Mayors and the Politics of the Property Tax

This post is the final installment in a series expanding on NLC’s 2016 State of the Cities report.

(Getty Images)

In his 2016 State of the City address, Helena, Montana, Mayor James Smith stated that “Our ability to compensate our employees from year to year depends first and foremost on property tax revenues.” (Getty Images)

Mayors have a love-hate relationship with the property tax. On one hand, it is one of the few fiscal tools they have to raise revenue for mounting needs. On the other, accessing this tax can be an uphill political battle. Given these dynamics, it was no surprise that ‘property tax’ was the hottest budget issue discussed by mayors in their 2016 State of the City speeches.

(National League of Cities)

(National League of Cities)

Tax Profile
Property tax revenues are driven by the assessed value of residential and commercial property. They typically lag the real estate market due to delays in local assessment practices. For example, the sharp drop in the real estate market that set the recession into motion did not hit property tax rolls until 2010. Cities faced several years of declining property tax revenues following 2010, even though real estate markets across the country were stabilizing. In North Ridgeville, Ohio, Mayor G. David Gillock noted that, “Our real estate tax [revenues] increased somewhat during 2011 and 2012, but due to… reevaluation in 2013, they again dropped precipitously. They are appreciating but are still about $300,000 below where they were in 2012.”

In recent years, property tax collections have begun to rebound, attributed largely to improved values catching up with collections, not necessarily rate hikes. Those with high property tax rates are cities like Bridgeport, Conneticut, or Detroit; these cities have low property values and/or high levels of local government spending as well as no access to sales or income tax.

Since the mid-1990’s, irrespective of economic conditions, the number of cities increasing property tax rates in any given year has always been about the same, about one in five. This is reflective of state- and voter-imposed restrictions on local property tax authority as well as the political challenges of raising property tax rates.

Political Challenges
In recent cases of tax increases, mayors have felt the backlash. Despite massive pension and education challenges, the city of Chicago had not had a substantial property tax rate hike in many years… until last year. Mayor Rahm Emanuel made a bold move and increased property taxes for residents and businesses, on average, about 13 percent (or $400 per year).

Given the fiscal challenges facing the city, the increase was overdue, but was not without political consequences.  Vocal opposition came strongest from the business community. A Crain’s Chicago Business columnist recently wrote that “in an action unlike any I’ve seen in decades, the Chicagoland Chamber of Commerce sent a letter to nearly 2,000 businesses in the Northwest Side’s 1st and 35th wards asking them to contact their aldermen and unite against these harmful policies.”

Property taxes have been called the scapegoats of the tax world, “a catch-all for gripes about potholes, traffic tickets and anything else that ails a local economy.” A key reason for the blatant disdain of property taxes is that the tax burden is more transparent (annual tax bill) and harder to avoid when compared with sales taxes applied at checkout or income taxes withheld from a paycheck. Case in point: earlier this year, Ferguson, Missouri, voters approved a half-cent sales tax hike for economic development but failed to garner the two-thirds needed to pass a separate property tax hike.

Undergirding much property tax angst is the continued slow and uncertain pace of economic growth. Mayors from cities as diverse as Buffalo, Baltimore, and Carson City, Nevada, touted their efforts to lower property tax burdens, stabilize property taxes and offer rebates and credits to seniors, low income families and city workers. “This year I am proposing to do even more with the creation of a property tax credit for our sworn police officers, firefighters and sheriff’s deputies who own homes in our city as their primary residence. I want to encourage more of our first responders to live in the neighborhoods they are sworn to protect,” said Baltimore Mayor Stephanie Rawlings-Blake.

Mayors also used their speeches to describe the complexities and potential unintended consequences of property tax reductions. While praising recent efforts to lower tax bills to more equitably balance commercial versus residential property taxes, Mayor Steven Adler of Austin, Texas, also noted, “The danger of using the wrong metric to measure whether your government is helping with affordability is not that we’re just measuring the wrong thing – it’s that measuring the wrong thing means we’re not working on what will really have an impact on affordability.” Although property tax reductions are visible, they alone are not the most impactful way to increase affordability within the city. He went on to discuss the importance of transportation, housing and workforce development.

In addition to oversimplifying solutions to complex city goals, property taxes reductions also mean less revenue for city services and the employees who provide them. “Our ability to compensate our employees from year to year depends first and foremost on property tax revenues… the Commission did not approve a cost of living adjustment for city employees for FY16,” said Mayor James Smith of Helena, Montana. “It’s a classic balancing act. It really captures the dynamic tension that exists between government and the private sector of the economy.”

