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Enterprising Cities: Left, Right and Center

(Image: Democracy Collaborative)

Part of the Series

This is an exclusive Truthout series from political economist and author Gar Alperovitz. We will be publishing weekly installments of the new edition of “America Beyond Capitalism,” a visionary book, first published in 2005, whose time has come. Donate to Truthout and receive a free copy.

“Enterprising Cities: Left, Right and Center” is part twelve of Truthout’s continuing series of excerpts from Gar Alperovitz’s “America beyond Capitalism.”

A decade ago David Osborne and Ted Gaebler devoted a chapter of their classic book, Reinventing Government, to the emergence of new forms of municipal businesses. The chapter’s title is indicative both of the trend and of the driving force behind it—”Enterprising Government: Earning Rather Than Spending.” As they observed, “[p]ressed hard by the tax revolts of the 1970s and 1980s and the fiscal crisis of the early 1990s, entrepreneurial governments are increasingly . . . searching for nontax revenues.”

The trend Osborne and Gaebler spotted has continued to develop—and though few have paid close attention to the emerging experience, an extraordinary range of local municipal efforts embodying Pluralist Commonwealth wealth-related principles now exists. Moreover, the massive Bush-era cutbacks in federal funding now hitting cities and states have dramatically increased pressures to explore such new sources of revenue for public services.

One of the most important areas of activity is real estate. As early as 1970 the city of Boston embarked upon a joint venture with the Rouse Company to develop the Faneuil Hall Marketplace (a downtown retail complex). Boston kept the property under municipal ownership and negotiated a lease agreement that provided the city with a portion of the development’s profits in lieu of property taxes. By the mid-1980s Boston was collecting some $2.5 million per year from the Marketplace. One expert estimates that Boston took in “40 percent more revenue than it would have collected through conventional property tax channels.”

Another innovating 1970s city was Hartford, Connecticut, under the leadership of then city council leader Nicholas Carbone. When Hartford’s new Civic Center complex was constructed, the city decided to retain title to the land, leasing out the rights for office space, retail establishments, and a hotel to private-sector operators. The city also took over an abandoned department store and leased it to a major airline for office space. As Carbone stressed, a basic goal was to “give the city control over land use [so as to allow it] to realize the increasing value as land prices increased.”

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Entrepreneurial “participating lease” arrangements for the use of publicly owned property are now common in many parts of the country—including, by way of illustration, New York, San Diego, Los Angeles, and Washington, D.C. Under such leases a developer pays the public landlord both a yearly base rent and an additional amount pegged to project performance (e.g., private profits or gross income). The principle at work is similar to that which private developers commonly use in shopping center leasing: “The more money the developer makes, the higher the rent.”

Alhambra, California, earns approximately $1 million a year in rent revenues from a six-acre holding it leases to commercial tenants. (It also requires tenant businesses to reserve a majority of jobs for low- and moderate-income community residents.) Cincinnati; San Antonio; and Louisville, Kentucky, have all acted as partners in commercial developments, reaping a share (e.g., 10 to 15 percent of net cash flow) of revenues from hotels and other ventures. In 2002 Louisville announced plans to build a new downtown hotel on a similar basis. San Diego holds almost seven hundred leases—including Mission Bay Park, Sea World, and a variety of retail, agricultural, and commercial sites. Annual revenues are more than $40 million.

Land development is so-called old economy. A fast-growing arena of new activity involves high-tech Internet and related services. In Glasgow, Kentucky, the municipally owned utility offers residents electricity, cable, telephone services, and high-speed Internet access—all at costs lower than private competitors. The city also has access to an intranet that links local government, businesses, libraries, schools, and neighbors. Residents can choose their cable TV provider: the municipality offers a package of eighty digital cable channels for under $15.95 a month (in 2003).

Tacoma, Washington’s, broadband network Click! also offers individuals and private companies Internet and cable service, as does Cedar Falls, Iowa. Almost three hundred communities as of this writing were operating networks like those in Glascow, Tacoma, and Cedar Falls.

Municipalities have also been active in the venture capital area, offering start-up investments and retaining stock in businesses that hold promise for the city’s economy. In 1987 a survey of 322 cities found that only 32 (9.9 percent) used venture capital investments as an economic development tool. A similar survey roughly a decade later found more than a third of responding city governments reporting venture capital efforts of one kind or another. Working with the New York Power Authority and two private companies, a New York City agency, for instance, put together an initial investment pool of $60 million. All profits and other gains were reinvested, yielding a fund worth $175 million at the end of the first five years of operation.

