadways; and
• $36.77 per household (or $13.57 per capita) for expanded public services.

Many growth critics have used these estimates as a measure of the cost that sprawl imposes on society. Advocates of smart growth policies have implied that these estimates represent the costs of continued low-density development on society. However, many of the purported costs are not imposed on society at all: They are private costs freely paid by the people who buy new houses.

The cost of sewer and water infrastructure in new developments is passed on to the buyer, and subsequent operation is typically funded with fees assessed on residents and businesses based upon use. Typically, new housing development infrastructure (local streets, curbs, sidewalks, storm and waste sewers, and water supply lines within the development) is paid for privately by the purchasers of new houses, having been built by developers or homebuilders. These are fully private costs that are paid for by persons who voluntarily move into new houses and apartments, having determined that they can afford such a move.

There are further indications that the projections from the Costs of Sprawl--2000 are not "unaffordable," and actually are modest in comparison to other costs in the economy. Specifically:

• From 1980 to 2000 (inclusive), the increase alone in total personal income in the United States was nearly $27 trillion (in 2000 dollars), or $1.3 trillion per year.5 This is more than 140 times the $9.1 billion in average annual additional costs projected in Costs of Sprawl--2000 for 2000 through 2025.6
• From 1980 to 2000 (inclusive), the total increase in local government expenditures in the United States was $4.5 trillion (in 2000 dollars adjusted for the increase in population), or $225 billion per year. This is approximately 25 times the $9.1 billion average additional public and private costs projected in Costs of Sprawl--2000.7

Municipal Expenditures: Econometric Analysis

Because the authors of the Costs of Sprawl--2000 mix public and private expenditures that they claim are related to sprawl, the study's findings offer little guidance on one of the key public policy issues related to suburbanization: What are the actual, additional municipal costs that suburbanization imposes on the community at large, if any? This report will attempt to fill that void by conducting an econometric analysis (see box) of municipal spending patterns to determine what portion of municipal costs appear to be related to the impact of sprawl.

If the Current Urban Planning Assumptions are valid, the trends that Costs of Sprawl--2000 identifies--having been underway for at least five decades--should reveal clearly the differences in expenditures between less sprawling and more sprawling areas. This means that older, higher density municipalities should have lower costs per capita than newer, lower density, more sprawling areas. These differences should be evident in the present spending patterns of local governments.

For an issue that has galvanized public debate in many communities throughout the country, there is little comprehensive, academic research on the actual relationship between land-use patterns and local government costs. The most recent research was published some time ago and is based upon early 1980s data. It was conducted by Professor Helen Ladd at Duke University, who performed an econometric analysis of growth measures and the actual public expenditures of 247 counties. She found that per capita expenditures on public services tend to rise as density rises and that higher population growth is associated with lower per capita local government expenditures--precisely the opposite of Current Urban Planning Assumption #1, above.8

Because the data used in her study are now more than two decades old, there is a need for more contemporary research on the factors that drive local government expenditures, especially in view of the predominant influence of "smart growth" urban planning theories. The purpose of this paper is to fill that gap with municipal cost data drawn from the 2000 Census.

Source of Data
Although the term "sprawl" has no precise definition, its most fundamental characteristic is lower population density. Smart growth advocates presume that building less sprawling, higher density communities results in lower government expenditures. If this is indeed the case, an analysis of municipal spending patterns across the country should show that as population densities go up, costs go down--and vice versa.

In order to reliably capture the impact of density on local government spending, we analyzed data for municipalities (cities and towns) rather than counties9 because that is the level of government most affected by finance issues regarding utilities (wastewater and water) and general public services. The source of municipal financial data for the analysis in this paper is the U.S. Census Bureau government finance database for fiscal year 2000, which contains information for approximately 1,800 municipalities. Additional data for municipalities are available from other sources, such as the 2000 U.S. Census (demographic and density data) and the U.S. Department of Justice (crime rates). Another advantage of using municipal (rather than county) data is that municipal boundaries typically contain little rural space; therefore, the population density within those boundaries is generally similar to urban population density.

Because the current urban planning debate is principally focused on where development occurs within the nation's largest metropolitan areas, the municipalities analyzed in this study included only those within metropolitan areas of more than 1,000,000 residents in 2000.10 Consolidated city-counties were not included, because such municipalities provide both city and county services and would be expected to have inherently higher expenditures as a consequence.11

The analysis in this paper does not include primary and secondary education costs. Most of the nation's primary and secondary education is provided by independent school districts that seldom match municipal (or county) boundaries. As a result, there is little, if any, broad demographic data specific to the geographical areas served by such districts. Related research indicates that, contrary to Current Urban Planning Assumption #2, elementary and secondary education expenditures tend to be lower in school districts with the greatest enrollment growth, and highest where there is the least growth.12 Our research focuses on municipal costs in three categories:

• Government expenditures (all costs except for utilities and education);
• Municipally owned wastewater utility charges; and
• Municipally owned water utility charges.

