Can Cities Beat the Fiscal Odds?

Can Cities Beat the Fiscal Odds?Beating the fiscal odds means cities are able to not only balance budgets, but continue to pioneer innovative solutions to the country’s most intractable challenges and lay the foundations for fiscal and economic growth. (Getty Images)

As the economy continues to show hopeful yet nascent signs of recovery, cities remain cautious about their fiscal condition. They continue to face rising costs of services, stark infrastructure needs, employee obligations, and omnipresent state and federal funding cuts and uncertainties. Still, cities have proven remarkably resilient. Despite a couple of high-profile cases, the vast majority of cities are balancing their budgets and making good on their debt.

But this hasn’t come easy or without consequences. The harsh reality is that municipal governments are operating at 90 percent of their pre-recession revenues, with little growth in sight and limited prospects for tapping into growth sectors within their local economies. Balancing local budgets in this environment is an ongoing process of revenue and expenditure choices that affect the types, levels and costs of services provided in a community. These choices often involve tradeoffs, even among investments critical to growth and innovation, such as infrastructure and workforce.

Take the city of Charlotte, for example. The city is currently looking to close a $21.7 million budget gap left by the state repeal of a business license tax and a surprise drop in property tax values. The city is reviewing its options, which include: pay freezes and eliminating positions; transferring some maintenance expenses from the general fund to a tourism fund (thereby decreasing funds for tourism activities); cutting funding to an arts and science program; and increasing development fees.

After all of this, the city will still be $10-15 million in the hole. Increasing property taxes may be politically infeasible, which likely means deeper and more widespread service cuts, higher fees, and less funding for programs and investments. No doubt, though, the city of Charlotte will find a way to close the gap, but at what cost to their future economic and fiscal health?

Even under these circumstances, our cities are leading change, progress and solutions to the most difficult issues of our time. Chattanooga is bridging the digital divide; Louisville and Buffalo are closing the skills gap; Seattle and San Francisco are raising the minimum wage. If we want grassroots innovations that are even more widespread and sustainable and that drive national economic growth, then cities need more than the fiscal cards they’ve been dealt. They need more than creative workarounds – but instead a consistent toolbox of resources to create the conditions that will accelerate their local and regional economies.

Their Hand: City-State Fiscal Structure

Cities, of course, are creatures of their states. The choices local governments can make are constrained by legal limits on their revenue raising authority.

In a new National League of Cities report, we examine the Cities and State Fiscal Structure across the 50 states and determine that a city’s “hand” is unique within each state and is a mix of:

  • Municipal fiscal authority: access to sales, income and property taxes. A mix of revenue sources is needed to provide cities with stability to buffer against economic downturns, and to allow them to capture revenue growth during periods of economic growth. No state uniformly authorizes its municipalities to utilize all three tax sources. Maps for export-03
  • Municipal revenue reliance and capacity: the amount of revenue (taxes and fees) a city generates that can be used to fund services and their share of resident needs. On average, U.S. municipalities derive approximately 71 percent of their general fund revenues from own-source revenues, including 24 percent from property taxes, 13 percent from sales taxes, 3 percent from income taxes and 32 percent from fees and charges.
  • State aid: the amount of state support for a municipality as a proportion of its total revenues. While it could be argued that too much state aid makes municipalities beholden to the state, in general, well-structured state aid can increase the capacity of all cities by equalizing the base support for cities that may lack sufficient resources. State aid has been decreasing despite increases in state mandates and cuts to state services that in turn force cities to pick up the slack (i.e., cuts to higher education or mental health services).
  • Tax and Expenditure Limits (TELs): constraints on local fiscal autonomy through voter imposed or state-imposed taxing or spending limitations, most frequently limits on property tax rates, growth in property value assessments, or caps on the total revenue allowed from these taxes. Forty-one states currently have some form of a TEL.

Incredibly, no state has afforded its cities an expansion of municipal fiscal authority since the start of the recession. Local fiscal health remains below pre-recession levels despite burgeoning broader economic recovery in part because authorization of more local revenue authority and other enhanced capacity measures are so rare.

States are balancing budgets too, and in some cases fulfilling tax reform promises on the backs of local governments.  Cities in Texas, for example, have traditionally traded lower levels of state aid for more local control but are seeing revenue threats as the state pursues caps on the local property tax. Last week, the state Senate Committee on Finance heard a bill, S.B. 182, which would lower the cap from 8 to 4 percent. This reduction would only provide a typical homeowner in McKinney, Texas a savings of $29.65 annually, but the city would have a revenue loss of $1.4 million. Similar threats are being considered in statehouses across the country.