How to Pay
Political challenges often keep local governments from accessing the property tax. This means that the question of how to pay still looms large. One of most common responses is to raise fees for services, which of course brings equity concerns as poorer families pay a larger share of their income for services. Some cities, like Syracuse, New York and Boston, have reengaged nonprofit tax-exempt institutions to contribute more cash and community programming to offset use of city services and provide unique benefits city residents. Some, like New Orleans and Denver, have focused on cost-cutting innovations in service delivery. In most cases, cities are using a mix of strategies to balance their budgets, provide services, tackle broad goals and meet obligations.

To learn more about the performance of the property tax and its impact on city fiscal health, don’t miss the release of NLC’s annual City Fiscal Conditions 2016 report on Thursday, October 13 at 11 a.m. EDT.

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

The New Equity Imperative for Local Economic Development

The city of Austin has set out to create the prototype for how communities of the future compete in a global marketplace.

Austin has a substantial local economic development goal: to remove an entire generation of kids from poverty and get them on trajectory to be competitive for the world’s top STEM and entrepreneurial jobs. (Getty Images)

With a fast growing tech economy and population, the city of Austin is a hotbed of growth and innovation well on its way to economic dominance… or is it? Closer examination reveals an economy inaccessible to large swaths of the local workforce, with divergent income growth for Latino and African-American families and gentrification hostile to traditionally underserved populations.

By the numbers, the Austin-Roundrock metro is second in the nation for overall strength and size of its economy and third for wealth and productivity – but the area comes in at an unimpressive 60th for inclusion. In other words, it ranks high among metros on traditional economic indicators, but low on how the benefits of this growth and prosperity reach all people in the region.

Unfortunately, this trend is not unique to Austin. It is an inherent feature of local economies across the country, reinforced by traditional economic development. A new report released this week by the Brookings Institution, Remaking Economic Development, calls on cities and regions to aim higher.

Equity Imperative

Although local leaders can be lulled into a false sense that inequitable growth is nonetheless sustainable growth, the recent recession and disappointing recovery have proven it to be, at best, short lived. “If the next generation of workers is not prepared to meet the needs of major employers, that stifles business development and retention efforts. If people are unemployed, they cannot purchase many of the goods and services the economy produces, hurting small businesses and entrepreneurs. Inefficient use of land and infrastructure hampers job access, limits productivity, and hurts property values,” notes Amy Liu, report author and Vice President and Director, Metropolitan Policy Program at Brookings.

Today’s equity imperative for local economic development is not only a moral one but an economic one. In order to thrive, cities must strengthen untapped and underutilized assets and deliberately rectify disparities by race, place and income. This new vision of economic development holds the promise to raise the standards of living for everyone, setting regions on a higher growth trajectory.

Leaving market forces unchecked – or, worse yet, reinforcing them with traditional economic development tools, – often means that growth occurs at the expense of lower-skilled, minority, younger workers. (Getty Images)

Leaving market forces unchecked – or, worse yet, reinforcing them with traditional economic development tools, – often means that growth occurs at the expense of lower-skilled, minority, younger workers. (Getty Images)

Ensuring Deep Prosperity

But, of course, this approach is easier said than done. Ensuring “deep prosperity” means turning the tides on seemingly intractable politics, complex systems and incentives that favor the status quo. Moreover, inclusive growth requires strong market fundamentals that are matched with data-driven, networked and diverse civic leadership.

But it can be done.

The Brookings report suggests several actions that city leaders can take to start the hard work of remaking economic development:

  • Setting the right goals — expand the scope and metrics of economic development to reflect a more foundational and holistic understanding of how to expand the economy and opportunity;
  • Growing from within — prioritize established and emerging firms and industries, invest in the ecosystems of innovation, trade, talent, infrastructure, and governance to support globally competitive firms and enable small businesses to start and grow in the market;
  • Boosting trade — facilitate export growth and trade with other markets in the United States and abroad in ways that deepen regional industry specializations and bring in new income and investment;
  • Investing in people and skills — incorporate skills development of workers as a priority for economic development and employers so that improving human capacities results in meaningful work and income gains; and
  • Connecting place — catalyze economic place making and work at multiple geographic levels to connect local communities to regional jobs, housing, and opportunity.

Keeping Austin Weird, and Educated

The city of Austin gets it. Although Austin weathered the recession better than many, rapidly rising poverty and inequality were becoming major economic concerns. In the not-too-distant future, businesses would not have a sufficient local workforce base to draw upon. Additionally, growing social service needs have become a serious fiscal drain on the city.

Led by then-new Economic Development Director Kevin Johns, the city of Austin set out to create the prototype for how communities of the future compete in a global marketplace. For Austin, taking the economy to the next level means a core focus on equity-based outcomes through a quality built environment and creative workforce.

