Paying for past choices: Cities struggle with infrastructure

Bordered by farm fields on one side and railroad tracks on another, this southern Minnesota town of 550 people has just a handful of businesses along its main drag, a pub, a bank, a service station. The grocery store closed years ago. So did the school. Like many of the state's smaller communities, Claremont has been experiencing a long, slow decline.

So, thinking they'd found a way to draw in a few new families, the leaders of Claremont decided in 2006 to partner with a developer to build a 15-home subdivision on the city's north end, near a cluster of trailer homes. The hope was that Claremont, which sits between Owatonna and Rochester on Highway 14, would serve as a bedroom community for couples whose work was split between the two cities. A planned highway improvement sounded encouraging as well.

Five years later, in a transformed economic climate, the development isn't much to look at. The one home that was built, a split-level with tan siding, stands empty at one end of a cul-de-sac. The street is lined with real estate signs and untapped utility boxes jutting from the grass like tomb stones. "I don't know what they were thinking," said Claremont Mayor Ginny Busch, a straight-talking local who took office after the groundbreaking. "It wasn't on my watch." On the other hand, she added, "If hindsight were foresight we would all be rich."

The situation in Claremont is hardly unique in Minnesota. Many cities are stuck with unfinished housing projects and empty industrial parks and infrastructure expansions that once looked promising but now feel burdensome. Some communities have sought to re-envision the projects through new partnerships and incentives. Others are seeking the least painful strategies for paying off debt, maybe by spreading the cost around via a sales tax or stretching the payments out over more years.

Being saddled with debt related to projects that haven't panned out makes it more difficult for communities to make hard choices about services as local budgets get tighter, property values decline, state aid shrinks and residents demand leaner government.

Cities of all sizes are carrying more debt these days, according to State Auditor Rebecca Otto's office. Between 2005 and 2009, "outstanding long-term indebtedness" increased across the board, one report said.

"Before the housing market crashed, there were lots of developments being put up, housing and malls," Otto said. "Some communities are stuck with those. Maybe the developer walked away. It does put a strain on cities."

These projects, for the most part, aren't outlandish--though some may view them that way now. Rather, they represent the routine doings of communities looking toward future growth.

"There are plenty of case studies around," said David Drown, a Minneapolis financial consultant who works with communities all over the state. "Cities make investments in infrastructure all the time in anticipation of growth and expansion. The revenues that are generated by growth are supposed to pay for the improvements. When growth stops, the equation gets out of whack."

In the case of Claremont, the city issued $450,000 in bonds in 2007, just before the housing market imploded, to build infrastructure for the subdivision: roads, sewer lines, water lines, a new wastewater lift station. The developer bought the land and planned to build and sell homes to pay the city back.

Now, the developer has walked away and the city anticipates taking over the project by the end of the year. It's seeking a new partner who will build a house or two for starters. Maybe it will also sell empty lots cheap to generate income to offset bond payments. Without income like that, the debt is costing each of Claremont's households about $200 per year.

Given significant belt tightening recently and a staff of just two and a half people, Busch doesn't welcome the added responsibility of running a housing project. "If we are taking over these lots, who is going to be responsible for managing them? We don't want to be in the housing business. But we are forced to be."

TO GROW OR NOT TO GROW

In some ways, smaller outstate communities have been hardest hit by the economic downturn because they often put up public money as an incentive for private development, according to Drown. "In the metro area, a lot of that development happens without city involvement," he said, because banks are willing to lend money. "You get outside the metro an hour and developers have a harder time financing projects. The bank thinks it's riskier and it probably is.

"If hindsight were foresight, we would all be rich."

"Cities either blow up and die, or this is what they do," Drown said. "Were some communities more prudent in their risk-taking than others? Sure. Some would call that conservative, do the least you can to get by. When things go badly, they do great. When things are building, those communities are criticized for lost opportunities."

The idea of cities investing in perpetual expansion--even during high times--is "utterly insane," according to Chuck Marohn, a planning consultant and executive director of Strong Towns. "Without question, cities have been overdoing it," he said. "The idea was that prosperity at the local level was easy. You just had to borrow some money and leverage the future for today.

"Cities are stuck with projects they don't need and can't pay for," Marohn said. "And what are they doing about it? A lot of prayer, I think. A lot of wishful thinking. There is this idea that this is a temporary thing that will turn around and we will rediscover 2005 and everything will be great again."

