The City of Ames is working on its budget for the fiscal year starting in July. It is also close to approving a version of the Climate Action Plan that includes a variety of implementation actions to move us toward a 2030 goal of significantly reduced greenhouse gas emissions.
Financial impact is an important part of prioritizing the actions needed to achieve Ames’ climate goals. So far, the public has seen a few large numbers – overall investment and net cost after savings. The City’s consultant, Sustainability Solutions Group or SSG, first estimated an overall investment of $2.4 billion and a net cost of $0.8 billion ($800 million), over 27 years. In a November 2022 presentation to the Supplemental Input Committee (LINK), after accounting for the Inflation Reduction Act (IRA) and the rising cost of natural gas, SSG decreased the net cost to $170M.
How can we decide whether this magnitude of investment is reasonable or possible for Ames? This blog post answers that query by putting the numbers into context. The first question is: “Who is paying for this, and who benefits from the savings that result?” From there we ask, “What part of the city department budgets will each cost affect?” Finally, we address an often-heard concern “Will this affect our property tax?”
Who is investing $2.4B? Who will benefit from the resulting savings?
A very large share of the $2.4B total investment will come from individual people making choices: “Do I buy an electric vehicle? Do I replace my A/C and furnace with a heat pump? Do I replace my gas stove or my gas appliance (stove, water heater) with an electric one? Do I walk, ride a bicycle, or take a bus instead of driving and parking?” Several factors go into those decisions. For some of us, the number one concern will be mitigating climate change. For some, it will be the economics: “Can I afford the up-front cost? Will it save me money in the long run? How long will it take for savings to pay off the initial investment?” For others, convenience, comfort, and/or health benefits will take priority.
Because individual decisions, such as what kind of car to buy, will make up a large part of the $2.4B, an appropriate way to make sense of this number is to compare it with the gross domestic product (GDP) for Ames, that is, the sum of all transactions in Ames where money changes hands. I’ve created a graph below using Ames GDP data from the last couple of decades, leaving room to extrapolate the GDP to 2050 (when the climate plan ends). The solid green line shows Ames GDP, which is about $8B now and has been rising steadily at about $200M/year. To add some perspective, if we simply average the projected $2.4B investment over 27 years, we get $88M/year (purple line on graph). This is 1.1% of the current Ames GDP. The red dashed line on the graph is the extrapolation to 2050, based on history. If we accept this as a good estimate for the next 27 years, then the average GDP over that interval will be about $10.5B and the gross cost of the CAP would end up being, on average, about 0.8%.
Figure 1: Comparison of extrapolated Ames GDP (red dashed line) with the expected average net investment needed for the Ames Climate Action Plan. The red dashed line shows an extrapolation of the growth in Ames GDP from now to 2050.
One way to see if this number for the Ames GDP makes sense, and to understand where it comes from, is to compare it to the average per capita income in 2022 [$54k from https://www.census.gov/quickfacts/amescityiowa] times the number of people in Ames [67k, same source]: this yields a smaller number of about $3.6B/year for 2021-22. This is noticeably smaller than the GDP of $8B because it ignores transactions that are not in the form of personal income.
Yet another way to think of this is through our share of Iowa’s GDP, based on population. The GDP for Iowa is about $180B/year, and 3.3% of Iowans live in Story County — that gives us $6B. The difference between this and the actual Ames GDP suggests that Ames is a relatively affluent community.
Whether we consider the GDP, the total personal income, or Ames share of the state GDP as our comparison, the total investment of $2.4B/27 years is in the range of 1% to 3%. That’s a measure of the cost impact. It is important to note that nearly all of that (or possibly more) will eventually come back to us in the form of savings on our energy costs.
Even when the savings from an action will ultimately match or exceed the investment, an important question is how long that will take — the payback time. For a major investment such as rooftop solar or geothermal heating, most people will be happy with a payback time that is ten years or less, and not so happy if that takes thirty years. The duration of the Climate Action Plan is 27 years, on the long side for an investment payback, whether you are an individual or a city.
What is the City’s share?
The report prepared by city staff in November estimated the total net cost to the city over 27 years as $200M, or $7.7M/year. This may now be smaller with the IRA and the rising cost of natural gas. However, the challenge isn’t to find this average net cost: it is to find the initial capital investment that ultimately returns enough in savings to nearly balance the investment. That shows up in this table in the difference between the cost per ton of carbon reduction before 2030 vs. the cost 2030-2050.
Even a few percent increase in the cost of purchasing essential items or in property taxes can represent a challenge for individual taxpayers. Yet, for perspective, these amounts are not very different from other major investments made by the city. For example, if the city of Ames decides to invest in a new incinerator for its waste-to-energy program, it will incur a one-time expense of $125-200M. It’s worth noting here that one possible benefit of aggressive climate action for Ames could be avoiding the need to purchase a new incinerator, for an estimated $120-200 million, as a robust program of recycling and reducing waste could make this purchase unnecessary.
Sources of funding for city action (and will my property taxes go up?)
To understand the potential impact of the CAP on property taxes, we first need to look at how the city’s activities are budgeted and paid for. The city budget can be divided into four main areas: the general fund that pays for city operations including police and fire services; special revenue funds that cover things like road work; capital project funds that are balanced on a longer timeline, not year by year; and enterprise funds that are self- contained, balancing their budgets through adjusting fees charged to users (though they also have additional sources of income).
