Putting the Brakes on Growth

Up and down the Golden State, these are fat and happy times. In Southern and Northern California and along the Central Coast, cities crow about falling unemployment rates and residents watch in wonder as their home values jump to the moon. Growth is a good thing.

Here in California’s big middle, stretching 400 miles long and 50 miles wide, it’s a far different tale. The problem isn’t a lack of growth. In fact, the Central Valley stands out as one of the fastest-growing regions in the country, sprouting new Targets and Home Depots and terra cotta subdivisions with names like Blossom Trail and Quail Lake.

Rather, in a paradoxical twist, the housing and commercial boom isn’t reaping prosperity for valley towns like Fresno as it has in Newport Beach or San Jose. Growth, at least the way it’s being done in California’s midsection, has become an economic loser, budget figures show, draining the financial well-being of cities from Bakersfield to Redding.

The bottom line numbers may seem a cruel joke in a state where the fruits of growth have been an article of faith for 150 years. But development in the Central Valley, which typically comes in the form of inexpensive housing tracts and strip malls, has failed to keep pace with the costs of growth, according to city budgets and interviews with local and state officials. What cities are spending to serve the new suburbs--extending police and fire protection, water, sewer and streets--often greatly exceeds property and sales taxes generated by the growth.

As a consequence, cities up and down this vast flatland--the nation’s most productive farm belt--have taken on record bond debt to pay for new infrastructure tied to growth. The debt is being carried on the backs of current and future residents who must pay higher fees to meet the bond payments.

State Controller Kathleen Connell sees a region in deep crisis, an entire swath of California where unemployment remains stuck in double digits, foreclosures stand at an all-time high and property values have plummeted so far that many residents are selling their houses for 20% less than they paid five or 10 years ago.

“Communities are placing an extraordinary debt burden on current and future residents,” Connell said. “At the same time, prime land is being swallowed up by big retailers that don’t generate economic development because what they offer are mostly minimum wage jobs.”

“Instead of increasing the economic power of a region, we’re generating cement cities.”

Now, with a realization among some local officials that growth isn’t paying for itself, a remarkable shift is taking place. Discontent has begun to express itself in actions that would have seemed heretical a few years ago.

For the first time, city councils in places such as Fresno and Visalia have voted down housing tracts and shopping centers under the banner of fiscal responsibility. In Tracy and other communities, “smart growth” groups are sponsoring ballot measures to remove land use decisions from elected officials. They want to place such matters in the hands of the people.

A Plunge in Home Prices

Although it’s hardly a movement, a slow-growth credo has begun to bud among residents who consider themselves far from environmental activists. Hit with more and more backdoor taxes and diminishing services, they swamp editorial pages with angry letters, complaining that average citizens are subsidizing a handful of wealthy builders in each town.

Like so many others in this valley, Mike and Lisa Fletcher were enticed by low prices to move into a new subdivision on old farmland. They bought their three-bedroom, two-bath house in a Fresno tract called Americana Countryside for $108,000 in 1991. It was their first house and they figured they would build equity for four or five years, then move into something better.

But the Americana tract, once promoted as a jewel of “new living,” now looks frayed. No longer an island, it sits amid newer and more sparkling versions of itself. Some homeowners still haven’t found the time or the money to put in frontyards or backyards. Others couldn’t fend off foreclosure, or turned their houses into rentals.

As for the Fletchers, their house has dropped in value. Half the neighborhood, like dozens of new tracts, is mired in a homeowners lawsuit alleging that the builder used shoddy materials and workmanship.

“We’d like to sell, but our house is now worth less than we owe,” said Lisa Fletcher. “It needs new carpet and other upgrades. So how do we compete with a new tract, where buyers can pick their own colors and everything’s fresh and the price cheap?”

