Big City, Small Budget
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In this post we’re going to examine an excellent point made by many readers in response to my last post about our severe housing shortage. The point essentially goes like this:
San José has too many houses relative to jobs, which means lower tax revenue per capita and fewer services. The City’s General Plan prioritizes closing our jobs deficit by attracting more employers and adding jobs at a faster rate than homes. Given this, is it responsible for San José to build more housing?
This topic deserves a dedicated post because our jobs-to-housing ratio is a real challenge with a direct bearing on most of the concerns I heard at voters’ doors over the past year: roads in disrepair, slow 911 response times, unmaintained parks, slow and infrequent transit, and more. Achieving the improvements many of us want to see in San José will require that we address our jobs deficit.
At the same time, I believe that San José should continue to build housing for our growing population (primarily driven by local births) and can do so in a way that does not worsen city finances (or traffic!). Before I explain, let’s break down San José’s relative lack of jobs and why it poses a serious fiscal challenge.
Silicon Valley’s Bedroom Community
Ironically — given Silicon Valley’s recent experience with job growth vastly outpacing home construction — it is true that San José has a long-running jobs deficit. Even in recent years, when many neighboring cities have experienced rapid commercial development, San José has achieved very little new commercial growth, especially for a city of our size.
In the 1950s and 1960s, San José was built out (largely through annexation) as a bedroom community to complement the job growth occurring in the smaller cities just to our north. Even now, San José has relatively little land dedicated to jobs. According to staff in our Office of Economic Development, most cities devote 20–30% of land to employment — commercial, industrial, retail, hospitals, and so forth. In San José, the figure is closer to 15%, and will drop to 14% or lower with the removal of a large portion of Coyote Valley from lands zoned for employment (which I supported, in full transparency).
Typically, large cities are job centers whose daytime populations swell with incoming suburban commuters. San Francisco, for example, sees roughly three times as many workers commute into the city each day as commute out. According to an analysis from the last census, San José is the only major city in the country whose daytime population is smaller than our nighttime population (i.e. more commuters leave each day than come into the city for work):
Thus, San José also has a uniquely low ratio of jobs (within our city limits) to employed residents. While Palo Alto has about 3 jobs for each employed resident, San José has fewer than 1:
Jobs = Tax Revenue = City Services
Why does all of this matter? In short, cities generate a large portion of their tax revenue from jobs- or business-related activity, including:
- One-time development fees on new commercial construction
- Ongoing property taxes on commercial, industrial and other employment land uses
- Sales tax revenue generated by companies spending money locally and workers eating out, shopping, etc.
- Hotel and parking fees generated by business-related activity, including conferences and other events
By a large margin, San José’s top two revenue sources are property tax and sales tax. Of course, COVID-19 has decimated our sales tax revenue and other sources of business-related revenue (hotel taxes for example), but even in normal times, San José’s budget is small on a per resident basis. It’s hard to get an apples-to-apples comparison of city spending because cities classify spending in different ways, but a top-line look at 2019–2020 general fund spending relative to population is instructive:
With 3 times the jobs per employed resident, Palo Alto is able to spend 82% more per person on city services. To be fair, average residential property values are also higher in Palo Alto, which accounts for some of this extra revenue. In Santa Clara, where average home prices are very similar to those in San José, the city is able to spend about 36% more per resident on city services than San José. These figures represent huge disparities in city services for residents.
Staffing levels provide another way of looking at this problem. To take one recently relevant example, policing, San José has significantly fewer officers per capita than neighboring cities and especially other large U.S. cities:
When San Joséans voice frustration with low service levels — from 911 response times and road maintenance to library hours and park cleanliness — we are, in some ways, voicing frustration with the jobs-to-housing ratio. Fewer jobs in San José translates into less tax revenue per resident, which in turn translates into a thinly staffed City Hall that struggles to provide the services residents expect and deserve.
San José faces another, hidden cost of being so residentially oriented that I also want to highlight. As I noted in my last post, 94% of San José’s residential land, more than any other major city in the country, is zoned for single-family detached homes:
Sprawling residential development (and again, in full disclosure, my wife and I live in a single-family home in the lovely Santa Teresa neighborhood, so I’m not passing judgment here) costs more for cities to maintain than the denser and mixed-use development patterns common in most large cities.
Think of it this way: San José has approximately 16% more residents than San Francisco (1.02M vs. 882K), but it has 380% more land than San Francisco. As a very rough calculation, these ratios imply that San Francisco has about 3 times more taxpayers per square foot of land to pay for the ongoing operation and maintenance of roads, sewers, parks, and other physical public infrastructure.
While those services are also more heavily used in cities like San Francisco, research indicates that there are significant economies of scale to intensive land use: on average, smart growth or urban infill development across the country has roughly one-third lower upfront infrastructure costs, 10% lower ongoing maintenance costs, and ten times higher tax revenue per acre. San José generally does not benefit from these dynamics.