“We began this journey in January 2010 to eliminate poverty and come to a full employment economy. This was the principal path to exiting the Great Recession, and continues today as we gain speed towards the next recession,” said Johns. “It includes our commitment to help musicians, artists and creatives living in poverty, as well as equity to residents of color and all citizens seeking a prosperous future but drawn into poverty.”

The Einstein Project is one cornerstone of this approach. The Project is a public private economic and education partnership in which Austin’s high technology and scientific companies teach 40,000 children in poverty. There has been a groundswell of support for the Einstein Project from companies including IBM, Samsung, Silicon Labs, National Instruments, Google, GM Research and Apple.

A key element of the Project is that it is incentivized through the company’s receipt of small property tax breaks (also known as Chapter 380). Using this revamped financial incentives program as a contract for the partnership allows the city to hold companies accountable to performance measures, which are evaluated by the Ray Marshall Center at the University of Texas.

This is important because the goal is substantial: to remove an entire generation of kids from poverty and get them on trajectory to be competitive for the world’s top STEM and entrepreneurial jobs… but hopefully stay in Austin, of course.  “This could save us as much as $20-30 million a year. That could be 40,000 kids who will not need subsidies as they become heads of households. Instead, these kids will become a huge talent base for our high-tech companies,” said Johns.

Adapting its financial incentives program – a tool traditionally deemed to deliver economic growth at the expense of local residents and businesses – is a signal that there is new era of doing business with and in the city of Austin. Maybe it’s easier for Austin because it already has a strong market, but it’s certainly an indication that taking the risk to remake economic development can pay steady dividends… and make the world a better place in the process.

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

3 Steps Cities Can Take to Anchor Economic Partnerships

With a new approach, anchor institutions have the ability to accelerate economic development priorities and reshape their hometowns for the better.

This is a guest post by Neil Kleiman.

Anchor institutions — colleges, universities and hospitals — are predominant local economic actors, often the largest employers within a city. These institutions provide a knowledge foundation for their home cities while also being drivers of local development. Medical centers and research universities foster an entrepreneurial climate that attracts young professionals and leads to spin-off companies in the growing tech economy. In virtually every city in the United States, there is recognition of this mutual interdependence, but rarely does that awareness extend to a consistent working relationship. The full potential of these partnerships has not been realized because of mistrust, half-starts and half-realized results.

While partnerships — the best of which rely on the combined efforts of the philanthropic, anchor and public sectors — have been lacking, they are getting stronger. Smaller cities, to their credit, tend to have a greater connection to their anchor leadership. Cities like Wilkes-Barre, Pennsylvania, Waco Texas, and Kansas City, Kansas are great examples of turnaround strategies jointly planned by anchor institution and local leadership. However, partnerships between anchors and cities often go awry. A university or hospital may work with local government on one specific project or community service program, but on others relationships can be marked by tense negotiations around real estate expansion, arguments over tax-exempt status and miscommunications stemming from a lack of understanding about how to engage productively with one another.

In our recently released report, Striking a (Local) Grand Bargain, the National Resource Network, NYU Wagner and the Urban Institute provide the following steps to establishing a productive and far-reaching connection between anchor institutions and cites that will lead to structured, systematic partnerships in pursuit of mutual self-interest and large-scale improvements.

Step One: Establishing the Bargain

Building a grand bargain may sound intuitive, but it means local leaders must take the initiative with the following actions:

  1. Identify clear community priorities appropriate for anchor institution partnership.
  2. Identify the best external partners from the philanthropic sector, business community or the federal government to advance local effort.
  3. Build on what you have. Many local communities felt that they don’t know where to begin, but invariably there is already some collaborative activity — even if at a small scale — that can be built on.
  4. Engage senior level leadership at local institutions to craft shared goals and strategies together.

Step Two: Leveraging Supportive Mechanisms

There are a number of mechanisms that can greatly advance any local compact. The federal government, as in years past, has developed tools and programs that can support partnership efforts, but it’s incumbent on local leaders to put them to good use. Tactics for leveraging supportive mechanisms include:

  1. Build a platform to increase community engagement in the community health needs assessment process (part of the new Affordable Care Act) so that hospitals and community groups can drive investment tailored to specific community needs.
  2. Use the tax code to encourage hospital community and economic development activity.

Step Three: Maintaining an Ecosystem for Collaboration

Without strong, consistent and regenerative leadership, compacts and partnerships will not withstand the test of time. An infrastructure of education and support must be put in place to keep the local ecosystem healthy. Even those anchor institutions that engage in major outreach efforts find that the focus and cultural change needed within their institutions is significant. The following are tactics for maintaining an ecosystem for collaboration:

  1. Rally all stakeholders around a laser focus on local and regional workforce needs. Colleges should use data and engage local firms to build curricular-based pathways around the exact skills and credentials employers need.
  2. Implement leadership trainings for institutions, public officials and community leaders. Regionally based trainings can clarify roles and interests and establish clear lines of communication.