Slow-Growth Movement Criticized

The debate over growth still has many passionate voices touting the jobs created by the building industry and the dreams that new homes fulfill. Unlike Ventura County or Napa Valley, no electorate has yet chosen to hem in sprawl by adopting urban growth boundaries. Ken Steitz, a real estate lender who moonlights as a Fresno city councilman, speaks for many valley natives when he says:

“Slowing growth is elitist and anti-market and anti-free enterprise. If a builder comes before the council and meets all the requirements, I don’t believe we have a right to tell that developer ‘No.’ ”

But consider what 15 years of growth has brought to the coffers of Fresno, the region’s largest city with a population that has swelled by more than a third to 415,000. Local annual tax revenues are $66 million higher in 1999 than in 1984, budget figures show. But the annual costs of serving Fresno’s growing population have jumped $161 million in the same period.

City officials make up the $95-million annual shortfall with grants and other federal money and charge developers and residents certain fees. But this creative financing is not nearly enough to cover the price tag for the big new sewer plant or other capital improvements tied to growth. To do this, Fresno, virtually a debt-free city 15 years ago, has taken on $329 million in bond debt.

It’s much the same story in Bakersfield, Modesto and Stockton. Like a dog chasing its own tail, each city must now keep growing for no other reason than to pay for the debt incurred by past growth, never quite catching up to itself.

“Growth doesn’t pay for itself,” said Gregory Klimko, Bakersfield’s finance director. “It used to be that cities put money aside, built a nest egg and then paid for the infrastructure that you needed. Now, those same cities are going out on bonding, betting on the come. Like everyone else, they’ve gone from cash to credit card.”

Sprawl not paying for itself has been a problem in many California cities, but here the losses are greater and cover an entire region.

A decade ago, this valley seemed destined to become America’s next great metropolis. State planners had been projecting one long zipper of suburbs along California 99 bursting with 9 million new residents by 2040. But the failure to create a solid middle class and an industrial base to complement the booming agricultural economy has slowed things down.

Jobs outside agriculture haven’t kept pace with population gains. Several cities still suffer the same unemployment rates--11% in summer and 15% in winter. State demographers now anticipate about 6 million new residents in the valley over the next 40 years.

The Building Industry Assn. says that there is only one way to meet this challenge: build more houses. Builders say that any budget figures showing growth as a losing proposition fail to account for one important measure: the economic multiplier of tens of thousands of jobs, from framers to carpet layers to landscapers.

“It’s estimated that every time you build a new house, you create 2 1/2 new jobs,” said Tim Coyle, lobbyist for the building association. “And on average, a family in a new house spends $6,500 in household items that first year alone.”

Slow-growth advocates counter that jobs in the construction trade wouldn’t be lost if tight growth boundaries were drawn around each town. Construction would be redirected to the core, where services already exist and where smaller subdivision and remodeling work could flourish, they say.

Indeed, across this valley, the big new tracts built to generate more tax revenue are bleeding millions of dollars from the existing tax base, according to county tax assessors. With an abundance of new gated and lakeside neighborhoods at town’s edge, older houses closer to the center have lost up to 20% of their value in recent years.

In Kern, Fresno, Stanislaus and San Joaquin counties, tax assessors have devalued nearly 200,000 houses and commercial properties since 1994 to the tune of $3.5 billion, a loss of $35 million in tax revenues for local and state governments. “It’s pretty simple,” said Stanislaus County Tax Assessor Mike DeFerrari. “Whenever you overbuild new subdivisions, the value of other homes deflates.”

Struggling families who bought their new tract houses with low-interest “teaser” rates now find themselves in the bind of ever-higher payments and plummeting values. Over the last three years, foreclosures on FHA-financed houses have more than doubled for the San Joaquin Valley, according to federal housing statistics.

Developing Farmland a Risky Deal

No matter which town, the new suburbs look like they have been beamed down from the same master planner. Many of the faces are white, those of residents who left older neighborhoods with growing minority populations. If they came looking for parks and libraries, they are often disappointed. When it is time to shop, there’s Wal-Mart up from Target next to Home Depot down from Costco next to Home Base.

