The Phenomenal World

The Phenomenal World

August 21st, 2018

The Urban Commonwealth

—   Andrew Kaplan

The Urban Commonwealth

—   Andrew Kaplan


As the federal government continues to abdicate responsibility for urban investment, cities face a depressing modern calculus. Urban inequality has increased over the past decade, and many cities are struggling to make much-needed long-term investments (see the well-publicized summer meltdown of NYC’s subways). Raising taxes is politically challenging and skimming funding from current programs may detract from other critical policy goals. With no federal cavalry on the horizon, cities are under pressure to make the best of what they have.

In this context, social wealth funds (SWFs) and urban wealth funds (UWFs), which have featured prominently in the public discourse recently, might seem like a policy panacea. SWFs promise to reduce inequality and build public wealth, while UWFs offer the tantalizing prospect of increasing revenues without raising taxes. Both scenarios seem desirable at face-value, but the consequences of wealth funds can vary greatly depending on their particulars. Digging deeper into these structures reveals why, though there is reason to be optimistic about applying elements of both types of institutions to urban contexts, there is also reason for caution.

First, a note about terminology. Often used interchangeably or loosely, SWFs and UWFs refer to two qualitatively distinct types of wealth fund proposal. Both SWFs and UWFs are collectively-held, independently-managed investment vehicles that aim to preserve and grow public assets. SWFs generally aim to apply transparency and social goals to the sovereign wealth fund blueprint by engaging “new” liquid resources (e.g. natural resource dividends, progressive taxation) to initially capitalize a fund, which is then invested in a varied portfolio of financial assets. UWFs, on the other hand, compile existing public assets (e.g. public land, commercial enterprises, utilities) under a single entity, which actively manages the assets to maximize value. While proposals for SWFs often seek to earmark proceeds for cash transfers (this specific arrangement is called a Citizens’ Wealth Fund), UWFs aim to broadly pursue social investment, at least as conceptualized by Dag Detter and Stefan Fölster.

Alphabet soup aside, the case for the first type of wealth fund, social wealth funds (SWFs), is theoretically and empirically compelling, but usually made at the national level. As capital’s share of national income growth swells and capital ownership concentrates increasingly in the hands of the few, wealth inequality has grown more pronounced. By recouping private wealth through measures like natural resource dividends or wealth taxation and investing this wealth in a collectively-owned financial fund, SWFs can redistribute gains from surging economic growth. Unlike traditional fiscal policy, SWFs build a store of public wealth, which pays off in the long-term; for instance, Norway’s sovereign wealth fund, the largest in the world, announced profits of over $131 billion in 2017, nearly one-third of the country’s GDP.

In theory, there’s no reason why this SWF model could not be applied to municipalities. Cities face similar inequality trends and could certainly use the long-term public wealth, especially if it were put to redistributive use. The level of government shouldn’t matter: the Alaska Permanent Fund (APF), which provides every Alaskan with an annual cash transfer (that, by the way, has little effect on employment), offers a successful blueprint for how a municipal SWF could operate, albeit on a regional level.

The problem lies in the lack of opportunities. Realistic circumstances for municipal SWF implementation are few and far between. Cities do not generally sit on untapped natural resources, and the margins for raising taxes (whether income, property, or otherwise) are slim. Barring the discovery of oil or a shift in the political realities of taxation, the prospects for immediate-term municipal SWFs are limited.

Urban wealth funds (UWFs), on the other hand, avoid this problem. As proposed by Detter and Fölster, UWFs do not rely on new revenue streams, instead seeking to maximize the value of existing public assets through active, independent management. Their strategy involves three steps: (1) overhauling public accounting to create an accurate balance sheet of public assets, (2) consolidating assets into a single investment vehicle directed by professional fund managers for the purpose of value maximization, and (3) shifting proceeds to long-term social investment rather than immediate consumption.

Several aspects of this model are compelling. It’s hard, for instance, to argue with improved public accounting. While an overhaul of municipal balance sheets would require significant investment and logistical coordination, the benefits of knowing assets’ market value would likely be worth the pain. Right now, most cities can’t effectively weigh the opportunity costs of shifting public assets (as Matt Klein notes, Boston couldn’t tell you if it makes financial sense to move Logan Airport to the outskirts). More transparent and comprehensive book-keeping could not only help cities better manage their resources, but also yield several positive externalities. In New York City, for example, the ongoing furor over vacant city-owned lots illustrates how public trust deteriorates when the municipality can’t offer concrete answers about the status of certain assets.

Just as with municipal SWFs, the act of shifting revenues away from short-term consumption and towards long-term social investment seems valuable too. In The Public Wealth of Cities, Detter and Fölster credit Singapore’s successful development over the past 50 years to their UWF (Temesek) and its returns on long-term investment (e.g. Temesek provided shareholders with 15 percent returns for the year ending in March 2016). To illustrate this point, they compare Singapore to Jamaica, another former British colony that gained independence in the 1960s. The two countries’ population, life expectancy, and GDP/capita were roughly similar in the 1960s; but in 2014, Singapore’s GDP/capita was roughly ten times Jamaica’s and its life expectancy gains nearly twice Jamaica’s.

