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Building Back Better Requires Smart Spending and Transformative Investments

Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz.

 

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(co-authored with Julie Wagner and Colin Higgins)

If you have been following the news lately, you may have noticed the attention being paid to the complexity of Congressional deliberations. While important to modernizing America and meeting the moment, these deliberations are but an early step in achieving the Biden Administration’s ambitious agenda. We believe that history will show that appropriating federal resources was actually the easy part of the process; spending federal resources in efficient, effective and equitable ways — “smart spending” in a nutshell — is what should keep us all up at night.

Depending on what Senator Manchin and Rep. Jayapal can agree on, we may see an additional $3 trillion in federal funding approved in the coming months. But, if the past is prelude, an abundance of capital — public or private — doesn’t necessarily result in smart spending, just more spending. Building Back Better, as we’ve said before, requires doing things differently.

The process of actually doing so is complicated by several factors. The shift from austerity and scarcity to abundance and public largesse has been a rapid one, leaving little time for strategic design or local planning. The degrading of the public sector over many decades and the weakness of many nonprofit intermediaries and community networks means that the capacity to design and plan is minimal in the preponderance of communities. We have a delivery crisis in the making in other words.

With federal rescue and recovery funds now beginning to flow at scale across the country, it is time to forestall this crisis-in-the-making. We believe a good starting point is by examining the way local networks can make smart spending more rather than less likely, and in-turn drive investments that are transformative and catalytic. Below we lay out five principles local practitioners can follow for smart spending, and five corresponding actions that the federal government can take.

Our thinking has been guided by two policy papers — Jeremy Nowak’s 2013 work on “Smart Subsidy” and our own 2008 essay around Transformative Investments. If America is to Build Back Better, as the Biden Administration intends, practitioners and policymakers alike would be wise to apply some of these lessons from the past 15 years.

Smart Spending: when public money draws in private & civic commitments

Jeremy’s piece, written for the Living Cities network, constituted a practitioner’s reflection on the role of subsidies in place-based real estate development and finance in markets beset with low property values and high building and renovation costs. As Jeremy summarized later in The New Localism,

“Smart subsidy fills a gap the market [cannot] (emphasis added). Public subsidy is not useful if it crowds out a market mechanism that could do a comparable job, hides operating efficiencies, or has no trajectory for longer-term sustainability (when that is feasible).”

Jeremy drew his thinking from a remarkable effort in Pennsylvania to create high quality grocery stores in disadvantaged communities. The Fresh Food initiative represented a unique partnership: the state put up $30 million in grants over three years and The Reinvestment Fund (a community development financial institution) matched the grants with more than $100 million in private debt and other financing, including new markets tax credit allocations.

Jeremy described the division of responsibilities between different entities and different forms of capital:

“The Reinvestment Fund managed both the grant and debt financing, the state monitored the program, the nonprofit Food Trust ensured that the stores met the standards of high quality and comparable pricing, and the Urban Affairs Coalition worked to ensure minority contractor participation.

The grant money was used to subsidize costs that were a barrier to entry, including workforce training, environmental remediation, and higher infrastructure costs. […] The debt financing was used as with any grocery store development for commercial real estate and business operations.”

Transformative Investments: when a project starts a chain-reaction

Smart spending, structured well and executed with discipline, has the potential to support catalytic projects and initiatives that can drive inclusive and sustainable outcomes. Our 2008 piece on Transformative Investments, initially written for Ethos and then re-published by the Brookings Institution, aimed to define and codify such extraordinary “transformative investments” as:

“… discrete public or private development projects that trigger a profound, ripple effect of positive, multi-dimensional change in ways that fundamentally remake the value and/or function of one or more of a city’s physical building blocks”.

By “building blocks” we meant the following:

“… the remaking of downtowns as living, mixed-use communities; the creation of neighborhoods of choice that are attractive to households with a range of incomes; the conversion of transportation corridors into destinations in their own right; the reclaiming of parks and green spaces as valued places; and the revitalization of waterfronts as regional destinations, new residential quarters and recreational hubs.”

By “multi-dimensional change” we included economic, fiscal, cognitive, environmental and social outcomes. On the social front, for example, we envisioned that:

“… transformative investments have the potential, while not always realized, to alter the opportunity structure for low-income residents. When carefully designed, staged and leveraged, they can expand the housing, employment and educational opportunities available to low-income residents and overcome the racial, ethnic and economic disparities that have inhibited city performance for decades.”

The notion of “transformative investments” is as relevant today as when the Ethos essay was written 13 years ago. We are already starting to see catalytic projects and initiatives in city after city, projects that have been underway for years and are getting new energy during this period of federal activity: the Dayton Arcade, Erie’s Perry Square revival, the Buffalo East Side Avenues Initiative, and Greensboro’s Steelhouse project, among others. These projects, if financed smartly and fully completed, have the potential to “trigger profound ripple effects” that advance economic, sustainable and inclusive outcomes. They will leave a lasting legacy for their cities and be a visible sign of economic restructuring and inclusive growth for the nation.