Municipally owned sports teams are also widespread. Communities that own (or have owned) minor-league baseball teams include Indianapolis; Rochester, New York; Franklin County (Columbus), Ohio; Lucus County (Toledo), Ohio; Harrisburg, Pennsylvania; Lackawanna County (Scranton), Pennsylvania; and Visalia, California.

At the major-league level, the Green Bay Packers football team is owned by a nonprofit corporation rather than a private corporation or wealthy private individual. The particular ownership structure, while not precisely the Pluralist Commonwealth model, does not permit any individual to own more than a small part of the team and makes it all but impossible for the team to be relocated to another city or purchased by outsiders.

Other developing areas include health services and environmental management. Denver Health, an innovative publically accountable enterprise, transformed itself from an insolvent city agency ($39 million in debt in 1991) to a competitive, quasi-public health-care system with positive earnings of over $10 million annually during the 1990s. Among other things, it operates a satellite system of eleven primary care centers and twelve school based clinics that employ some three thousand Denver-area residents.

Hundreds of municipalities generate revenues through landfill gas recovery operations that turn the greenhouse gas methane (a by-product of waste storage) into energy. Riverview, Michigan, one of the largest such recovery operations, illustrates the trend. In the mid-1980s Riverview contracted with DTE Biomass to build a gas recovery facility at its Riverview Land Preserve. More than 4 million cubic feet of methane gas are now recovered daily. In turn, the sale of gas for power production helps produce over forty thousand megawatt hours of electricity per year. Riverview’s royalties covered initial costs of the effort in the first two years of operation and now add to the city’s cash flows. (Among the many other innovative and successful methane recovery operations are those run by the Illinois Department of Commerce and Community Affairs, the South Carolina Energy Office, Los Angeles County, and Portland, Oregon.)

The basic principle at work in municipally owned real estate development is that appreciation of land should be turned to public advantage. In many communities, Community Land Trusts (CLTs) following this principle also use ownership strategies to help produce stable and affordable housing for low- and moderate-income residents.

A Community Land Trust is a nonprofit corporation established to develop and own housing (or own land leased for housing) especially in neighborhoods undergoing development that is driving prices beyond the reach of low-income residents. One of the earliest and most influential is the Burlington (Vermont) Community Land Trust (BCLT), organized with bipartisan support when an early 1980s economic boom caused housing costs to spiral out of reach for many long-term residents.

Land is owned by BCLT and leased to home-owners. Member-residents devote no more than 30 percent of their income to rents or mortgages. Those benefiting from the resulting low costs sign contracts agreeing that future housing resale prices will not increase beyond a certain percentage, thereby allowing other low- and moderate-income families to continue to benefit from the trust’s ongoing efforts.

A recent report by PolicyLink in Oakland, California, observes that CLTs are also reaching out to other groups and constituencies:

[T]he community land trust in Concord, New Hampshire, is working with the Neighborhood Reinvestment Corporation on an IDA program to help families save for homeownership. North Camden CLT in New Jersey has spear-headed a comprehensive community planning initiative. Durham Community Land Trust in North Carolina provides construction job training for community residents. The Burlington Community Land Trust has been a mainstay of the city’s Enterprise Community, cleaning brownfield sites, developing community facilities for various social service organizations, and redeveloping abandoned commercial buildings.

Various groups are also beginning to extend the CLT concept in new directions. In 2001 the Nehemiah Corporation announced a new multimillion urban trust to purchase land and provide below-market leases to community service organizations. (Nehemiah is making its initial land purchases in Atlanta, Baltimore, Charlotte, Indianapolis, and North Camden, New Jersey. A similar approach has been adopted by the New Columbia CLT in Washington, D.C.—which is purchasing land to help support low-income residents who, in turn, are also developing cooperatives.

An important related approach utilizes ownership strategies that capitalize on other public investments: when a municipality invests in mass transit development—as, for instance, in connection with new subway construction—land values near transit exits commonly rise. Traditionally, most municipalities have relied on “after-the-fact” taxation of developers and others who build stores, apartments, and other developments to take advantage of the public investment in such areas. In recent years, however, many municipalities have realized that public ownership—as opposed to traditional tax strategies—offers the possibility of greater returns (and other advantages as well).