Hold or Fold

Within these constraints, cities are using the tools available to them, and in some instances, implementing creative financing strategies. In the best case scenarios, strategies like social impact bonds, crowdsourcing, participatory budgeting and even ballot measures can help meet specific needs or increase engagement with the community. But they do not offer long-term, broad-based, reliable, general revenue streams.

Fees and charges have become an increasing proportion of local revenue due to a lack of access to other sources and the political difficulty of raising taxes. Fees and charges include development fees, waste disposal fees, court fees and service fees such as libraries and parks. They can be regressive, making it difficult for lower-income residents to access services, or impose charges on development that can negatively impact economic growth.

Beating the fiscal odds means cities are able to not only balance budgets, but continue to pioneer innovative solutions to the country’s most intractable challenges and lay the foundations for fiscal and economic growth. This requires more local tax authority, access to a mix of revenue sources, state aid that enhances the fiscal base of less-wealthy cities, and a revision of existing tax and expenditure limitations to make them less binding, or better yet, nonexistent.

We are gambling with the economic future of our country if we do not offer our cities more flexible fiscal structures that align with new economic realities and the responsibilities that we lay on their doorsteps.

Read the full 2015 Cities and State Fiscal Structure report here.

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About the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

Carrots and Sticks: How Cities Are Taking a New Approach to Regulatory Compliance

This post is a response to the recent Governing article on regulatory compliance.

carrot stick(Getty Images)

There has been some recent buzz about the dangers of local regulatory compliance. Regulating businesses is necessary – you wouldn’t want to eat at an unsanitary restaurant, or take your car to an auto mechanic who wasn’t certified. However, some say that regulating businesses can be counterproductive, costly and raise equity concerns. Holding up examples of cities coming down hard against large swathes of businesses on relatively minor infractions can certainly make that case.

But these instances are the exception, not the rule.

Less Stick, More Carrot

While local governments would be wise to heed the warnings of fallout from “inspector zeal,” the regulatory reality is that most cities aren’t filling their coffers with health inspection fines. Ensuring that businesses operate in a healthy and safe way is clearly an important function of city government, but paying for inspectors can be expensive. And because cities are still facing fiscal challenges, many are approaching compliance with caution, carefully scoping out the financial, social and economic costs and benefits of their compliance approaches.

As a result, the regulatory environment emerging in most cities is guided by a clear articulation of the end game – to ensure safe, healthy communities and prosperous businesses. This means a more informed, sensible carrot-andstick approach: punitive “stick” measures when necessary, paired with a bushel of “carrots” in the form of compliance incentives and supports.

The “stick only” approach characterized by harsh, blanket enforcement is giving way to targeted compliance that leverages innovations in data and analytics, reforms bureaucratic red tape and makes it easier for businesses to comply in the first place.

Driving Innovation: The Impact of Analytics and Legislation 

New York City and others have enlisted the help of online review tools like Yelp to proactively identify health and safety concerns. A new Pew analysis noted that “[New York City’s] Department of Health and Mental Hygiene launched a nine-month pilot study in July 2012 that used data-mining software to screen and analyze about 294,000 Yelp reviews. It searched for keywords such as ‘sick’ or ‘food poisoning’ to find cases of foodborne illness that may not have been officially reported.”

Some cities – such as Boston, which has created a Problem Properties Taskforce – are even starting to use predictive analytics to better understand and pinpoint particular cases where compliance interventions can have the greatest impact.

Despite efforts to target the worst offenders, compliance “crackdowns” can disproportionately affect lower-income and legacy businesses that don’t have the skills or time to navigate government regulations and can’t afford to pay for fees, tax increases or compliance upgrades to their business. For these reasons, San Francisco is currently considering Legacy Business Legislation to help businesses that have been in operation for over 30 years remain in compliance and in their original locationThese businesses would be eligible for certain types of assistance, including priority access to pre-inspections for ADA compliancy, pro bono legal advice on leases, and property tax rebates. The legislation will predominantly support small mom-and-pop restaurants and cafes, and smaller bars and retailers that cater to the LGBT community.

Regulatory Overhauls

Even more common than predictive analytics and legacy business legislation is simply regulatory reform. Take ChicagoBoston, Cleveland, Kansas City, Mo., and Seattle, for example. These cities are making it easier for businesses to comply by reducing the number of permits and licenses, improving approval times, making requirements and timelines more transparent, revisiting outdated and onerous laws, and creating accessible ways for businesses to interface with government and obtain information.

