Land-Use Regulation and Fiscal Sustainability
Letter from ACT president Ben Ross, November 30, 2010
As is generally recognized, the difficult budgets of the past two years are more than a reflection of the economic cycle. As our county evolves into a more urban and more economically and socially diverse community, we must rethink our past practices in order to ensure the fiscal sustainability of the public services — transit among them — that Montgomery County residents depend on.
Land-use regulation is one of the central functions of our county government. That it affects the county budget is unquestionable. To be sure, this relationship is recognized when we talk about the tax revenue from development under new master plans. But far more important, in the long run, and far less discussed are the systemic fiscal impacts that are built into the way we regulate land use. The current rewriting of the zoning code gives us the means to address these impacts and move toward a more sustainable way of life, fiscally as well as environmentally. This is an opportunity that should not be missed.
Over the last 40 or 50 years, oversight of land use in our county has undergone a fundamental structural shift. We formerly had a system of zoning, in which tracts of land were classified for a single use and building was allowed if it fell within the limits of the zone. The sprawl land use mandated by single-use zoning has many grave defects, intolerable traffic congestion among them. Since the wedges and corridors plan was adopted decades ago, an expanding consensus of the county's residents has recognized the need for a different pattern of growth.
The obsolete and destructive system of single-use zoning has not been repealed, however; it remains on the books, encumbered with a maze of added rules that make it nearly a dead letter in practice. Most of the county's developable land is zoned for low-density development that is contrary to the goals and spirit of the county's master plans. The master plan is implemented through “alternate” methods of development that are theoretically optional but in practice mandatory, because landowners lose most of the value of their property if they build what the land is supposedly zoned for.
Under the “alternate” methods, the size and design of each building, along with “amenities” that the builder contributes to the community, must be approved by the Planning Board. The general use of this procedure has created a system of central administrative allocation, in which the design of every new building and a side-deal specifying the amenities are negotiated among the developer, Planning Board staff, and neighboring residents. This arrangement raises two overriding fiscal issues: allocation of the amenities among competing public needs, and adequacy of resources to administer the system of controls. In our current budget situation, such questions can no longer be ignored.
The system of central control has evolved gradually, with little consideration of fiscal issues and even less attention to underlying principles of economic theory and democratic governance. The original zoning system was based on an economic theory prevalent in the 1920s, which held that planning was needed to overcome the anarchy of competition. Herbert Hoover, who did much to popularize zoning and master plans, was a strong adherent of this outlook, but at the time it was widely shared across the political spectrum from extreme right to extreme left. Since then, much has been learned about planning, markets, and mixed economic structures that have features of both, but the evolution of land-use regulation has been largely isolated from progress in the understanding of economic institutions. Our system of development approvals is an economic system, and its dysfunctions are easier to understand if we look at it in that light.
The amenities provided by builders are, from an economic point of view, a form of taxation, yet there is no mechanism for systematic allocation of the tax revenue. When the Planning Board approves an amenity, the amount of required expenditure is rarely specified. As a result, there are no statistics on the overall amount of money that is spent on amenities, but there is little doubt that it is large.
Spending decisions on amenities are made by negotiations between a developer, whose main interest is getting approval as quickly and cheaply as possible, and the immediate neighbors of the project. The planning board and its staff typically rubber-stamp any agreement between developers and objecting neighbors. The effect is to disenfranchise the vast majority of county residents — everyone who doesn't live nearby, and even nearby residents who support the project on its own merits. Self-interested decision-making by small groups leads inevitably to misallocation of resources. The wishes of immediate neighbors can even be directly antagonistic to the interests of the county as a whole — for example, developers are sometimes required to install walls and plantings for the purpose of obstructing pedestrian access to their projects.
This method of allocating public resources is undemocratic, and over the long term it is not sustainable. The county's future fiscal challenges require the surplus captured from land development to be shown in the budget so that spending decisions can be made democratically. This can be done if the current system of in-kind amenities is replaced with a cash tax payment, yielding revenue that the county can allocate in its budget.