Local planners bemoan that when Kmart and Toys R Us opened new stores at the edge of Fresno, the two retailers closed older stores in the city’s interior. In this way, the new town cannibalizes the old.

City planners say that converting farmland to suburbs is a risky deal for any city or county. Land that produced something real, cost almost nothing to serve and brought in outside dollars is suddenly replaced with a suburb whose houses need policing, children need schooling and water lines need connecting. The trick, planners agree, is using that residential base to attract a strong dose of commercial and industrial growth.

But this is easier said than done and even with a good mix, they say, it’s tough to make growth work.

When Los Angeles and San Francisco were building out and up, there was no Proposition 13 to freeze property tax revenues. Back then, the federal and state government were awarding grants to build water and sewer systems. This largess is no more. Today, planners say, the cities can either tax residents through assessment districts and utility user fees or make developers pay more.

Not wanting to anger either group, elected officials have opted for a third choice: borrow.

“In the early 1990s, we talked about a utility tax, but the council didn’t want to go there,” said Fresno budget manager Blaze Bruney. “How do you build quality? That is the struggle today. How do you replace worn-out infrastructure?”

No city has had a tougher time making growth pencil out than Bakersfield. Back in 1984, when the town was a relatively slim 78 square miles and served a mere 130,000 people, local tax revenues pretty much covered basic services. Today, Bakersfield leaps out over 114 square miles, bigger than cities with twice its 231,000 population. Tax revenues barely cover 60% of the city’s basic services.

Part of the fault, city officials say, lies with surrounding Kern County, which for years did away with its planning commission and allowed developers to build tracts without even sewer lines. It became the burden of the city, upon annexing the land, to convert septic tanks.

Pauline Larwood, a Kern County supervisor from 1983 to 1995, said that she and other board members approved houses and mini-malls that cost the city plenty. Unlike Bakersfield, she said, Kern County is able to disguise its losses from growth because of oil tax revenues.

“I knew residential development wasn’t paying its way,” she said. “Yes, I voted for my share of developer projects in other supervisors’ districts. I did so because if I wanted something in my district, I was going to need their vote.”

The supervisors approved each development without availing themselves of economic models that weighed costs and benefits, Larwood said.

Larwood, who now heads a local group called Smart Growth, wants county leaders to adopt a point system that ranks each development plan according to certain measures: the quality of the farmland, the proximity of infrastructure. “We need a system that places a value on farmland because converting that land is no longer economically feasible,” she said.

To the north, Modesto and Stockton also have saddled themselves with bond debt to pay for sewer and water projects. But both cities, in votes opposed by builders, have adopted utility user fees to offset some losses from growth.

Modesto Seeks to Limit Sprawl

Modesto is a case study of a city that minimizes costs by minimizing sprawl. Tax revenues cover 83% of basic services, one of the highest such rates in the valley. Residents have passed measures that direct growth to the center of town.

“We’re better than most, but our business and property taxes still are not keeping up,” said Stan Feathers, city budget manager.

Like Modesto, Stockton is one of the few valley cities boasting a lower jobless rate than in 1984. Despite expenditures outpacing tax revenues, Stockton remains bullish on growth. “If you’re a businessman and you’re looking to expand, looking to the future, you go to the bank and borrow money. You take on debt. Well, a city is a business,” said Gary Ingraham, Stockton’s assistant city manager.

Urban planners say that something has to give. As a first step toward making growth pay its way, they say, cities must swallow hard and collect higher fees for each house built, whether from the builder or the buyer.

“The general consensus in the planning field is that local governments need to collect a separate impact fee of $25,000 per housing unit in order to keep their budgets intact,” said Carl Abbott, a professor of urban studies and planning at Portland State University.

Some cities outside the valley already charge such fees. Home builders here say that any steep surcharges would simply be passed on to buyers.

Slow growth advocates and boomers alike are now fixed on Tracy, one of the state’s fastest-growing cities, where residents are organizing a ballot drive to quiet the housing boom. The group wants to stem the tide of Silicon Valley workers who find affordable dream houses over the Altamont Pass, on the fruit plains of Tracy.