The bottom line is that San José, as one of the most residential cities in America — and a rather sprawling one at that — faces some serious structural disadvantages in generating tax revenue and providing city services. For those who want to dive deeper into the topic, SPUR wrote an excellent report in 2016 about San José’s small per capita tax base, various strains (e.g. Redevelopment Agency debt, unfunded pension liabilities) on our budget that I don’t have the space to dive into in this post, and strategies for improving our fiscal position.
In all, the friendly critique of my last post (i.e. the argument that San José needs jobs, not housing) is very fair. However, I don’t think it is the final word on the subject.
Walk and Chew Gum
San José absolutely needs to attract jobs and, with the right policies and investments in place, it can. As the largest city in the Bay Area and the least affordable housing market in the country, San José also needs to build housing (as do other cities in the region). Fortunately, San José can enable more housing without worsening the structural budget challenges I’ve outlined above. Job growth and housing affordability do not have to be zero-sum.
On the jobs front, San José has a number of long-term advantages that will allow us to grow our tax base. Our comparative advantages deserve a standalone post, but to highlight just a few, San José has: an extremely talented and diverse workforce; phenomenal weather with about 260 days of sunshine per year; significantly more land than any other city in the region; existing and planned infrastructure that will enable it to become a major regional transportation hub; a world-class airport near downtown and without the delays that plague SFO; abundant access to open space.
We also have the comparative advantage of being a bigger city with a more balanced and business-friendly ethos than San Francisco and many of the small cities on the Peninsula that tend to fight growth and change at every turn. Case in point, our Envision San José 2040 General Plan makes job creation one of the city’s key strategies. The Plan identifies employment lands and development strategies that could add up to 382,000 new jobs by 2040, primarily in Downtown and North San José.
If executed (and it’s a big if, especially with the uncertainty created by COVID-19), this job growth would significantly expand the city’s tax base and improve service levels for residents. It would also make Downtown San José a destination and greater resource for all residents. And, it would improve the quality of our transit as increasing commuter demand spurred the necessary investments in rail and bus lines (including BART) to help workers and residents alike have more options for moving around the South Bay.
As critical as job growth is (and I’m an advocate for it), it does not follow that San José should not build housing. Historically, the jobs-to-employed resident (or jobs-to-housing) ratio has been a good indicator of tax revenue per resident and fiscal stability. However, generational shifts in living patterns and Americans’ return to urban centers is beginning to change underlying land use patterns, the potential tax revenue that housing can generate, and potential economies of scale for city services.
While single-family homes consume more in city services than they contribute in tax revenue (and we are generally out of space to add a meaningful number of them anyway), residential developments at higher densities (i.e. about 50 units per acre, which can be achieved with buildings in the 3–4 story range) can generate net tax revenue for city coffers and take advantage of economies of scale for services, from sidewalks to libraries.
As the largest city in the Bay Area, with nearly four times more land than San Francisco and significant transit potential in our urban core, San José ought to lead the region in both job creation and homebuilding. We just have to be smart about where and how we do it. Not all parts of the city can be treated the same in this regard. What makes sense in Downtown won’t make sense in Almaden. But, in general, future development that creates denser, mixed-use zones served by transit (“urban villages”), as described in our General Plan as well as SPUR’s 2017 Room For More report, can enable San José to grow its tax base, improve city services and have more vibrant urban areas that enhance our collective quality of life.
I also want to note, in closing, that our state government needs to do more to support housing providers like San José and incentivize all cities to provide housing for the state’s growing population. Cities that add significant job capacity (i.e. permit new commercial development) without commensurate home construction should have to address the housing cost externality they are imposing on cities like San José.
There are various ways to do this. The state could, for example, redistribute a portion of commercial property tax revenues on the basis of each city’s recent contribution to the state’s overall housing stock. Similarly, targeted state funding for transportation, parks or other local services could be tied to meeting homebuilding goals. Until Sacramento adjusts the way tax revenues are apportioned to cities, the latter will continue to systematically prefer commercial development over homebuilding.
As your incoming representative, I will advocate for this kind of reform in Sacramento. But even without action from our state leaders, San José can control its own destiny. Both economic development and housing have a role to play in increasing San José’s fiscal strength and improving city services for residents. To be sure, we won’t achieve this goal without attracting more jobs, but new housing can be additive, too. In fact, if we can get out of our own way on the housing front we may even find that denser, more walkable and transit-oriented urban clusters within San José (i.e. “urban villages” in parts of the city that can support them) become their own engines of economic development and tax revenue — not to mention enjoyment — for the city as a whole.
Councilmember-elect, San José District 10; firstname.lastname@example.org, 408–891–9708
Matt is Councilmember-elect for San José District 10, which includes Almaden Valley and Blossom Valley. Matt takes office in January 2021 and uses this blog to share what he’s learning about a variety of local issues and his take on those issues. Matt and his wife, Silvia, are proud to be raising their two young children, Nina and Luke, in District 10. You can subscribe to Matt’s updates here: https://forms.gle/ycvcf3fbKSFU2JfA6