Planning Board staffing
In the county's current fiscal straits, the Planning Board like other agencies has had staff cuts. Yet the demands on staff time continue to increase. As a result, the planning board has had to prioritize its activities and drop those not of highest priority. This problem existed even before the recent budget cuts, and has only been reinforced by them.
A bias toward large-scale investments is inherent to economic systems based on central allocation, as was recognized by economists who studied the former Soviet Union. It takes more time to review and approve many small projects than one large one, and so our Planning Board prioritizes large development projects. The staff's preference for large parcels is reinforced by the high transaction costs of the alternate-method approval process. The zoning ordinance reinforces this systemic bias in some areas by explicitly forbidding high-density development on small parcels while allowing it on larger parcels. Elsewhere, meritorious proposals are rejected simply because they are too small — a very recent example is the Reed Brothers housing development near Shady Grove.
Squeezing small landowners out of our urban centers has many deleterious effects. The urban critic Jane Jacobs emphasized the importance of diversity of ownership in creating a vibrant urban center. Yet an explicit goal stated in our master plans is the exact opposite — land assembly into large parcels for development. Surely this contributes to the complaints so often heard about “sterility” of new developments.
With so much work needed for development approvals, the staff does not have enough time to revise master plans. Plans are updated only when developers are ready to build. A good example is the garden apartment buildings along Battery Lane in Bethesda, which are clearly not the ideal land use in that urban center. Their single-use zoning was left unchanged when the Woodmont Triangle Master Plan was adopted on the ground that they were not “ripe for development.”
A system in which obsolete plans remain in place until market forces demand revision is not planning. Our so-called Planning Board finds itself, at best, negotiating new buildings between developers and opponents. At worst, development is frozen into patterns dictated by theories of single-use development that we claim to have long abandoned.
An important lesson from the economics of Soviet central planning is that the attempt to completely centralize decision-making power winds up dispersing it. No individual or board can have enough information to decide everything, and power passes to the few individuals with the most information who settle things by negotiation among themselves.
This phenomenon is readily visible in our system. Master plans are few in number, they are openly debated, and the elected County Council balances the desires of developers and immediate neighbors against county-wide interests. But in the approval process for individual developments, project design and the selection of amenities are entrusted in practice to negotiations between developers and the immediate neighbors. Small-scale decisions made by this process often undercut the vision in the master plans — thus, for example, the urbanism of downtown Bethesda is marred by surface parking lots and empty plazas offered up to appease anti-urban homeowners who don't even live in the Central Business District.
As these problems manifest themselves, our reaction is often to apply new rules and added layers of oversight. This only exacerbates the dispersion of power. The more complex the system, the harder it is to control. To re-establish democratic decision-making over land use, boundaries between administrative and market methods of coordination must be drawn consciously. The aim must be to create a mechanism that balances the demands of the marketplace against those community interests that the market does not reflect. The current situation, where complexity is the biggest obstacle to central control, calls for a thorough-going simplification of the system of regulation.
The needed simplification has two central elements. First comes an end to the system of fictional zones overlaid with “alternate” methods of development that are in practice mandatory. The Planning Board and its staff must be freed of their unsustainable burden of work. Property should be zoned so that the development that is expected proceeds “of right.” Second, and closely linked to the first, the resources now dispersed into negotiated amenities must be captured through taxation. This will allow fairer and more democratic allocation and will directly contribute to relieving the county's long-term fiscal problem. More broadly, such reforms will improve the county's business climate by lessening the delay and uncertainty which are a greater deterrent to economic growth than the absolute level of taxation.
The current fiscal crisis makes urgent a democratic allocation of wealth that is now squandered on needless bureaucracy and misallocated “amenities.” More broadly, it is past time to reassert democratic control over new development. We urge the Council and Planning Board to address these issues systematically in the revision of the zoning code.
 Only negotiated amenities are at issue here. Developers should comply with general rules, such as affordable housing requirements, and supply infrastructure that is inherent to a project, such as internal streets and sidewalks, stormwater control, etc.