Group leaders say that the population has more than doubled to 50,000 since 1984, but the newcomers have almost no investment in Tracy beyond their houses. They shop and eat and spend their days on the other side of the mountain. The balance between jobs and housing has gotten so out of whack, they say, that one of the few growth industries in town is baby-sitting, watching over the children of all those early-morning and late-night commuters.

“We’re trying to get Tracy to shift its focus,” said attorney Mark Connolly, a lifelong resident who hopes to qualify the slow-growth measure for next year’s ballot. “The city has one man working to attract commerce and industry compared to a full staff, plus outside consultants, just to process residential plans.”

The initiative seeks to curtail growth to 750 new houses a year--still a robust clip. But even if the measure wins, Connolly said, it comes almost too late. The council has approved so many future houses that Tracy will almost certainly surpass the 100,000 population mark early next century.

In the heart of the valley, the Fresno City Council recently turned down a prominent developer seeking to subdivide 70 acres on the northeastern edge of town. The rare vote so stunned the populace that for the next two weeks the Fresno Bee was filled with letters to the editor praising the “courageous” council members.

Then the developers fired back, packing City Hall with scores of builders, lenders and hammer-and-nail guys. One by one, the speakers predicted mass bankruptcies and job loss if Fresno adopted a slow-growth stance. One by one, council members commended the builders for all the philanthropic good they had done. Before the meeting was over, the council promised to revisit the matter this fall. Just last week, the council rebuffed another big developer seeking to build 429 homes in the same area.

“A shift in public opinion is underway here,” said Russ Minick, a Bee editorial writer. “You can almost smell it in the wind. There’s this kind of inchoate sense that when it comes to land use, something is haywire, something is all wrong. . . . Something isn’t adding up.”

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The Bitter Fruit of Sprawl

Local tax revenues in the San Joaquin Valley are not keeping pace with the costs of providing services to new suburbs. Cities try to make up the gap by taxing residents and billing developers. But these charges do not cover the full costs of sprawl. Here is a fiscal snapshot of four cities in Central California:

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FRESNO 1984-85 1999-2000 Population: 268,000 415,000 City in square miles: 93 103 Unemployment: 11.6% 12.8% Yearly local tax revenue: $56 million $122 million Yearly spending to provide city services: $114 million $275 million % of city’s basic services covered by tax revenue: 49% 44% Bond debt: $3.3 million for $329 million for water sewer infrastructure and sewer

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BAKERSFIELD 1984-85 1999-2000 Population: 130,000 231,000 City in square miles: 78 114 Unemployment: 11.1% 11.6% Yearly local tax revenue: $37 million $69 million Yearly spending to provide city services: $38 million $115 million % of city’s basic services covered by tax revenue: 97% 60% Bond debt: $15 million for $30 million for sewer upgrades sewer upgrades

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MODESTO 1984-85 1999-2000 Population: 124,000 185,000 City in square miles: 29 35 Unemployment: 14.9% 11.1% Yearly local tax revenue: $24 million $53 million Yearly spending to provide city services: $27.5 million $64 million % of city’s basic services covered by tax revenue: 87% 83% Bond debt: $11.5 million $69 million for for sewer upgrades sewer and water

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STOCKTON 1984-85 1999-2000 Population: 168,000 244,000 City in square miles: 44 56 Unemployment: 12% 9.4% Yearly local tax revenue: $36 million $75 million Yearly spending to provide city services: $59 million $125 million % of city’s basic services covered by tax revenue: 61% 60% Bond debt: $11 million $115 million for sewer and water

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Note: Unemployment rates are based on county figures for July. Local taxes consist of property, sales, motor vehicle, hotel, business licenses and permit fees. In the case of Modesto and Stockton, residents are charged a utility users fee that helps new growth pay for itself. To supplement local tax funding, cities have set up separate revenue flows, including bond money, to pay for infrastructure costs. Typically, this debt service is tied to future growth through higher fees charged to future residents and developers.