In Miami for instance, Metro-Dade Transit participates in two large transit-linked joint development ventures. Dadeland South Station includes two office buildings totaling 472,000 square feet, a 305-room luxury Marriott Hotel, 350,000 square feet of retail space, and 3,500 parking spaces, generating annual revenues in excess of $600,000 for Miami-Dade County. Dadeland North Station currently consists of 320,000 square feet of retail space and forty-eight apartments and ultimately will include a mix of hotel, office, and residential development. Total city revenues over the term of the lease for the latter (through minimum rent payments and a percentage of gross income) are projected to run between $40 and $100 million.

The Valley Transportation Authority of Santa Clara County, California, has designed its Transit Oriented Development program to encourage mixed-use development within two thousand feet of transit stops. Its Almaden Lake Village Project is expected to generate $266,000 a year for the city through a long-term ground lease with a private developer—and will also offer one in five of the newly developed residential units at below-market cost to low-income households. The Washington Metropolitan Area Transit Authority in Washington, D.C., has established fifty-six -revenue-generating joint development projects that earned $14 million in 2002, making it the public authority’s largest nonfare box revenue source.

The expanding experience and growing sophistication of such ownership efforts suggest the likelihood of additional applications of Pluralist Commonwealth principles as time goes on—especially given the severity of growing municipal financial problems. Such efforts also have implications for long-range population dispersion strategies designed to recapture increased land values brought about as the result of public investment policies that target jobs to smaller towns and rural growth points.

It is often held that public ownership must be inefficient. Studies of municipal electric utilities, however, belie this view. One out of seven Americans (a total of roughly 40 million people) rely on power from the two thousand public utilities currently operating in urban and rural settings. Although the majority of such systems are located in smaller communities, publicly owned systems are also found in large urban areas such as Los Angeles, Long Island, San Antonio, Sacramento, Nashville, Jacksonville, and Memphis.

Residential customers of investor-owned utilities (IOUs) commonly pay electricity rates roughly 20 percent higher than those paid by public power customers. Commercial IOU customers pay rates 11 percent higher. Industry studies suggest that most of public power’s price advantage is due to the fact of public ownership itself; locally controlled public utilities often can be especially responsive to customers’ needs and do not need to pay dividends to private shareholders. At the same time, public utilities—through payments in lieu of taxes and payments to municipal general funds—contribute substantially more to state and local governments than do private utilities through taxes. During the 2000 California electricity crisis municipally owned utilities were also able to maintain lower costs and provide secure ongoing service. A number of public utilities have pioneered ways to protect the environment and improve sustainability by promoting conservation and by becoming industry leaders in the use of wind, solar, geothermal, biomass, hydroelectric power, and other renewable sources of energy.

Related both to the new forms of local public ownership and the experience with municipal electric utilities is the question of privatization. Columbia University professor Elliot Sclar’s studies suggest that many of the hoped-for gains of contracting public services to private firms have proven to be exaggerated or illusory. Superficial assessments, he notes, often ignore the high costs of monitoring and rewriting contracts to maintain quality control. In addition, often cost savings are simply the result of lower-quality services. Sometimes corruption enters into the picture. It is estimated that difficulties in the privatization of waste collection in New York City, for instance, cost businesses $500 million.

There is evidence, however, that the threat of privatization can sometimes improve the efficiency of public enterprise, even when privatization does not, in the end, occur. Stephen Goldsmith, a former Republican mayor of Indianapolis—subsequently a high-level adviser in the Bush administration and as of this writing the chairman of the Corporation for National Service—ran for election on a platform of widespread privatization. After taking office as mayor, Goldsmith became convinced that “competition—not privatization per se—provided the key to improving city services and reducing costs.” Public employees were allowed to bid on city contracts, and to redesign their offices and operations in the process. Public employees won a majority of the first sixty contracts put out to bid, with estimated savings of $135 million in the program’s first three years.

Sclar’s assessment is that much of Goldsmith’s achievement was also related to his administration’s “ability to exhibit a genuine willingness to take the unit’s employees seriously. Goldsmith, in effect, officially sanctioned [them] to go ahead with changes that the employees had wanted for more than a decade.”

The result—a creative integration of the (local) public ownership and democratization principles of the Pluralist Commonwealth vision—defines an obvious area for development and refinement as the fiscal crisis continues to force further change.

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