Econometric Models
For purposes of this study, three econometric models13 were developed to estimate the relationships between various factors and municipal expenditures:

• The General Government Model was developed to estimate the relationship between municipal current expenditures per capita and growth-influencing factors;
• Wastewater Charges Model; and
• Water Utility Charges Model.

The Wastewater Charges and Water Utility Charges models were developed to capture the impact of density, growth, and age of community on the cost of these functions. These are frequently cited in the urban planning literature as being upwardly affected by more sprawling development.

Another reason for analyzing utility charges separate from general government functions is that water and wastewater services are generally financed by user fees, rather than by the general tax revenues that finance most other municipal government operations. In fact, these utilities are not inherently government services: In many communities, regulated private companies provide such functions.14

Other Potential Municipal Expenditure Drivers

The fact that the econometric analysis explains so little of the variation in municipal costs per capita, combined with the fact that the highest density, slowest growing, and oldest communities do not have the lower expenditures per capita predicted by the Current Urban Planning Assumptions, would seem to indicate that other factors are more important drivers of variation in municipal costs between communities.

The most obvious place to look is local government employee compensation. Employee compensation is by far the largest expenditure function for most local governments, consuming, on average, 64 percent of total current expenditures.25 Employee compensation is approximately 3.5 times capital expenditures.26

Employee compensation varies significantly between jurisdictions. Census Bureau information indicates that local government average wages and salaries for similar positions and skills vary by as much as 93 percent between some states.27 These cost disparities are not necessarily explained by regional differences. For example, in the Denver metropolitan area the municipality with the highest wages and salaries per capita pays nearly 1.5 times the area average, and more than five times the municipality with the lowest wages and salaries per capita. Further, there are also significant differences (up to 123 percent) between the percentage add-on of employer-paid employee benefits costs among local governments by state.28

There are other factors that could be responsible for such large variations. There could be significant variations between the numbers of hours actually worked by government employees. This is evident at the state level, where differences of up to 38 days annually have been shown.29 Thus, it seems likely that differences in municipal government employee compensation per capita could be an important factor in explaining differences in municipal expenditures.30 Finally, there could be significant variations in the number of employees, or in employee productivity.

Although the available data cannot be used to econometrically test the impact of public employee compensation on municipal costs, the nominal ranking analysis used in the previous section can be extended to include a review of government employee compensation. 31 Table 5 provides an estimate of per-capita municipal employee wages and salaries for each set of quintile rankings for the three urban planning, growth-related variables.

As the data in Table 5 illustrate, virtually all of the difference between the highest municipal expenditure quintile and the lowest is accounted for (or more than accounted for) by the difference in municipal employee compensation per capita. This indicates that differences in employee compensation--not growth factors--may be the strongest driver of municipal expenditures.

• Population Density. Wages and salaries per capita tend to rise from quintile 5 (lowest) to quintile 1, which has, by far, the highest expenditures in the highest density quintile.31
• Population Growth Rate. The highest wage and salary expenditures per capita are in the slowest growing quintiles (quintiles 1 and 2), and lowest in the fastest growing quintiles (quintiles 4 and 5).
• Municipality Age. As illustrated in Figure 1, the highest wage and salary expenditures per capita are in the oldest municipalities (quintiles 1 and 2), with the lowest expenditures in the newest municipalities (quintiles 4 and 5).

Each of these conclusions works strongly against what one might expect from the Current Urban Planning Assumptions. This is illustrated by reviewing the data for the quintiles under each Current Urban Planning Assumption that would be expected to have the lowest expenditures per capita. Table 6 indicates that differences in employee compensation alone are more than sufficient to account for the differences in municipal expenditures per capita--whether by density, population growth, or municipality age.

• Population Density. The variation from the average in wages and salaries per capita in the highest density municipalities is larger (1.34 times) than the variation from the average for the same municipalities in local government expenditures, as shown in Figure 2.
• Population Growth Rate. The variation from the average in wages and salaries per capita in the slowest growing municipalities is larger (2.32 times) than the variation from the average for the same municipalities in local government expenditures.
• Municipality Age. The variation from the average in wages in salaries per capita in the oldest municipalities is nearly as large (0.91 times) as the variation from the average for the same municipalities in local government expenditures. If the average employer-paid benefits add-on is included, the variation in employee compensation would be larger than the difference in expenditures (1.12 times).

In fact, the impact of increases in local government employee compensation has been far greater than the sprawl-based costs projected in Costs of Sprawl--2000. From 1980 to 2000, the gross additional local government employee compensation alone in the United States was nearly $2.2 trillion (in 2000 dollars)--or more than $105 billion per year. This is approximately 12 times the $9.1 billion average annual additional cost projected in Costs of Sprawl--2000.32

An Alternative Explanation for Differences in Municipal Spending: Political Entrenchment

The generally higher spending levels of the older municipalities may be due to a process of "political entrenchment" that occurs with the passage of time. The large impact of local government employee compensation indicates that internal employee interests may be a principal factor driving municipal expenditures per capita. According to the nominal ranking analysis presented in Table 7, there appears to be a strong relationship between higher employee wages and salaries per capita and higher density, lower population growth rates, community age, and higher population--all of which are in opposition to what would be expected if the Current Urban Planning Assumptions were correct.

