New Thinking for City Finances
Local governments can find sources of revenue through innovative
leveraging of public assets
By Gar Alperovitz
CITY FINANCES HAVE long been under pressure, but the Great Recession
and steady attacks on federal and state spending have compounded local
financial difficulties. The National League of Cities’ annual research
brief, City Fiscal Conditions, documents rapid deterioration. Reported
revenue declines of 2.5 percent in 2009 and 3.2 percent in 2010 were
unprecedented in severity in the 25-year history of the survey. In
2010, 79 percent of cities reported cutting personnel, 44 percent cut
services, 25 percent cut public safety spending, and 17 percent cut
current employees’ health benefits. Expectations going forward are
even more downbeat.
Hard times call for new thinking. We are going through a systemic
crisis, not simply a political crisis, and the assumptions of the last
three decades about the relationship among politics, social and
economic programs, and the economy are now obsolete. Cities everywhere
can find surprising answers to fiscal difficulties by looking to
scores of little-known innovative strategies under way in diverse
communities across the nation.
The economic crisis has, for instance, produced widespread interest in
the Bank of North Dakota, a highly successful state-owned bank founded
in 1919. Over the past 14 years, the bank has returned $340 million in
profits to the state, with broad support in many cities from the
business community as well as progressive activists. Elsewhere, cities
from Lowell, Mass., to Berkeley, Calif., have discovered they can make
better use of the millions of dollars that temporarily sit in bank
accounts by choosing where to place deposits based on banks’
willingness to re-lend those dollars to meet local community
development goals. This strategy can stimulate local economic
development without placing new burdens on taxpayers.
Another promising direction is generating revenue through direct city
ownership of land and businesses. What might once have been called
“city socialism” is now commonly dubbed “the enterprising city,” with
Republican and Democratic mayors alike involved in efforts ranging
from land development to Internet and wi-fi services. In many cities,
profits from municipally owned electric utilities also help finance
other services and thus reduce the tax burden. In Los Angeles, for
example, the Department of Power and Water contributes about $190
million per year to the city’s revenues.
Still other cities have created new businesses to promote local
economic development. Hundreds of municipalities, for instance,
generate revenues through landfill gas-recovery, turning the
greenhouse gas methane (a byproduct of waste storage) into energy.
Others have established programs to make equity (venture capital)
investments in local firms and share in their success. San Diego, for
instance, has invested $2.5 million in an “emerging technology” fund
targeting small businesses in low-income communities. In 2011,
Maryland Gov. Martin O’Malley restarted a similar program, the
Maryland Venture Fund, which had previously returned $61 million to
the state on the $25 million it had invested it local companies.
At present, city and state governments spend roughly $60 billion on
economic development incentives (tax abatements, tax-increment-finance
bond financing and the like). Much of this spending is pure folly:
Maryland’s $44 million retention subsidy to Marriott in 1999, awarded
after the company had already decided not to relocate, is a
particularly egregious example. A 2002 study of the Connecticut
Development Agency found that companies benefiting from government
subsidies “had created only 9 percent of the jobs they had forecast”
and that the average subsidy for each new job was $367,910.
Nonetheless, for a politician on a two- or four-year electoral cycle,
such “easy remedies” are all too tempting. Similarly, some mayors and
governors have sold off public assets, sacrificing long-term fiscal
sustainability for short-term gains.
A more sensible municipal development agenda might leverage still
other public assets to nurture the local economy. For instance, the
ability of city governments to use the municipality’s purchasing power
to keep business dollars circulating locally is vastly
under-appreciated. Used wisely, city purchases can provide a
revenue-neutral way of supporting the development of
community-anchored businesses: directing city contracts to companies
structured in ways that keep jobs in the city.
A new model of anchored ownership in Cleveland suggests what can be
done: The purchasing power of the city’s existing “anchors” —
hospitals, universities and local government itself — is used to
provide a long-term market for a network of green worker cooperatives
in some of the city’s lowest-income neighborhoods. This not only
provides “anchored” jobs but also builds the tax base and reduces the
demand for city social services.
Cities could take an even more active role in fostering this kind of
development. A municipality, for instance, could use money currently
raised through tax increment financing (TIF) and other mechanisms that
now support relocation incentives to instead support a “Cleveland
model” approach, reducing government expenditures and raising local
tax revenues at the same time.
In an age of increasing fiscal crisis, comprehensive city-level
economic planning that draws on the new strategies being refined
around the nation — together with similar initiatives at the regional
and national levels — may offer the only way out of the trap of
disinvestment, austerity, and a failing and negative municipal
politics that pits taxpayers against public employees in so many of
the nation’s communities.
Gar Alperovitz is the Lionel R. Bauman Professor of Political Economy
at the University of Maryland and the co-founder of the Democracy
Collaborative. His latest book is “America Beyond Capitalism:
Reclaiming Our Wealth, Our Liberty, and Our Democracy.” His website is