Figure 2: This pie chart makes it easier to see and compare pieces of the city budget. We’ll look more closely at the general fund, and the enterprise funds. The green wedge shows the general fund, about 17 % of the total budget. This is where property taxes are collected and spent. Property taxes add up to just 45% of the general fund (and 7.7% of the overall budget).
The big pink slice in Figure 2 represents enterprise funds, which include electric services. Elements associated with our electrical services are a big part of what will help us get to the goals for the CAP. This part has nothing to do with property taxes, but choices could affect the electric rates we pay – up or down.
As the enterprise funds are 61% of the total budget, we’ll look at that first.
Figure 3: Here we break out the enterprise fund budget. The green wedge is the electric services – at 75% this is the lion’s share of the enterprise fund budget.
Figure 4: Here we look only at the electric services. The two largest expenses for the electric utility are fuel and electricity purchases (brown crosshatch, nearly 2/3 of the total) and the cost of generating electricity (blue stripe, second biggest piece).
Electric utilities are the elephant in the budget. I will write a separate blog post on this complex subject but cover a few key points here. We currently run incinerators that burn natural gas with refuse-derived-fuel (RDF) to produce electricity. Our current incinerators are required to run with nine parts natural gas to one part RDF. These incinerators only run because we need to dispose of the garbage – there are other, greener and less expensive, sources for our electricity. Even with incineration, a big portion of our garbage ends up in a landfill, as raw trash or as ashes after incineration. If we are to continue to use this method for disposing of our trash, and without a program to reduce the amount of waste, the city will need to purchase a new incinerator for $125 to $200M. This will lock us in to incineration for many years. Alternatives involving increased recycling and aggressive reduction in the amount of trash that leaves our homes and businesses could delay or eliminate the need for this expensive equipment, making it easier to fund the Climate Action Plan, avoiding a lock-in of further greenhouse gas emissions, and probably saving us all quite a bit of money in the process.
The general fund and property taxes – where do they come into the picture?
Figure 5. The general fund (17% of the city budget) covers essential aspects of city services, including law enforcement (just over ¼, green); Fire safety (black); Library services (purple diagonal lines); Park maintenance (deep pink); and aquatics (blue). This fund pays for city staff not employed through one of the enterprise funds.
The general fund provides the opportunity for the city to (a) add staff for the purpose of furthering climate action and (b) try some innovative programs that, once tested, may allow the city to apply for additional federal or state funds, or may be taken over by a private entity (business or non-profit). This fund is important for the climate action plan, even though it will provide only a small fraction of the cash flow needed to implement the plan. Recall that this fund is where property taxes are collected and spent. Property taxes add up to just 45% of the general fund (and 7.7% of the overall budget)
Three different government entities decide our property tax rates. First is the county assessor, who has responsibility for determining the value of the property. The assessed rate is intended to be approximately the market value, though the latter fluctuates quite a bit over the 2 years between assessments.
Second, the state of Iowa has rules about what fraction of the assessed value the city may tax, depending on the kind of property. For example, residential property is taxed at 54% of its value this year, while some businesses pay up to 90% on all or a portion of the assessed value, although this was recently revised to lower business taxes.
Finally, the city of Ames adds up all the taxable value and figures out what rate it needs to apply to generate the income for essential services.
Because Ames has relatively high property values, it can tax at a lower rate and still acquire enough money to cover essential services (such as those you saw in the general fund graphic, Figure 5. Some other towns in Iowa are not so lucky; they are already at the maximum rate allowed by state law.
To get a sense of how property taxes could be affected: If the city decided to budget $1M/year in the general fund for CAP purposes, it could cover that by raising the property tax per $1000 assessed valuation from $5.51 to $5.90, a 7% increase. This is not something our city would choose to do without considerable deliberation, but it is also something that is within the realm of possible actions.
Summary of key points
The total cost (or better, investment) to implement the CAP represents between 1% and 3% of the Ames GDP for 2021, and probably less than 1% of the average GDP for 2023-2050.
The net cost to the city is about 3% of its annual budget, based on November numbers.
New SSG estimates show net cost lower, thanks to the Inflation Reduction Act (IRA) and rising natural gas prices.
Most of the city investment will come from areas other than those funded by property taxes.
Property taxes balance the budget for the general fund and may fund some of the actions needed to achieve CAP goals, but the big-ticket items do not involve this fund.
Electricity generation and the way we process our waste is the biggest single item in the budget, and decisions being made now will likely determine whether we can reach our goals on time.
The challenge is investment now => savings later. In other words, the problem isn’t the net cost, it is the near future cash flow.
While I am responsible for the contents of this blog, I receive valuable input from other members of the Ames Climate Action Team. For this post, I am grateful to city staff for the extensive documentation and presentations related to the city budget that we can access through the city website. Lee Anne Willson, April 2023.
Sources of my numbers:
City manager’s draft budget for 2023/24
Special report (Property tax calculation)
November 15 Staff report on CAP implementation
GDP for Ames from 2000 to 2021, Federal Reserve Bank of St. Louis
GDP for Iowa in 2021
Mean income and population of Ames, 2021/2022:
Population of Story County