Improving the ease of doing business is not only the most impactful compliance carrot available to local governments, but it is also a top contributor to a business-friendly environment (often surpassing low taxes). By using carrots and sticks in an innovative approach to regulatory compliance, cities are creating a win-win scenario in which the community is protected and businesses are encouraged to contribute to a vibrant, healthy economy.

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About the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

Local Government Employment Buoys Stagnant Public Sector

Today’s BLS February jobs report shows a slight improvement in public sector employment, with local government employment responsible for the majority of the gains.

Total public sector employment is up 7,000 jobs in February; local governments added 4,000 jobs, and state governments added 3,000. There were no gains in Federal government employment. Within local government employment, local governments (excluding education) added 2,600 jobs, and local schools added 1,200.

Despite these improvements, local government employment remains 512,000 jobs below its July 2008 post-recession peak.

March jobs report graphic

View the January Local Government Jobs Report.

christy-mcfarlandAbout the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

The Evolution of Economic Gardening and What it Means for Big Business

This post originally appeared in the November edition of Site Selection magazine.

Cleveland-OhioThe City of Cleveland, Ohio, has made cultivation of second-stage companies a central cog in its anchor strategy, in part through development of post-incubator space. (Getty Images)

Economic gardening is an economic development approach that targets second stage businesses – small, local businesses with the potential and desire to grow.  This “grow from within” development strategy started in Littleton, Colo., in 1989 after the relocation of a major employer devastated the local economy. Precisely because of this harsh history, economic gardening became associated with small businesses, specifically eschewing economic recruitment or a focus on larger employers.

According to Chris Gibbons, director of business/industry affairs for the City of Littleton and co-creator of economic gardening, “The relocation of manufacturing plants offshore and the general decline of economic health in parts of the country have reduced the effectiveness of traditional economic ‘hunting.’ ” For these reasons, economic gardening in its purest form has been adopted in many smaller, more rural and harder-hit areas of the country.

Out of those start-up seedlings has come a harvest of second-stage businesses – companies that have moved past the start-up phase of development but are not yet fully mature. They have a proven product and a market for their goods or services often reaching beyond the local area, bringing dollars into the community, and generating a substantial economic impact.

As the outsized impact of second-stage businesses became more apparent, as cities came to realize that typical small business programs didn’t meet the needs of these unique businesses, and with a desire to strengthen the broader business ecosystem, cities across the country have therefore adapted economic gardening to their local circumstances. What has evolved is a second-stage strategy that leverages larger employers in meaningful ways to accelerate smaller businesses.

Where to Connect?

According to the Edward Lowe Foundation, between 1995 and 2012, second-stage companies represented 11.6 percent of establishments, but 33.9 percent of jobs. Employee numbers and revenue ranges vary by industry, but the population of firms with 10 to 100 employees and/or $750,000 to $50 million in receipts includes the vast majority of second-stage companies.

“Second-stagers now face more strategic issues as they strive to gain a stronger foothold in the market and win more customers,” says the foundation. “Second-stagers wrestle with refining core strategy, adapting to industry changes, expanding their markets, building a management team and embracing new leadership roles.”

4 quadrants (2)According to the U.S. Small Business Administration, economic gardening addresses these unique needs by providing infrastructure, connectivity and market intelligence.

In Kansas City, Mo., KCSourceLink connects small businesses to a network of more than 200 nonprofit resource organizations in the region that provide business-building services.

“In the 11 years we’ve been working in the entrepreneurial ecosystem, we’ve determined that second-stage companies are a key segment, creating jobs and stability in the community,” says Maria Meyers, director of the UMKC Innovation Center and KCSourceLink founder. “Resource partner organizations in the network – such as the Helzberg Entrepreneurial Mentoring Program, the Small Business and Technology Development Center and the World Trade Center – provide second-stage companies with critical connections to larger corporations, mentoring and market opportunities.”

From Vacant to Vibrant

A key trait of second-stage companies is their readiness to grow, both physically and with new market reach. Acceleration of growth firms has actually become an attraction strategy for some suburban communities located outside of larger innovation hubs such as Boston, Austin, Cleveland and Kansas City.

These communities may not have a high density of traditional start-up supports, but can offer value-add to companies seeking to expand, such as affordable wet-lab space.