• Population Density. The highest wages and salaries quintile has the highest population density. Densities decrease with each quintile, with the lowest wages and salaries quintile having the lowest population density.
• Population Growth Rate. The highest wages and salaries quintile has the lowest population growth rate. Population growth rates increase with each quintile, except for the highest growth quintile (quintile 5). The second-fastest growing quintile (quintile 4) has the highest population growth rate.
• Municipality Age. The highest wages and salaries quintile has the oldest average municipality age. Community age decreases with each quintile, with the lowest wages and salaries quintile being the youngest.

Perhaps reflecting such entrenchment, older municipalities have often been notably resistant to cost-effective management innovations such as privatization, competitive contracting, more flexible labor arrangements, and innovative management techniques.33 For example, the oldest quintile of municipalities had a general government expenditure level 23 percent higher than the youngest (Table 5).

It must be pointed out, however, that employee compensation is not likely to be the only cost function that could be exercising undo special-interest influence on the costs of local governments. Other political interests not quantified (and perhaps not quantifiable) may also exercise an impact on municipal spending.

Larger governmental units--which also tend to be more dense and older34--may be inherently more susceptible to special-interest capture, whether employee, business, labor, or other. Generally, it can be expected that the influence of individual voters would be less in larger jurisdictions and that special interests would be more likely to exert control. Larger jurisdictions would seem to provide economies of scale for lobbying. It would seem reasonable that where there is greater opportunity for special-interest control, government costs are likely to be higher. The data in Table 7 indicate that the highest wages and salaries quintile (quintile 1) has an average population that is more than 50 percent larger than average, and that the average population of each succeeding quintile is lower. The lowest wages and salaries quintile (quintile 5) has the lowest population--approximately one-half the average. This finding is counter to another widely held urban planning assumption: that larger units of government are more cost effective due to economies of scale.

All of this seems to indicate that municipal costs are more susceptible to overwhelming influence by political interests than they are to economics. Theoretical studies, such as Costs of Sprawl--2000 may suffer from what might be called the "length of pipe fallacy"--the assumption that labor rates, cost of materials, and the costs associated with apparently similar projects is the same in every local government jurisdiction in a metropolitan area.35 In fact, older, inner-city government labor rates are often higher than suburban rates: Overheads may be higher and certainly the operating environment can be more challenging. For example, expansion of an inner-city sewer system is likely to be far more costly than laying a new one in a greenfield area.

"Entrenchment" may have first been noted by Adam Smith in The Wealth of Nations. He pointed out that historical control of guilds in the older cities had produced a situation in which prices were lower in the suburbs, which were beyond the reach of the guilds. This kept prices in the older cities above market levels.36 Economist Mancur Olson similarly postulated that, as time goes on, political and special interests become more entrenched in older national governments.37 Stronger bureaucracies, more powerful employee organizations, strong local business interests, political interests, and more rigid operating procedures may have developed over a longer time period. These may force costs in older municipalities to be higher than they would be in newer municipalities.

An "entrenchment" theory of municipal finance would be consistent with the findings of economist Charles Tiebout, who argued that people tend to "vote with their feet"--to move to newer communities that better meet their desires and needs. Relative tax levels were an important component of this thesis, which characterized the new suburban communities as competing with one another for new residents.38

Conclusions and Policy Implications

Our analysis indicates that the Current Urban Planning Assumptions are of virtually no value in predicting local government expenditures per capita. The lowest local government expenditures per capita are not in the higher density, slower growing, and older municipalities.

On the contrary, the actual data indicate that the lowest expenditures per capita tend to be in medium- and lower-density municipalities (though not the lowest density); medium- and faster-growing municipalities; and newer municipalities. This is after 50 years of unprecedented urban decentralization, which seems to be more than enough time to have developed the purported urban sprawl-related higher local government expenditures. It seems unlikely that the higher expenditures that did not develop due to sprawl in the last 50 years will evolve in the next 20--despite predictions to the contrary in The Costs of Sprawl--2000 research.

It seems much more likely that the differences in municipal expenditures per capita are the result of political, rather than economic factors, especially the influence of special interests.

Wendell Cox, Principal of the Wendell Cox Consultancy in metropolitan St. Louis, is a Visiting Fellow at The Heritage Foundation and a Visiting Professor at the Conservatoire National des Arts et Metiers in Paris. Joshua Utt is a Ph.D. candidate in Economics at Washington State University and an Adjunct Fellow at the Discovery Institute in Seattle, Washington.

APPENDIX