How Cities Can Fund the Future

Local governments are far from broke—if they can tap their enormous market power.

Voters in booming Seattle have proved willing to approve ballot initiatives to help fund infrastructure projects. Leaders in other cities should take note. Elaine Thompson/AP

How Cities Can Fund the Future

Local governments are far from broke—if they can tap their enormous market power.

There’s a huge question facing American cities, and, thanks to the recently enacted federal tax law, it just got more urgent: How are cities going to fund the future?

Cities stand to absorb a major financial hit from the new legislation. For the most part, the substantial reduction in corporate tax rates will mean fewer resources at the federal level to invest in those things—research-inspired innovation, quality infrastructure, skilled workers—that drive long-term economic competitiveness. The corporate tax rate reduction also has the effect of devaluing federal tax credits that have been used to raise private capital for low-income housing, historic preservation, and research and development.

But tax reform is only the latest in a long series of fiscal challenges that localities have been dealing with. For the past several decades, higher levels of government have systematically pushed down responsibilities for solving hard challenges and making critical investments without providing a concomitant delegation of capacity or resources.

The conventional wisdom is that cities are broke. But that’s because we think of cities as governments and we focus on what they owe, given pension and other liabilities. As we write in The New Localism: How Cities Can Thrive in the Age of Populism this narrow view of cities constrains our ability to see the multiple opportunities for raising capital. We see cities, firstly, as networks of institutions and leaders and, relatedly, as communities that have vast market and civic power that can be tapped.

In our view, cities have three tangible options in the hunt for capital.

Cities must organize private and civic wealth

Our book is full of examples of cities that have used private and civic resources to advance key community objectives, such as spurring entrepreneurship or catalyzing redevelopment of critically located neighborhoods. We strongly believe that the institutional models and financing mechanisms invented in Cincinnati (Center City Development Corporation), Indianapolis (Central Indiana Corporate Partnership), and St. Louis (Cortex) could be adapted and adopted by cities across the country. These models work because they deploy corporate, philanthropic and university resources through professionally managed entities that have clear missions and work in close cooperation with the public sector.

In the near term, cities might even want to create Social Impact Funds and convince local corporations to channel a portion of the tax windfall they are poised to reap for investment in tax credit projects that build affordable housing, restore historic properties, and rejuvenate local business districts.

Cities must unlock public wealth

As we’ve written before in CityLab, we believe that cities can leverage the public assets they own (e.g., land and buildings in downtowns and along waterfronts) to invest at scale in critical public goods like infrastructure. In The New Localism, we devote a chapter to the workings of the Copenhagen City & Port Development Corporation, a publicly owned, privately managed corporation that has regenerated the historic harbor and used the revenue to service the debt on a city-wide transit system. Think of that: an entire transit system built on the revenue from the sale or leasing of public land.

The Copenhagen model represents a third way between mediocre public management on one hand and unnecessary privatization on the other. Can the U.S. do this? Yes, if we understand what the government owns (not just what it owes), values public assets, and repurposes our legacy public authorities to operate in a way that generates markets rather than protects institutional fiefdoms.

Voters must support concrete projects and initiatives

The referenda process, where it exists, is a path to large-scale investment in the future. Over the past three election cycles, for example, voters in cities and metropolitan counties have approved hundreds of billions of dollars for infrastructure investments ranging from transit extensions to rail station redevelopment to road modernization. In the 2016 election cycle alone, voters from Los Angeles and Seattle to Wake County, North Carolina, and Indianapolis approved nearly $200 billion in additional taxes to spur ambitious transit and more sustainable patterns of development.

And voters are not just approving referenda for infrastructure. Ballot initiatives passed in Broward County, Dayton, King County, and San Antonio are generating hundreds of millions of dollars in local revenues to provide children with high-quality early education and other proven investments in young adults.

Perhaps most intriguingly, the use of public referenda to raise public resources cuts across red and blue party lines, in conservative and liberal communities.

These three capital-raising strategies, although quite distinct, share some common elements. They require city leaders to have a vision for growth that is grounded in the unique aspects and opportunities of their community and supported by objective data and analysis. They require an investment prospectus that details the size and shape of the capital needed to make the vision real. And they require public, private, or civic leaders to step up and sell the vision, whether at the ballot box through referendum or in the boardrooms of corporations, philanthropies and universities.

Is this easy? Of course not. But it has been done and the models exist. And capital, in this country at least, is not the constraint. With the right institutions and mechanisms, hundreds of billions of dollars are out there to be raised and deployed.

One final thought: We have no choice. In the absence of a functioning federal government, investing in America’s future will have to happen from the bottom up.