How to spend smartly for transformative investments during Build Back Better

Our combined thinking on smart spending and transformative investments raises two questions for policymakers and practitioners.

  1. How do cities deploy federal resources with these notions of Smart Subsidy and Transformative Investments in mind?
  2. And how does the federal government make it more likely that cities act this way?

Below we take an initial stab at answering these complex questions.

What should local practitioners do? Five Principles to Guide Action

On the local level, being smart and transformative means deploying federal resources according to the following five principles:

  1. Target investments with data for bigger impact. Federal resources should be deployed locally in a way that is targeted rather than scattered, concentrated rather than dispersed. There is a political propensity, within cities as well as across metropolitan areas and states, to spread funding like peanut butter across a slice of bread. Such an approach — usually the result of horse trading across battling constituencies and jurisdictions — follows a kind of political logic. We urge local practitioners to resist the temptation of these politics, since funding sprinkled around has no dramatic impact in the near term and no lasting effect in the long term. Building Back Better requires making sizable bets; otherwise, investments will be neither transformative nor catalytic and the short-term political victories of geographical horse trading will soon be eclipsed by underlying economic problems that have gone unaddressed.Smart spending, in essence, requires smart and informed leadership. This means taking a critical eye to the data to identify where there is underperformance in advancing prosperity and identifying opportunities that transform (and overcome) these limits. These tend to fall into multiple categories of projects including: (a) those which require a public “shot in the arm” given the chasm between redevelopment costs and market value; and (b) those which are miscalculating the full potential of places by seeing their value solely through narrow economic gain when some additional support and vision can effectively advance the broader growth and prosperity of a city or city-region. At the end of the day this requires assembling the data that exists in new, creative, and clear-eyed ways to see patterns and potential that may not be immediately apparent. While this requires up-front effort, it pays dividends in the impact of projects.
  2. Support whole districts, not just siloed projects. Federal resources should be deployed locally in a way that is driven by big vision and strategy, regenerating whole districts rather than individual buildings, entire corridors rather than single storefronts. This requires new tools, what we call an “Investment Playbook,” that can reveal multiple uses that serve community needs (e.g., an iconic community anchor, complete streets, a fresh food market, a community enterprise incubator), concretize their costs and potential capital stacks and match federal sources. Developing such an approach will also help transformative investments become additive to — rather than disruptive of — the urban landscape, by ensuring that a whole suite of workforce, community regenerating, and affordability investments come alongside the investment to broaden its beneficiaries.
  3. Increase federal funds with other capital. Federal resources should be deployed in ways that leverage private and civic capital, allowing public sources to go further and farther. The torrent of federal funding, as large as it is, does not obviate the need to build a financing stack in many projects of public subsidy, private debt and civic capital. Taking a “public alone” approach would miss a tremendous opportunity (to say nothing of it violating Jeremy’s principle of smart subsidy). There is an abundance of private and civic capital sitting on the sidelines that stands ready to be unlocked if local practitioners can make the blending of quality capital the norm rather than the exception. In many respects, the most sustainable and catalytic projects will be those that marry local capital (oftentimes philanthropic or patient) with federal dollars. The Pennsylvania Food Trust model that inspired Jeremy’s “smart subsidy” article is emblematic of what’s possible with this approach.
  4. Focus on long-term impact through institution-building. Federal resources should be deployed in ways that are geared to long term sustainability and durability rather than a short-term sugar high. That means establishing structures that can design and deliver catalytic projects in seriatim rather than merely carrying out transactions in isolation. A structure might be a locally capitalized development corporation like the Cincinnati Center City Development Corporation or the Erie Downtown Development Corporation. Or it might be a public authority that can maintain an equity stake in what is built and created, like an American-inflected version of the Copenhagen City and Port Corporation or other European public asset corporations (see, e.g., the newly created Tulsa Authority for Economic Opportunity). Structures are the gift that keep on giving. Transactions tend to be ephemeral and passing. With the influx of federal resources to act as seed capital for some of these institutions, now is the time to focus on structure-building to ensure lasting prosperity (rather than one-time largesse).
  5. Find replicable models in new places. Smart spending is informed by best practices, codified global and local successes, that can be replicated and adapted with local variations. The United States is simultaneously demographically diverse and highly parochial. We can and should take a page from what is happening in the United Kingdom around High Streets or the Netherlands and Denmark around climate resilience or Chile around inclusive entrepreneurship.

 

What should the Federal Government Do? Five Ways to Design for Impact

Our focus in this piece so far has been on what local recipients can do to promote smart spending. But the federal government has essential roles to play. As we have previously written, the harsh fact is that multi-dimensional, catalytic projects are the modern equivalent of heroic acts given the compartmentalization of federal programs, the complexity of federal incentives and the absence of true coordination between federal agencies (often irrespective of which party controls the government).