In turn, some innovation hubs are focusing not only on the growth of start-up and second-stage companies, but on retaining them as well. In order to do that, these cities need to provide both the physical space and the market opportunities for them to continue to grow from within -and this where the opportunities lie to engage larger businesses.

The City of Cleveland’s rallying point for second-stage companies is actually its anchor strategy, an economic development approach that leverages the economic power of major employers such as hospitals and universities to build wealth in neighborhoods and grow other industries and businesses.

In Cleveland, anchor institutions were incubating some great start-ups, but as they reached second stage, they left for the suburbs, or were purchased and moved to other locations. In an effort to further capture value from their anchor strategy, the City of Cleveland partnered with local developer Fred Geis to create space for second-stage companies. This “post incubator space” came with all the amenities these growth companies seek, as well as incentives from the city and continued engagement with hospitals and universities.

“The three buildings in the Midtown Tech Center have allowed us to capitalize on our Anchor Strategy, attracting companies like Cleveland Heart Lab that have grown from 15 jobs when they exited the incubator to over 115 high-paying technical jobs now,” says Tracey Nichols, director of economic development for the City of Cleveland. “These former vacant properties have brought 389 jobs to the area since 2012.”

Although economic gardening arose as the antithesis to larger employers, the approach as a solo strategy disconnected from retention/attraction efforts is rare. More often, as in Cleveland, economic gardening has evolved as an integral part of a broader economic development portfolio, leading to a more strengthened and supportive business ecosystem.

christy-mcfarlandAbout the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

Have City Finances Recovered?

At the release event for NLC’s annual City Fiscal Conditions, it was revealed that although the worst is behind, city finances have not yet reached full recovery.

CFC-Panel-Blog

Most accounts of the current state of economic and fiscal health go something like this: stabilizing but not yet returned to pre-recession levels. The media guys (and gals) hate it. There doesn’t seem to be much of a story when all we are seeing is incremental change. But when you think about persistently stagnant growth, the real question becomes, how far are we from full recovery?

At a release event today for NLC’s annual City Fiscal Conditions, it was revealed that although the worst is behind, city finances have not yet reached full recovery.

The cost and demands of services, pension, healthcare and infrastructure are on the rise. Federal aid and accompanying mandates are in flux and create uncertainty for local governments. Revenue options are constrained by economic conditions, state limitations and political culture.

Compounding these fiscal stresses are new demographic trends, housing and labor market changes, and the rise of new and disruptive industries, all of which underscore the misalignment between traditional revenue sources — property, income and sales taxes –and the economic activity that drives them.

So, how do we know how far city budgets are from full recovery? What are the key vital signs of city fiscal health?

The outlook of city finance officers, general fund revenues, workforce and personnel, and ending balances offer a unique window into recovery at the local level.

Outlook of City Finance Officers

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In 2014, 80% of city finance officers report that they are better able to meet the financial needs of their community this year than last. In fact, more city finance officers report a positive outlook this year than in the 29-year history of the survey.

On the flip side, this finding also means that 80% of cities across the country were worse off last year, indicative of magnitude of the recession and the depths to which cities sank throughout the recessionary period.

General Fund Revenues

General fund revenues grew modestly in 2013, and were the first post-recession year over year growth in revenues. However, revenues are projected to stagnate as cities close the books on 2014.

Chart 2 2006 base year-02

To gain more perspective on how the general fund revenues are faring pre and post-recession, we created an index using 2006 as the base year. 2006 was the pre-recession peak in revenues, the low came in 2012 when revenues were 88% of 2006 levels.

The first post-recession increase in revenues didn’t come until 2013 but in 2014 are still only projected to be around 90% of the 2006 revenue base.

Revenues are not yet at full recovery and the growth in revenues appears to be stagnating.

Tax graph-03

Another window in general fund revenues is to take a closer look at the drivers of the general fund: property, sales and income taxes.

During the recent recession, all three sources of tax revenue declined together due to the severity and length of the recession. Property tax revenue is anticipated to increase slightly in 2014 as collections catch up with improvements in the real estate market. This will be the first increase coming out of the recession.

Sales tax and income tax revenues continue to grow in 2013, but are projected to slow as cities close the books on fiscal year 2014. This is indicative not only of a harsh winter, but also the type of employment recovery we are seeing, with low wage jobs dominating growth.