"We're not going back to 2005," said Marohn. "We still haven't adjusted back to normal. We are a fraction of the way through a longer transition."

CLOQUET'S ALMOST EMPTY BUSINESS PARK

The city of Cloquet envisioned industrial and commercial growth when it began building its 55-lot business park back in 2006, after issuing $2.1 million in bonds. Located on Highway 33 near the St. Louis River, the park--outfitted with water, sewer, roads and a wetland pond--has drawn just two tenants since then, a home supply store and an engineering firm, which broke ground last spring.

"I think the community is still very supportive of what we did," said Cloquet city administrator Brian Fritsinger. "So far I haven't heard anybody question this. People do say the timing wasn't the best."

Fritsinger is counting on a gradual economic recovery, but doesn't expect a return to the bubble years. "Gradual change works best here anyway. We will get back to a leveling off and a steady growth pattern that's smaller than it used to be." In hindsight, he said, the city might have taken a more incremental approach, perhaps leaving some of the business park undeveloped.

With fewer companies looking to build--a business park just six miles from Cloquet, in Esko, hasn't drawn a single tenant--a city has to market itself aggressively and provide incentives, according to Holly Butcher, Cloquet's community development director. "We've gone out and driven to businesses that have called us in the region," said Butcher, who counts the park as an asset. "Previously, related to commercial, we didn't have to do much of this. It used to be really fast-paced. People are shopping around." The city is considering installing a fiber broadband network as further enticement.

The principal bond payments for the business park, more than $200,000 per year, start in 2013. Lot sales and assessments were supposed to cover the bill. So far Fritsinger isn't worried because the city has been collecting around $100,000 in property taxes yearly to establish a fund for the project. "If we don't see development in a year or two, we'll dig into what are our options. Fortunately, we haven't had to do that yet."

HUTCHINSON: WATER, WATER EVERYWHERE

Inside the city of Hutchinson's state-of-the-art water treatment plant, completed in 2007, three enormous banks of pristine reverse osmosis filters stand ready to remove pollutants and corrosive agents from the city's drinking water. Yet only one of the banks is running.

This project, along with a subsequent expansion of the city's wastewater treatment plant, was launched before the economy turned, when the city's water demand was much higher. Back then, the old water plant strained to meet a need that sometimes reached 4.2 million gallons per day during peak summer months. The new facility can produce up to 6.5 million gallons per day, but during a recent late fall visit, demand was in the neighborhood of 1 million gallons.

Hutchinson is home to a 3M plant, a yeast factory and Hutchinson Technology, among other companies. Back when the plants were on the drawing board, state regulators were demanding better water quality, both flowing from the tap and into the Crow River. It seemed like the perfect opportunity to build a couple of infrastructure projects--with a total public price tag of just under $30 million--that would take the city into the future.

But the future changed. Hutchinson Technology reduced its workforce dramatically. A metal plating business, also a major water user, closed. And housing growth stalled. "We did think we would see a certain level of usage," Mayor Steve Cook said. "I don't know if anybody was forecasting the economic situation that came down."

Much like Cloquet and Claremont, the city is searching for ways to make the infrastructure projects more viable. Staffing and operating costs at the plants have been cut. For a fee, the wastewater facility will accept waste from the public, such as from a dairy farm. And the city is looking for partners, a nearby town that might want to tie in to one plant or the other.

Of course, the city could further raise user fees to cover its bond payments of around $3 million per year, but Cook is concerned that if fees get too high, they might discourage businesses from moving there. The city refinanced the bond debt, stretching it over more years. And with resident support, it went to the Legislature last session and won approval for a 0.5 percent sales tax to help out, a tactic more cities are considering these days since it spreads the cost around. "A lot of people come to the community to shop or work," Cook said. "It's a regional center."

Even if he'd had a crystal ball to forecast the downtown, he said the city would have had to address the water plants. "We still would have had to do something because of the regulatory requirements. But it would have been something different."

Still, Cook has his eye on the future as he touts the city's water quality. "In trying times, the natural reaction is to pull back and be more cautious," he said. "We are trying to be smarter but still invest where we should be investing so Hutchinson is still an attractive community to bring businesses to and live in."

"Short term, we have some issues. Longer term, (the plants) will help us attract businesses and help the community grow."

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