The Biden Administration could do five things to fix this problem and enable local practitioners to truly build back better:

  1. Focus on delivery alongside design. There is a bad habit among smart people in Washington D.C. of designing the perfect program without thinking about how it will be delivered (this Rube-Goldberg policy problem is a by-product of the hyper-specialization of expertise and siloed bureaucracies and sub-committees about which we’ve previously written). Fixing this problem requires an intentional focus on design and delivery at the same time. Practically, that means engaging local practitioners to help reverse engineer programs to reflect how multi-dimensional investments are actually made in the real world. That means thinking about institutional governance and capacity at the beginning of the process rather than after the funds are allocated. This latter point was once de rigueur at the federal level. Programs and institutions were authorized in tandem — metropolitan planning organizations as part of the 1991 Intermodal Surface Transportation Efficiency Act, for example. Bringing this focus back into policymaking would improve the results achieved by the Biden Administration.
  2. Increase impact by lowering transaction costs. As they are thinking about designing new programs, and reforming others, the Administration should focus on designing programs and tax incentives to maximize the impact of spending by lowering transaction costs. Practitioners will provide chapter and verse on the inefficiencies of the New Market Tax Credit and its propensity to drive up legal fees, which ultimately detract from project investments and outcomes. And that’s just one program! Try marrying New Markets Tax Credits with other federal programs (Low Income Housing Tax Credits or Community Development Block Grant funds, for example), and see if your project survives the effort. Money for revitalizing communities that have suffered from disinvestment should not be difficult to spend  — as that defeats the purpose of making it available in the first place. As the Biden Administration looks to deploying its various programs, it must make the harmonization of disparate programs, products and incentives a national delivery priority. Otherwise, we may be sitting here in 5 years with little to show for this current flurry of legislative activity.
  3. Guide the field with affirmative examples. As federal agencies are designing programs, they should provide clear guidance on what smart spending looks like, with specific and tangible examples for localities to emulate. The federal government, for the most part, excels on telling recipients what not to do with federal money. This reflects an auditor’s mentality, which has grown exponentially over the past few decades in fear of one investment gone wrong (Solyndra anyone?). Mitigating the risk of program embarrassment is not how we will build back better. The restructuring of our economy cannot be achieved by preventing bad outcomes which are infinitesimally rare. Rather than throwing up their hands, federal rule-makers should both build in accountability measures and focus on providing clear guidance on uses they want to see funds used for.
  4. Invest at scale in quality planning. It is admirable and ambitious to invest federal dollars to further the reshaping of the US economy, accelerate the transition to green energy and advance inclusive outcomes. But achieving those ambitions requires the federal government to give communities the support they need to plan for success. While it’s not the most awe-inspiring political soundbite, investments in planning are vital to achieve the big outcomes (which, it also happens, are good soundbites). There is precedent for such action. In 2009, the Obama Administration persuaded Congress to appropriate resources for the Sustainable Communities Initiative. Communities were given permission to integrate land use, housing, transportation and environmental planning into one comprehensive vision. Millions at the front end then supported billions of federal dollars for disparate activities, a return on investment that is unequaled in most federal efforts. This is a model that should be emulated across the silos of federal investment (given that the current potential investments are many times larger than the 2009 Recovery Act).
  5. Empower a Delivery Unit. The Biden Administration should, in short order, establish a delivery unit within the White House to take the friction, inefficiency, duplication and messiness out of implementation and execution. There is precedent for this in other countries (the approach was pioneered by the Blair Administration in 2001, when the Prime Minister set out to reform the delivery of public services). As the Administration shifts from legislating to delivering on the Build Back Better Agenda, they should follow the well-established path of creating a Build Back Better delivery unit: building a small team with a clear set of goals and metrics, that regularly tracks performance and establishes realistic plans for funding and program delivery. Such an approach should not exist in isolation and should leverage the emerging federalistmulti-sector, effort to deliver transformative investments clearly and deliberately. Leading national philanthropies should fund the creation of multi-sector delivery units at the local level (which we have previously called for) so that transformative investments can be pioneered, tested, codified, amplified and communicated across all parts of our nation.

Conclusion

The bottom line is that the lenses of smart subsidy and transformative investments are a way to see the possibilities of this moment through a more holistic frame. They represent a framework that moves from a philosophy of “don’t do dumb projects” to one of “do big things” as federal resources begin to flow. At the end of the day, this is about advancing American innovation and competitiveness, accelerating the transition to a green economy and expanding opportunity and prosperity more broadly. We believe that these important outcomes can be achieved, but the thorny details of delivery will be borne out on the local level — through the hard and under-appreciated work of practitioners. We hope in this newsletter to have brought into focus what must be done on the federal and local levels to unlock smart spending and transformative investments nationally.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. 

Julie Wagner is the President and Founder of the Global Institute on Innovation Districts. 

Colin Higgins is a Senior Research Fellow at the Nowak Lab.