Municipal Workforce

Speaking of jobs, throughout the recession, many cities implemented some combination of personnel and workforce-related cuts, including hiring freezes and layoffs, in an effort to reduce costs.

muni workforce-07 (2)

The good news: for the first time post-recession, more cities are increasing rather than decreasing the size their municipal workforces. The bad news: in the context of returning to full recovery, there are still ½ million fewer local government jobs today than there were in 2008.

This is particularly troublesome given the state of the mid-wage and mid-skill jobs crisis we are experiencing today.

Ending Balances

Ending Balances, or reserves, provide a financial cushion for cities to help balance budgets or to use toward a major planned project. Bond underwriters also look at a city’s reserves as an indicator of how likely the city is to make good on its debt.

Ending balance chart-02

Ending balances are on a positive trajectory, at almost 22% of expenditures in 2013. Prior to the recession, ending balances hovered around a high of 25% of expenditures, indicating that reserves have not yet hit pre-recession levels.

So, as we take stock key city fiscal vitals, we are starting to see city finances turn the corner coming out of the recession, but as revenues, workforce, and ending balances indicate, they have not yet returned to full recovery.

For first time since the recession, general fund revenues are increasing, but are projected to stagnate in 2014. More cities are hiring, helping to close the mid-wage, mid-skill gap, but we are still ½ million jobs away from pre-recession levels. Ending balances are showing a positive trajectory, but again, still have not caught up.

Cities were at the forefront of the Great Recession and are making their way back through tough choices, innovation and partnerships with the private sector, nonprofits, and others. Given persistent constraints on city budgets, however, the future is anything but certain.

christy-mcfarlandAbout the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

How Local Government Hiring Addresses Growing Wage Gap

Public sector employment has consequences for the quality of economic recovery since the majority of local government jobs are mid-wage.

Boston-Police-HiringGetty Images
It’s no secret that although national employment is on the upswing, the type of job growth we’re experiencing is troublesome. Low-wage jobs are growing more quickly than high-wage jobs, with mid-wage jobs trailing even further behind. In fact, while lower-wage industries constituted only 22 percent of recession losses, they are responsible for 44 percent of recovery growth.

As I first alluded to back in 2012, employment in the public sector has consequences for the quality of anticipated economic recovery since the majority of local government jobs are mid-wage. Throughout the recession, many cities implemented some combination of personnel and workforce-related cuts, including hiring freezes and layoffs, in an effort to reduce costs. This resulted in the loss of hundreds of thousands of mid-wage jobs in public safety, public works, parks and recreation, public health, social services, transportation, and administration, among other municipal services.

As budgets stabilize, though, local government hiring is picking up. In fact, cities are adding jobs at a faster clip than their counterparts in state and federal government, with the majority of recent gains in overall government employment at the local level. Healthier municipal budgets and a stronger workforce means not only more mid-wage city workers, but also better prospects for mid-wage employment in the private sector.

According to the Economic Policy Institute, increased government spending supports private sector jobs—either through contracting or due to increased demand for job-specific supplies (privately-produced automobiles to supply police officers, for example). Local government investment in transportation, water, sewers and communications infrastructure also promotes private sector growth by reducing costs and creating opportunities for additional private sector investments, such as those in workforce.

Getting Back to Business

Strengthening municipal operations through restoring services and the workforce is proving to be a priority for cities. Our research on mayors’ annual State of the City speeches found that 83 percent of speeches touched on Budget/Finance related issues and 35 percent devoted “significant coverage” to the topic. These speeches illustrate that mayors across the country recognize their employees as valuable assets and worthwhile investments for the positive development of their communities.

SOTC-Finance 9-26-14-08In San Jose, for example, Mayor Chuck Reed said,

“Times have been tough, but we have turned the corner and are slowly beginning to restore services. We are training new police recruits and hiring community service officers. We were able to keep 49 fire fighters who had been paid for with federal grants that expired. We opened four new neighborhood libraries that sat vacant for years. We turned streetlights back on.

We’ve also begun to restore pay to our police officers and other city employees. We know that we’ve lost a lot of good people because of the pay cuts – often to cities that are wealthier or haven’t yet felt the impact of their unfunded pension liabilities. It will take time to restore pay to the levels we want (and our employees deserve), but this is an important step in keeping a quality workforce.”

Mayor Steve Williams, Huntington, WV noted,

“Our employees, our single greatest resource, have not had a raise since 2008. In many years, it was an easy decision to say we could not afford a pay raise. This is not one of those years. The budget is tight, but we cannot afford to not provide our employees a pay raise. Therefore, I am recommending a 3 percent across-the-board pay raise for all bargaining unit employees and administrative personnel.”

