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The Hidden Wealth of Cities

To find it, a new book says, localities need look no further than their roads, airports and convention centers.

downtown san diego
Downtown San Diego, with a view of the convention center.
In the years since the Great Recession, there’s been a lot of effort made to ensure a government is sharing its complete fiscal picture. In many cases, this transparency push has resulted in a government’s bottom line going from a surplus to a shortfall thanks to the introduction of things like pension and retiree health benefit liabilities to annual balance sheets.

But some think governments are still leaving a few things off the ledger. Dag Detter and Stefan Folster, co-authors of the new book The Public Wealth of Cities, say localities are failing to realize the true value of the public assets they own, such as airports, convention centers, utilities and transit systems, just to name a few. “The public sector owns a lot of commercial assets,” says Detter, a Swedish investment advisor and expert on public commercial assets.

But, he adds, it doesn’t manage the risk of increased costs associated with those assets very well. Then, “the inclination is to give [management] away to the private sector,” he says. “But when you do that, you also have to give away the upside.”

The solution, according to the authors, is independent management and governance. Detter says cities could realize their hidden wealth potential if their commercial assets were bundled together and managed by a politically independent “urban wealth fund.” Such a structure, Detter says, would allow these assets to be turned into bigger profit-generators for cities.

As an example, Detter points to Cleveland, which reported capital assets of more than $4 billion in 2014. To him, there are several flaws with this estimate. First, thanks to a legal quirk, many assets acquired before 1980 are not accounted for at all. Second, the city reports the value of its assets based on historic costs instead of the likely market value, which Detter estimates could be three or even seven times more. If Cleveland put its assets into an urban wealth fund, a modest yield of 3 percent on a fund with a market value in the neighborhood of $30 billion could amount to an income of $900 million a year. That’s nearly double what the city earned in tax revenue in 2014 and is money that could be spent on infrastructure, health care and other critical needs.

Doing such a thing in the U.S. would require a lot of work. For instance, a city or county would not only have to determine all its assets’ market value, but it would also have to develop a strategy for them. The example Detter and Folster give in their book is Copenhagen, which through a publicly owned, privately driven urban wealth fund revitalized its waterfront and financed a citywide transit system without raising taxes.

John Ryan, principal of the infrastructure recapitalization firm InRecap LLC, says U.S. cities could adopt a piecemeal approach by lumping a handful of similar assets together for a mini urban wealth fund. What’s more, many localities could utilize existing quasi-public development corporations by expanding their focus from just new development to existing assets.

Ryan adds that urban wealth funds don’t necessarily have to be as profit-driven as Detter envisions. To him, the larger point is that governments aren’t focused enough on their long-term wealth. Ignoring that part of the balance sheet, he says, causes officials to make short-term decisions about finances.

“If you think all you have to work with to deal with emerging long-term liabilities are short-term cash and whatever assets you have on the shelf, then it will seem that there’s not much choice but to use gimmicks or kick the can,” he says. “But if instead you believe that you have some long-term assets that maybe aren’t so obvious but could be the raw material for good long-term solutions, at least you’ll start to look for better, more sustainable options.”

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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