Yet, even though the qualitative evidence does suggest that Temesek and GIC (Singapore’s sovereign wealth fund) have contributed to Singapore’s success, it’s difficult to causally separate the UWF structure (particularly its political independence) from other Singaporean policy choices. This hints at a broader question. In the absence of quasi-natural experiments or other counterfactual analysis, it’s reasonable to interrogate the value-add of the independent UWF structure itself. In other words, would cities be equal or better off if they had used their excess resources, assets, and capacities according to another – perhaps more explicitly political – long-term structure? It’s hard to say without more robust empirical literature.

But even if we accept that these structures produce benefits for places like Singapore, using existing public assets engenders further concerns. While the UWF revenue model alleviates the “key challenge” of SWFs (finding initial funding), many existing public assets have current and potential non-profit utility, some of which might matter just as much or more than value maximization. This seems particularly true when it comes to land, one of the most plentiful and valuable municipal assets.

Central Park is an obvious example. While selling a portion of Central Park for condominium development might pay out a considerable sum (which could then be socially invested), the loss of public utility from using the public space, which is hard to measure in equivalent quantifiable terms, would almost certainly counteract the benefits of the additional revenue. Anticipating this, Detter and Fölster themselves suggest that certain public assets, like parks, be excluded from a UWF.

But while Central Park may be black and white, other situations present tough decisions. Consider a public housing complex in a neighborhood with unaffordable housing. For simplicity’s sake, imagine a UWF fund manager has two options: sell the land or maintain the housing units. Public bookkeeping improvements would certainly help her make a more informed decision about market value, and thus financial opportunity costs. Let’s say, even, that the analysis demonstrates that the value-maximizing choice requires selling the complex. Should the city still sell the public housing complex, knowing that families will be forced from their homes? How should their utility factor into the decision-making?

The point here is not necessarily to answer the questions, nor is it to exactly delineate which of a city’s total public assets should be managed according to non-profit goals. Instead, it is to draw attention to the fact that (a) such a decision requires a more expansive calculus than profit maximization and (b) it is highly questionable whether fund managers, whose added value explicitly derives from their ability to maximize returns, are equipped to make this decision. Though democratic whims can yield short-sighted outcomes – indeed, this is in many ways a key premise of Detter and Fölster’s argument for separating UWFs from short-term politics – the political process still exists to represent the will of the people in making these types of decisions. It seems optimistically technocratic (at best) and deeply problematic (at worst) to relinquish democratic control of public assets in instances where maximizing the revenue-generating power of the asset could come at the expense of maximizing public utility.

In this regard, municipal SWFs have an advantage over UWFs. Because SWF are usually funded through “new”, liquid sources (e.g. oil dividends, wealth tax, etc.), the process of maximizing value does not generally interfere with other public objectives. This calculus suits the expertise of fund professionals and the model of independent management much better. While SWF objectives should still be clear and transparent, so that the public can weigh in on controversial investments (e.g. fossil fuels, tobacco), the risk of unwittingly sacrificing public utility in the name of profit is far more limited.

Though neither option is perfect, cities should not throw the baby out with the bathwater. Several elements of these models could help cities in the short-term; in fact, some reforms, such as improved public accounting, could even add value without creating a municipal SWF or UWF. In this vein, American cities might consider two small-scale approaches, depending on context and circumstances.

First, in cities where natural resources are available or taxes can be increased, policymakers could consider resisting the temptation to immediately spend new revenue in favor of creating a modest municipal SWF (similar to the APF). Though striking oil may be unrealistic, several cities are considering reforms around taxation – toying with congestion pricing and land value taxes, amongst others – and local policymakers could pair these reforms with a municipal SWF to shift revenues towards building public wealth. Over time, such a fund could slowly socialize wealth through new revenue streams, investment yields, and redistributive dividends (such as cash transfers).

Second, where natural resources are unavailable or tax increases politically unviable, cities could consider experimentation with limited UWFs, which offer a safer option for protecting public interests than the comprehensive model of Detter and Fölster. Here, the specific public assets used are of critical importance. The experience of Copenhagen’s port UWF, which revitalized portions of the city without raising taxes, is instructive. Copenhagen’s UWF focused on underutilized industrial areas and neglected waterfront land, where there are fewer competing goals beyond redevelopment. The clear objectives and narrow scope reduced possibilities of interfering with other public goals, so the benefits of value maximization and independent governance were more readily realized. Another UWF variant, Hong Kong’s MTR Corporation, offers a different template. The HK MTR, which manages one of the world’s most successful public transportation systems by integrating rail infrastructure with value capture of the surrounding environs, demonstrates how a limiting a UWF to a specific sector can prove successful.

Beyond the two frameworks considered here, cities might also be interested in a third wealth fund paradigm: UWFs with explicit non-profit objectives (such as providing affordable housing). This approach has been discussed less thoroughly in the wealth fund discourse, though a recent Friends Provident Foundation report suggests that creating an “Urban Land Fund” could help cities reduce the cost of social housing by buying and providing cheap land. Empirical examples do exist: Singapore’s Housing and Development Board (HDB) uses mass public land ownership to manage an affordable and stable housing market. It also, however, serves as a helpful reminder that such endeavors would require a radical reframing of the American municipal relationship with land, property-owning, and housing.

Title The Urban Commonwealth
Authors Andrew Kaplan
Date August 21st, 2018
Collection Guaranteed Income
Filed Under

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