Three levels of government: Federal, state, and local

November 17, 2006 | Capital, Government, Housing, Legislation and policy, Local Government, Nations, States

Not only does the US have the world’s most complex housing finance ecosystem, we also have an unusually complex hierarchy of government when it comes to place, with three full levels:

 

Cerberus

Nice doggie, with three heads

 

·         Federal: 1.  By all relevant measures (revenues, span of control, people employed), the Federal government is the dominant actor, from sea to shining sea.

·         State: 52.  All fifty of them, plus the District of Columbia, plus (in some areas) Puerto Rico, each with its own governor (or mayor in DC).

·         Local: 36,000. Every state is further subdivided into localities — cities, towns, and townships.  Massachusetts, for instance, has 351.  If Wikipedia is to be believed, there are 19,400 cities and 16,500 towns throughout the county.

three_levels_b1

 

 

(To add to the confusion, in many parts of the country there’s a fourth level, county government, that overlaps with smaller state or larger local functions … but thankfully, we’ll set that aside for this post.)

 

Why the multiplicity?  What does each level do?

 

Disney_three_musketeers

One for all, and all for one!

 

(Other nations with three-level government include Australia, Canada, and South Africa.)

 

Australia_three_levels

 

Housing has three critical elements: property, people, and capital, and each level of government naturally attaches itself to one of them:

 

  1. Capital is a national issue.
  2. People are a state or regional issue.
  3. Property is a local issue.

 

Three_kings_shadow

Each follows the others

 

1.         National: capital.  Previously we’ve discussed the four housing roles of government: Law, Enabling environment for capital, Public-Private Partnership, and Subsidy.  The first two of these are bedrock — without them, it’s impossible to develop any effective housing affordability policy.  It should therefore be no surprise that law and the enabling environment are national government’s responsibility, in areas such as these:

 

·         Macroeconomic policy.  All credit is riskier than that of the sovereign government in whose currency we transact.  Without a Treasury and a Federal Reserve, we’d have unreliable interest rates, and that volatility always leads to housing unaffordability.

·         Clear title and settlement.  Laws to assure reliability of title, efficiency and credibility of settlement, and consumer disclosure all emanate from the Federal government.  So the Real Estate Settlement Procedures Act (RESPA), the Home Mortgage Disclosure Act (HMDA), and dozens of similar statutes all have a Federal origin.

·         Mortgage markets.  Likewise, it is a national responsibility to create large-scale lenders and insurers, starting with the Farmers Home Administration (FmHA, now Rural Housing Service, RHS) in 1934, then Federal Housing Administration (FHA) in 1937, then Fannie Mae and Freddie Mac, and most recently the Federal Home Loan Banks.

 

Fhlb_map

The Federal Home Loan Banks: national charter, regional franchises

 

·         Investment taxation.  Governments manage and influence capital flows through national tax policy.  In the US, the mortgage interest deduction, deductibility of local real estate taxes, rental depreciation, capital gains treatment on real property, and so on — all are critical calibrators of investment appetite.

·         National housing priorities.  Because the Federal government captures by far the lion’s share of all taxes, it can use this vast pooling to create national-level housing priorities.  These have come in the form of appropriated programs (e.g. Section 8 Housing Choice Vouchers) or tax expenditures (e.g. LIHTC or historic credits).  National-level programs are tremendously effective because the standardization allows capital and information to flow from state to state.

 

2.         Regional: people, demography, and economics.  As capital is national (because it can move at the click of a mouse), markets are regional or metropolitan (because people move in vehicles), with cities being bounded since Caesar’s era by the time of a home-to-work commute. 

 

Julius

Julius Caesar banned all wheeled vehicles from Rome during the daylight hours.

 

Because regions (in the agricultural era) and metropolitan areas (in the urbanized era) vary dramatically in their climate, demography, economic base, and economic prospects, naturally it requires regional or state government to deploy national resources and also to assure that markets spanning multiple localities grow in a healthy way.

 

We thus see states competing with other states to attract inward investment, and then more locally to stimulate regional and municipal infrastructure.  States also can oversee local government performance (e.g. on affordability targets), and can insist that laggard localities catch up (e.g. via Chapter 40B’s state-level inclusionary zoning that overrides local zoning).

 

When metropolitan areas themselves become larger — say, anything over three million people — the metropolis feels itself different from ‘downstate’ or ‘upstate,’ so we have the splintering phenomenon that Chicago, for instance, has a ‘home rule’ allocation of LIHTCs independent of Springfield, and New York City has housing finance and regulatory agencies that have won their independence from Albany.

 

Steinberg_new_york

Albany‘s nowhere in the picture

 

States also play the absolutely critical role of bridging policy between ultra-quick capital (national) and ultra-slow property (local), finding ways to use national programs for local priorities.  Thus the LIHTC, with its state-level qualified allocation plans (QAPs), unwittingly stumbled into a self-reinforcing delivery mechanism: each state has its own allocation, but if the allocation is unused, other states may slurp up the excess.  Result?  Everyone uses its whole allocation, and everyone innovates.

 

Brueghel_wedding_banquet

Now, there’s enough here for everybody.

 

In this the LIHTC harnesses the natural competitiveness of peers (in this case, states) and harmonizes it with their natural collaboration against a superior (in this case, the Federal government). 

 

3.         Local: property.  The inescapable reality of real property is that it cannot move.  This makes real property unique among the ecosystem’s elements:

 

·         People can move.

·         Jobs can move.

·         Companies can move.

·         Financial assets can move at light speed.

 

Everything moves … but property.  That’s why real estate professionals repeat the location, location, location  mantra — because it’s the only fixed reference point in an environment characterized in every other phase by change.

 

Guide_star

The best location is that way

 

Localities, therefore, are the ultimate decision authority for land use and property use.  Their goal is effective diversified land use to produce robust economic ecosystems that encourage people to live in their community.  Cities and towns keep score by rising property values — the ultimate test of people’s approval of an area — and since cities are businesses, if they succeed in raising property values they will have more revenue to spend on city services, in a virtuous circle of civic improvement. 

 

Three_steps_customer_service

If we’re nice to homeowners, they’ll move to our town, won’t they?

 

And, paradoxically, rising city economics means less housing affordability and a greater need for workforce or other affordable housing

 

We can put it all together, at least conceptually, in the table below:

three_levels

 

 

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