Anchor institutions, despite their namesake, are not holding cities back. With a new approach, a Grand Bargain based on shared interests, anchor institutions have the ability to accelerate economic development priorities and reshape their hometowns for the better.

About the Author: Neil Kleiman is the Director of NYU’s Wagner Innovation Labs, and serves as the National Resource Network’s Deputy Executive Director for Policy and Research.

New Evidence That the Tax Exemption Matters

Tax-exempt municipal bonds provide support for infrastructure projects such as the Leonard P. Zakim Bunker Hill Bridge in Boston, pictured above. (photo: Will Damon)

Walking down Commonwealth Avenue in Boston this summer, it was hard to imagine more than six feet of snow in this very place not more than a few months prior. Although the snow has melted (finally), a wake of potholes is a daily reminder to residents, businesses and government of the critical need for sound infrastructure.

Most infrastructure projects, including roads, schools and sewer systems, are paid for by tax-exempt municipal bonds. This places municipal bonds squarely at the center of inquiry between increasing infrastructure needs and decreasing public investment.

A new white paper released this month by ICMA and GFOA, Municipal Bonds and Infrastructure Development – Past, Present and Future, helps to untangle the relationship between bond market conditions and infrastructure investment. Demographics and politics appear to play a larger role in capital spending levels than do interest rates, the study finds, but of critical importance is the tax-exempt nature of municipal bonds.

The post-recession slowdown in local and state infrastructure investment would have been significantly worse had the tax-exemption not been in place. “If the federal tax exemption for municipal bonds were repealed, state and local governments would have paid $714 billion in additional interest expenses from 2000 to 2014,” notes author Justin Marlowe, University of Washington. “For a typical bond issue this would mean $80-210 in additional interest expenses per $1,000 of borrowed money.”

Other key findings from the new report include:

  • In 2014, state and local governments invested nearly $400 billion in capital projects, a significant slowdown in spending. Total state and local capital spending has not yet returned to pre-Great Recession totals.
  • Approximately 90 percent of state and local capital spending is financed by debt.
  • There are more than one million municipal bonds in the market today, issued by more than 50,000 units of government, and their total par value is just over $3.6 trillion.

Financing methods, such as pay-as-you-go and public-private partnerships, are explored as alternatives to tax-exempt municipal bonds. Although effective for some types of capital projects, these methods should be viewed as complements to tax-exempt financing, not robust alternatives, notes the report. For example, “[PAYGO] can take decades to save up the requisite capital, and on a present value basis, debt becomes cheaper at some point in the intermediate to long-term future.”

With limited alternatives, the instability of a federal funding stream and a recession hangover that continues to stifle political inclination toward financial risk, the importance of the tax-exempt municipal bonds cannot be understated.

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

The Dual Reality of Economic Recovery in Cities

This post was co-written by Emily Robbins.

This is the first post in a series about NLC’s new economic analysis, Cities and Unequal Recovery, which reveals ways that cities can support and accelerate inclusive economic growth.

To better understand the specific, local-level impacts of unequal recovery and the policy implications for city leaders, we conducted the Local Economic Conditions Survey 2015. Cities and Unequal Recovery analyzes that survey and offers a place-based perspective on economic recovery from the unique vantage point of those who are held most accountable for prosperity and equity in cities: chief elected officials.

Here’s what we found:

At the local level, most cities experienced either greatly improved or slightly improved conditions.New businesses and business expansions are widespread in cities, however, labor force challenges threaten to stymie this business growth.The trend of increased home values is great news for local property tax rolls and for existing property owners, but bad news for the growing number of individuals that are currently priced out of the housing market.The widening income inequality in cities is striking, and underscores the fact that local economic recovery is not taking root across the entire socioeconomic spectrum.While comebacks in key business sectors and property markets are stabilizing local economies, rising tides do not lift all boats. As cities continue to attract more residents and businesses, they are faced with the challenge of ensuring that the benefits of growth reach everyone in the community. This new local economic reality must be matched with strategies to address inequality not only as a deeply concerning social problem, but an economic one as well.

About the Authors:

christy-mcfarlandChristiana K. McFarland is NLC’s Research Director. Follow Christy on Twitter at @ckmcfarland.

Robbins_small (2)Emily Robbins is the Senior Associate of Finance and Economic Development at NLC. Follow Emily on Twitter: @robbins617.

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.


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.


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.


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

Better Able Less Able-02

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.