The words of mayors Reed and Williams are indicative of others, and signal the value of our municipal workforce not only to quality services, but to addressing the critical issue of closing the middle-wage gap.

This post is the third blog in NLC’s State of the Cities project.

christy-mcfarlandAbout the Author: Christiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

More than money: Alternative incentives that benefit companies and communities

Construction in Raleigh, N.C.

Post adapted from Smart Incentives

Specialized services can complement financial incentives, while taking the concept of a partnership between business and community to a new level. Guest blogger Swati Ghosh, the International Economic Development Council‘s Director of Research and Technical Assistance, reports below on an interesting new paper addressing these and other alternative incentives.

Of all the tools that economic developers use to attract businesses to their community, incentives are the most controversial. Typically financial in nature, incentives are direct subsidies to businesses in the form of tax breaks, loans or grants. Proponents maintain that such subsidies are necessary to grow jobs locally as they reduce the cost, or risk, of doing business in a community. Critics, on the other hand, argue that there is no direct link between economic activity and such business subsidies, and some even suggest that they are a drag on economic growth.

Economic developers should closely follow an emerging alternative – programs and services that assist businesses but are not direct financial subsidies. Termed alternative incentives, these are investments in community programs that strengthen the business climate or that help a particular business in a way that benefits the broader community. They are a win-win: For businesses, alternative incentives can reduce the cost or risk of doing business in a community, yet communities retain these investments even if a firm shuts down or relocates to a different community.

IEDC’s Economic Development Research Partners program has developed a new paper focusing on alternative incentives. It is not an argument against the use of financial incentives; rather, it advocates for increased use of alternative incentives either alone or in conjunction with financial incentives. The paper, “More than Money: Alternative Incentives that Benefit Companies and Communities” (PDF), examines five categories of alternative incentives:

  • Talent/Workforce development
  • Real estate and permitting
  • Research and data
  • Networking and promotion
  • Infrastructure improvements

The paper is based on a survey of the IEDC membership to understand usage of over 40 different types of alternative incentives. It also includes several examples of organizations that have successfully utilized alternative incentives for business attraction and expansion, alone or in conjunction with other financial incentives. The paper concludes with recommendations for ways that economic developers can use alternative incentives effectively:

  • Focus on building relationships
  • Examine your organization’s strengths and utilize them creatively
  • Offer a wide spectrum of services
  • Bring along the key stakeholders
  • Focus on the needs of the community

As scrutiny, clawback provisions and other restrictions on the use of financial incentives increase, it may be beneficial to examine other options to support businesses. Alternative incentives not only stay in the community, but bring less of a burden in terms of monitoring and legal costs – benefits that every community and EDO can agree on.

Business Incentive Initiative

This post was written by Ellen Harpel, founder of Smart Incentives and president of Business Development Advisors LLC (BDA), an economic development and market intelligence consulting firm. Post originally appeared on Smart Incentives blog.

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Local businesses in New York City’s West Village. Source: Flickr user wallyg

City leaders have many concerns about the cost and effectiveness of economic development incentives in their communities, as we learned from the session on economic development financing tools during last year’s Congress of Cities. A new initiative working to develop best practices for evaluating incentives at the state level will help local elected officials whose communities use state incentive programs for business attraction. It should also provide some guidance for cities striving to assess their own local incentive programs.

The Pew Charitable Trusts recently announced the launch of the Business Incentives Initiative. This Initiative will help improve data collection, management and reporting within state incentive programs in order to “improve decision-makers’ ability to craft policies that deliver the strongest results at the lowest possible cost.”

Pew and the Center for Regional Economic Competitiveness will engage leaders from seven states (IN, LA, MD, MI, TN, OK, VA) to develop best practices for evaluating economic development incentives by:

  • Identifying effective ways to manage and assess economic development incentive policies and practices.
  • Improving data collection and reporting on incentive investments.
  • Developing national standards and best practices that states can use to successfully gather and report data on economic development incentives.

As project manager Jeff Chapman explained in an interview with Bloomberg BNA:

This initiative builds on Pew’s ongoing project to help state policymakers implement ongoing evaluation of economic development incentives. As states work to measure the effectiveness of these programs, they often find they lack the data needed to determine whether an incentive is producing the expected outcome. Further, there is currently no source that has identified and compiled the best practices on how to overcome this obstacle.

