The Nexus of Local Corruption: The Unearned Increment

(c) by Mark Dempsey

The late Sacramento County Supervisor, Grantland Johnson, once told a room full of his constituents that it's widely acknowledged throughout our state that local governments in the Sacramento region are the most in developers' hip pockets. This is not a contest we want to win.

The source of the fortunes made in land speculation--a more accurate description of developers' actual activity--is the "unearned increment." The unearned increment comes from a political favor granted by those local governments. The speculators can option farmland for a few thousand dollars an acre, and then, when the local government grants them the right to develop that land, they can sell it to builders for as much as 100 times the option price. 

Meanwhile, the Sacramento region has 20 years worth of undeveloped infill. Why on earth do we even consider developing outlying farmland when there is plentiful infill now? The answer: it produces no egregious profit for the speculators.

Perhaps the worst example of this near Sacramento is North Natomas--twenty foot underwater floodplain surrounded by weak levees. This is land so unsuited for development that one provision in a federal grant to increase regional sewage treatment capacity said there would be a six-million-dollar penalty if that increased capacity served development in North Natomas.

The speculators did not hesitate. They went to then-vice-president George H.W. Bush, who made that six million dollar penalty payable in a more palatable pay-as-you-develop installment plan. For lagniappe, Bush also arranged for a $43 million grant to improve the North Natomas Levees to pre-Katrina standards.

Most of North Natomas is built out now, and the speculators were able to sell that land for roughly 100 times what they had paid for it. That's a 10,000% gross profit, called the "unearned increment." 

We can attribute all of the unearned increment to local government's decisions, too. And if the speculators exchange their land for other income-producing real estate, they defer paying income tax on this gigantic profit indefinitely.

Meanwhile, North Natomas levees do not meet post-Katrina standards, and Sacramento remains second only to New Orleans in catastrophic flood risk. Several hundred million dollars are needed to strengthen those levees, but the residents of the now-built-out North Natomas will be paying for that, not the speculators.

This is not the only way to develop land. In Germany, the developers have to sell the land to the local government at the farmland price, then buy it back at the upzoned price. Local governments get all of the unearned increment.

And German public amenities are very nice indeed. In addition to single-payer healthcare, Germans enjoy first class infrastructure--our engineers rate U.S. infrastructure D+. German higher education is tuition-free, even for foreigners. The arts budget for just the City of Berlin exceeds the National Endowment for the Arts for the entire U.S.A.

This corrupt dynamic, selling our patrimony for a mess of poorly developed floodplain, is what drives the speculators to back local government candidates. These candidates are easy to spot: they have the biggest signs. The developer-backed candidates will try to reassure local environmentalists that Sacramento's designed-to-fail (and working as designed) transit must be included in any outlying development, but this is cold comfort.

What they won't do is shorten commutes, diminish the CO2 from those commutes, or quell the climate catastrophe barreling down the tracks toward us. Even as local officials complain about the shortage of public money, building outlying development ensures infrastructure maintenance will be roughly double the cost to maintain compact infill infrastructure. 

What the speculators' candidates will not do is give the benefit of the unearned increment to the public. 

Mark Dempsey is a former Realtor who sat on a Community Planning Advisory Council for the County of Sacramento for nearly a decade.