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The Secrets of Sioux Falls’ Success

While other cities flounder in fiscal distress, the South Dakota city thrives. Its long-term commitment to prudence keeps paying off.

Well run cities don't make headlines, but we ought to pay attention to them for at least three reasons. First, it's important to recognize public officials who lead well and citizens who govern themselves well. Second, we should try to learn what they're doing right and find ways to apply it to other cities. Finally, we need to give a little encouragement to citizens that there are, despite the headlines, successful cities in America.

Not that there aren't plenty of headlines to discourage people. In just the past week, San Bernardino became the third California in less than a month to seek bankruptcy protection. In Scranton, Pa., the cash-flow crisis has become so severe that the mayor ordered the salaries of all city employees, including himself, cut to the federal minimum wage — a move that has resulted in the predictable court fight with the city's unions. Scranton is one of 27 Pennsylvania cities now operating under the state's "Act 47," a 25-year old program for distressed cities.

On the other hand, you don't see many headlines about Sioux Falls, S.D. This is a city that seems to be absolutely thriving. A look at the financials shows that it took a hit in the recession like everyone else, but not a bad one, and now things are going very well. The city is has a good bond rating — AA2 from Moody's. Unemployment is at 3.8 percent. The city's population is growing, averaging about 3,000 people a year. And it just broke ground on a 12,000-seat event center that will cost $115 million in public money, to be absorbed in the regular capital budget without a tax increase.

The expenditure for the event center was approved by 58 to 42 percent in a public vote. Mayor Mike Huether told me that a poll done as part of the campaign for the event center found that 81 percent of the voters in Sioux Falls think the community is heading in the right direction.

So what's the secret? Why is Sioux Falls doing so well when many other cities are struggling? Well the mayor says it's because they "run it like a business." That's a line we've heard a thousand times and, after decades in the public sector, I'm among the first to quickly respond that governments are nothing like a business. But I hear a little different meaning in the phrase from Huether. He means that city officials manage the taxpayers' money as if the city were a business that would go belly-up if it weren't careful. "Businesses shut down when they have a bad business plan, and the exact same principle applies in government," he says.

In this he is absolutely right. Governments, especially city governments in the United States in the 21st century, are in a fiercely competitive environment. Many of the middle- and high-income people they need to attract can live anywhere they want. They're not tied by employment to a particular location, and they're going to live where the quality of life is best for them. And despite the tax-incentive war that's going on, the real driver of location for successful companies is increasingly the need to be where the talent is.

Sioux Falls is a strong-mayor city, which means that the mayor is the CEO, responsible for managing the city; virtually all of the city's employees work for him. And in a rare feature for a strong-mayor city, Sioux Falls has an independent internal-audit function. The lead internal auditor, Rich Oskol, is hired by and reports to the city council. Oskol produced a recent review of the city's Comprehensive Annual Financial Report that lends a great deal of credence to Mayor Huether's proud claims. Oskol compared Sioux Falls to 12 similar cities, and it had better numbers than its peers on every measure. For example, the city has a financial policy requiring a reserve fund of at least 25 percent of expenditures — an extremely strong number. In fact, its reserves have exceeded that percentage substantially throughout the recession and at the close of 2010 stood at almost 35 percent.

The city's CAFR quotes a recent review by Moody's in which the bond-rating firm describes Sioux Falls as having a "historical record of prudent management" and a "commitment to protect existing reserves and funding legacy costs on an annual basis." Mayor Huether says Sioux Falls takes prudence and progress very seriously, with a little more focus on the prudence, and that the city's approach to management is "boring." In a lot of cities in America today, "boring" is only a fond wish.

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