All states were invited to submit proposals to participate, and seven were selected. They have agreed to commit top decision-makers from economic development, revenue, and other relevant state agencies to work intensively with Pew throughout this 18-month program. Each of these seven states has also already begun to address the challenges associated with economic development incentive program management and evaluation. The Pew team will work with the states to develop and implement tailored solutions for each state, while also paving the way for development of best practices and training that will be available to all states.

I am pleased to be part of the Center for Regional Economic Competitiveness team working with Pew on this important effort. Our role will be to leverage our economic development and incentives expertise to provide technical assistance to the states.

Here at Smart Incentives, we have emphasized the importance of data, analysis, transparency and accountability in economic development incentive use. The lack of quality data regarding compliance and effectiveness is a significant problem for the economic development field and policymakers trying to do what’s best for their communities. The Business Incentives Initiative represents a notable step forward in enabling smart incentive use in all states.

HarpelEllen Harpel is President of Business Development Advisors (BDA) and Founder of Smart Incentives. She has over 17 years of experience in the economic development field, working with leaders at the local, state and national levels to increase business investment and job growth in their communities. 

Contact: eharpel@businessdevelopmentadvisors.com or ellen@smartincentives.org. Follow Ellen on Twitter @SmartIncentives.

Can Cities Survive on Love Alone?

Although For the Love of Cities by Peter Kageyama was published in 2011, the book, concept and author have been gaining popularity recently by a breadth of cities and city-loving organizations.

Kageyama calls for city leaders to take on the task of giving “love notes” to the community. Yes, that right, love notes or emotional capital, in the form of parks, arts, open space, local culture, play, walkable spaces. These create emotional connections and attachment between people and their cities.

It is certainly well documented that a thriving quality of life, or “lovability” as the case may be, supports growth and helps people feel attached to their communities.

But in the context of what this means for local governments, is Kageyama’s “lovability” theory the answer cities have been waiting for? Can cities survive on love alone? Here’s my take.

Lovability is not a silver bullet. Although coffee shops, dog parks and cultural events are critical to retaining and attracting residents and businesses, “lovability” is not a sufficient condition to bolster economic growth and retain/attract talent in places that are truly struggling.

A community needs a baseline level of economic health and employment opportunity before quality of life becomes a driving force, i.e. no amount of dog parks can solve Detroit’s underlying economic challenges.

This isn’t to say struggling cities shouldn’t strive to enhance quality of life/lovability, but they need to do it along-side the difficult work of addressing critical challenges like economic development, workforce skills, infrastructure and youth violence.

Chelsea mich clock tower

Chelsea, MI is a case in point for the mutual support that can exist between “love notes” and functional services. Nearly 30 years ago, the downtown association, elected officials, community banks, Chamber of Commerce, small business owners, and regulatory departments worked together to fully invest in returning its rundown downtown as the epicenter of the community. The catalyst for attracting storefronts – love notes, in the form of the the Purple Rose Theatre Company and a local restaurant.
The partnership tapped Chelsea native and long-time resident, actor/musician Jeff Daniels, who founded the nonprofit theater Purple Rose. The restaurant, the Common Grill, was given space to open in an old vacant department store in the middle of the downtown. The theater and restaurant not only enhanced local culture and attachment, but brought patrons into downtown and allowed for pedestrian traffic in other shops.

Create a culture of authentic engagement. Cities can do much to create lovability and attachment, but more important, how can cities tap this attachment for authentic civic engagement that drives change in the community?

Through support of the John S. and James L. Knight Foundation, NLC recently released Bright Spots in Community Engagement, a scan of communities across the country to better understand how local governments are empowering residents to advance the well-being of their communities.

Creating a culture of authentic engagement involves:

  • Reaching a broad spectrum of networks and representatives from all facets of the community, particularly those not typically engaged
  • Using new tools and strategies, particularly those that tap the power of technology, i.e. open data
  • Using a range of strategies (both traditional and more innovative) to engage residents. This helps reach more populations and leads to greater sustainability
  • Knowing when to lead and when to providing more subtle leadership in the form of support and collaboration where efforts are well underway from the grassroots
  • Making the physical and digital space available for engagement (schools, libraries)

For example, in the city of Philadelphia, partnerships across sectors have led to an open data and technology initiative that has attracted the city’s co-working spaces, venture funds, local foundations, emerging technologies, press and universities.

