Local Governments in a Restructuring Economy

New strategies are needed to confront today's economic development challenges. One answer could be community building machines.

BLOG POST | Feb 13, 2018

by Austin Aldag, graduate student and research specialist, Cornell University  

It can be said that local governments determine economic development because according to ICMA’s Economic Development Survey (EDS),  67 percent of local officials agree that economic development policy is their primary responsibility.

Traditional local economic development theory revolves around attracting private firms to settle within a local government. Educators have branded these “growth machines.” Historically, these have taken the form of manufacturing plants, industrial land uses, and private offices that help achieve economies of scale and build networks for easily supplying goods to market. For residents, these firms provide jobs. For state and federal governments, these increase their income tax revenue and decrease unemployment rates. For local governments, for-profit firms increase property values, increase sales and property tax revenue, and attract residents.

Today, the traditional growth machine is broken. Local governments have had to face the hard realities of an industrial decline and the Great Recession. Private firms have moved jobs abroad, flocked to the suburbs because of technological advances in telecommunications, and taken advantage of local government tax abatements and inter-local competition for their own benefit. These tools promote a local "race to the bottom." Amazon’s search for its HQ2 is a perfect example.

To fill the void, educational and medical institutions (“eds and meds”) have broadened their spatial footprint and bargaining power. This may, at first, appear to be a positive result of industrial decline; however, from the perspective of local government, many of these growing land uses are tax-exempt. Of the already limited and constrained revenues that localities raise directly and control, the growth in these sectors lowers their ability even further.

Partnerships between colleges, religious groups, medical institutions, and local government officials could help remedy this wicked problem. Whereas the traditional growth was strictly between local leaders, developers, and for-profit firms, there is an exciting new possibility for the emergence of community building machines. This new coalition would not be focused on profit. Rather, it would be focused on the well-being and quality of life of residents.While possible, these partnerships are not widespread. The EDS indicates that only 25 percent of colleges and universities and only 5 percent of nonprofit organizations that serve the poor participate in crafting economic development strategies.

To better understand how local governments are responding to these challenges, Cornell University conducted a survey of all local governments in New York State (NYS), and 58 percent responded to the survey. NYS is a fascinating case to watch as local leaders respond to these changing economic structures. NYS ranks first in the U.S. both in terms of nonprofit organizations (more than 31,000) and nonprofit employees (1.3 million). The decline in manufacturing has been compensated for by job growth in eds and meds, and private employment has flatlined in upstate New York but has continued to increase elsewhere. If community building machines were to emerge, it would be in upstate New York.

More than 47 percent of NYS local governments indicated they are under either significant or moderate fiscal stress. In terms of what drives stress, the strongest sources are state-level policies and mandates. Tax-exempt properties and economic development challenges also drive local stress.

One tool localities have used in this regard are payments in lieu of taxes (PILOTs), where nonprofits pay an amount for the services they use. While this may work out great theoretically, the actual amount paid in these agreements is significantly lower than the local service obligation. According to Cornell's survey, only one-third of respondents indicated they receive a PILOT from tax-exempt organizations.

Are "community building machines"  forming in NYS higher than ICMA's data would suggest? Apart from state and county governments, the levels of coalition building to reduce local fiscal stress are significantly low. Nonprofit service partners were indicated by only 3.5 percent of respondents; 2 percent indicated they partner with colleges and universities within their community, and only half of one percent (0.005) indicated that religious groups help develop their jurisdiction’s response to fiscal stress. Local governments should not craft economic development policy on their own. Community building machines should be formed.

References 

1 International City/County Management Association. 2014. “ICMA Survey Research: Economic Development Survey Research Results 2014.” Accessed: https://goo.gl/mFSzhT

2 William H. Lucy and Peter S. Fisher. 2000. “Chapter 16: Budgeting and Finance” in C. Hoch, L. Dalton, and F. So (eds.), The Practice of Local Government Planning, 3rd ed. Washington, DC: ICMA, pp. 401-420.

3 John Logan and Harvey Molotch. 2002 (1987 original). “The City as Growth Machine” in S. Fainstein and S. Campbell (eds.), Readings in Urban Theory. Cambridge, MA: Blackwell Publishers, Inc., pp. 291-328.

4 David Harvey. 1989. “The Urbanization of Capital” in The Urban Experience. Baltimore: Johns Hopkins University Press, pp. 17-58.

5 David Gordon. 1978. “Capitalist Development and the History of American Cities,” in William Tabb and Larry Sawyers, eds., Marxism and the Metropolis. New York: Oxford University Press, 25-63.

6 Alana Semuels. 2015. “‘Good’ Jobs Aren’t Coming Back to the US.” City Lab. Accessed: https://goo.gl/Cbw27V

7 Pooka Makhijani. 2016. “Why Co-Working Is Moving to the Suburbs.” City Lab. Accessed: https://goo.gl/b8RSA7

8 Taiji Furusawa, Kazumi Hori, and Ian Wooton. 2015. “A Race Beyond the Bottom: The Nature of Bidding for a Firm.” International Tax and Public Finance, 22(3): 452-475.

9 Timothy J. Bartik and George Erickeck. 2008. “The Local Economic Impact of “Eds & Meds”: How Policies to Expand Universities and Hospitals Affect Metropolitan Economies.” Brookings Institution: Metropolitan Policy. Accessed: https://goo.gl/LzBKE5

10 Gerald E. Frug. 1999. City Making: Building Communities without Building Walls. Princeton, NJ: Princeton University Press.

11 Austin M. Aldag, Mildred E. Warner, and Yunji Kim. 2017. “What Causes Local Fiscal Stress? What can be Done About it?” Dept. of City and Regional Planning, Cornell University, Ithaca, NY. Accessed: http://cms.mildredwarner.org/p/268

12 Office of the New York State Comptroller. 2016. “Profile of Nonprofit Organizations in New York State.” Accessed: https://goo.gl/zGx2q4

13 Federal Reserve Bank of New York, Buffalo Branch. 2007. “Upstate New York At-a-Glance.” Accessed: https://goo.gl/wcFEM

14 Daphne A. Kenyon and Adam H. Langley. 2011. “The Municipal Fiscal Crisis and Payment in Lieu of Taxes by Nonprofits.” Landlines. Cambridge, MA: Lincoln Institute for Land Policy. Accessed: https://goo.gl/mgsSdS

 


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