“My belief is that if we keep helping these good guys [in City Hall] do good work, their colleagues will need to learn the value of partnering with engaged citizens,” noted Alex Hillman of Indy Hall, a co-working space in the city dedicated to neighborhood development.

The city of Philadelphia is an active participant, serving as a convener of key stakeholders, providing access to data systems, using the mayoral bully pulpit to bring attention and lend credibility to the initiatives, and institutionalizing this strategy through the mayor’s executive order on open data and the appointment of Mark Headd, formerly of Code for America, as the city’s first Chief Data Officer.

Cities across the country, like Chelsea and Philadelphia, are not only developing creative ways to help residents feel love for their cities, but leveraging this love into long term economic and fiscal impact and authentic civic engagement.

When it Comes to the Skills Gap, Perceptions Matter

This is the second post in a series this week discussing different perspectives on the results of NLC’s 2013 Local Economic Conditions Survey.

With the recent release of the March jobs numbers, we are quickly reminded that what may finally seem like recovery must be viewed with cautious optimism. Our first blog post in this series dug deeper into the realities of what appears to be a strong and growing real estate market, one in which residential property improvements have largely overshadowed lingering and detrimental challenges in the commercial property market.

This post examines city officials’ perceptions about the labor market as well as skills challenges that may be posing structural barriers to sustained local and national recovery.

Concerns Over Skills Gap

The changing nature and composition of the economy has highlighted the necessity of a local workforce with skills that are appropriately aligned and matched with employer demand.

Unfortunately, more than one in two city officials (53%) report that current local workforce skills are posing a problem for the economic health of their communities. Nearly nine in 10 city officials (88%) note that workforce alignment has not improved over the past year.

Percent of City Officials Reporting Change in Workforce Skills Match to Demand of Local Employers, source: Local Economic Conditions 2013

Perception vs. Reality

We know that a so-called “skills gap” is not the only driver of challenges in the labor market. A skills gap is often the perception, or face, of a much more complex and tangled web of trends relating to a shrinking labor force, long term unemployment, underemployment and divergent hiring patterns.

The facts are stark: the labor market is shrinking, the economy is not creating enough jobs, and those dropping out appear to be in the prime of their working years, ages 25-54. The longer this continues, the more likely this pool will become unemployed in the longer-term, with deterioration of skills, networks and trust in the market to provide opportunity for them.

As reported in the Atlantic, “We increasingly have a bifurcated labor market…the job market looks normal for people who have been out of work for less than 6 months, and horribly dysfunctional for people who have been out of work longer than that.”

In addition to a shrinking labor market and longer-term unemployment, we are also facing an under-employment problem.  A Wall Street Journal analysis of recent U.S. Labor Department data shows that “284,000 graduates—those with at least a bachelor’s degree—are working minimum-wage jobs in 2012, including 37,000 holders of advanced degrees. That’s down from a peak of 327,000 in 2010, but double the number in 2007 and up 70% from a decade earlier.”

This is a problem in and of itself, with increasing college debt burdens and decreasing wages, but more so, because many with higher skills are taking middle and lower skill jobs, crowding those at the low end of the skills ladder out of the job market.

This rings particularly true given that we are seeing less job creation at the higher-end of the skills spectrum.  Brookings recently released a study finding that employers are indeed hiring more readily across the U.S., but that this is driven by industries such as construction, hospitality and healthcare.

A middle-skills gap appears to be a reality, particularly in the industrial trades, which have received decreased attention in high schools over the years from parents and guidance counselors as viable career options.  But even in these sectors, claims of uncompetitive wages, undesirable locations and work shifts, and poor hiring practices and systems are also at play.

Perceptions Matter

So, at the end of the day, a skills gap is but one of a host of challenges undergirding potential structural issues in the labor and jobs markets. Regardless, local officials, apparently nearly 90 percent of them, have been confronted with the reality of businesses telling them that they cannot find qualified workers.  This threat of employers picking up and moving, or choosing to hire or locate elsewhere, means that businesses are not happy and are not or will not be job creators for the community.

Cities across the country, from Avondale, Ariz. to St. Paul, Minn., are exploring ways to be both responsive to their business community while also tackling the heart of these complex problems in order to open pathways to employment for their residents.

They are partnering with businesses, workforce systems, economic development organizations, educational institutions and other stakeholders to examine the depth and scope of labor market issues and to educate residents for available employment. They are also placing greater responsibility on the business community to provide training opportunities for potential and current employees and engage in more sensible hiring practices.