Local Leadership during the Financial Crisis: Can cities innovate their way out of fiscal mess?

Last Friday, September 9th 2011, the Urban and Regional Policy Program of the German Marshall Fund, in conjunction with the Daniel Rose Center for Public Leadership in Land Use at the Urban Land Institute hosted a meeting on “Local Leadership during the Financial Crisis: New Approaches to Municipal Finance and Investment” at the Bank of America in Washington, DC. The meeting brought together high level city officials from the United States and Europe to discuss how cities are coping with crippling budget deficits and painful cuts in personnel and programs as a result of the global recession. While some of the conversation focused on how cities can best navigate necessary cost-cutting measures, much of the dialogue explored ways in which cities can innovate around budgeting and service delivery models in order to fundamentally restructure their fiscal circumstances.

Many of the participants on the event’s featured “City Leaders” panel underlined the need to approach municipal investment through a two-pronged strategy that emphasized meeting short-term, immediate service needs while investing in large infrastructure projects that would boost long-term fiscal health. Mayor Kasim Reed of Atlanta, for instance, pointed out that if a city did not fulfill its critical obligations to citizens now, its reputation could suffer to the point where economic recovery in the future might be rendered moot. The Mayor’s argument was taken a step further by Stephen Hughes, Chief Executive of the City Council in Birmingham, UK, who noted that if governments could successfully identify basic service priorities, they would be better able to focus on preventative and interventionist measures that would reduce service delivery costs at the outset. Officials and experts throughout the day spoke consistently of the need to challenge prevailing ideas about just what constituted those core city services: even the sacred cows of police, emergency, and fire services were subject to debate.

But big picture strategic decisions were only one part of the wide ranging discussion; of particular interest to the audience were specific programs that some panelists recognized as having tangible effects on their cities’ fiscal health. Mary Bunting, the City Manager of Hampton, VA, implemented a community budgeting process called the Hampton “I Value” program that engaged citizens in a comprehensive budget discussion that successfully measured the community’s “needs” as opposed to its “wants”. The Hampton example illustrates that innovation in municipal budgeting and service provision doesn’t necessarily have to entail technological advances or a deep restructuring of government agencies; rather, programs can be centered on the relatively simple idea of increased public engagement.

Of course, participants discussed many examples of technological and structural innovations that were no less intriguing. New York City Deputy Mayor for Health and Human Services Linda Gibbs spoke at length of her work to streamline the contracting process between city agencies and non-profit social service organizations. Before the introduction of the program, called HHS Accelerator, there were 1,200 nonprofits in New York City holding 9,000 separate municipal contracts across all city agencies. In Gibbs’ words, the Accelerator program “turned that upside down” by creating a standard 11-page contract between each nonprofit and the city, which has significantly reduced the amount of time and capacity that beleaguered nonprofit staff and government agencies spent on the contracting process. To make the process even more accessible and user-friendly, each contract is entered and stored in a comprehensive city-wide electronic database.

In Europe, Stephen Hughes of Birmingham described an innovative (and yet nascent) fiscal tool currently being piloted in prison systems in the United Kingdom called Social Impact Bonds. Social Impact Bonds are issued by governments to private or philanthropic investors who will provide up-front funding for preventative social improvement programs. The future revenue savings that will result from, for example, reduced prison, healthcare, or social service costs will go toward paying back investors, but only if predetermined improvement outcomes are met. Social Impact Bonds thus have the potential to do two key things that can drastically change the way services are delivered: they shift strategic priorities to a preventative mindset, and transfer financial risk from the public to the private sector.

A third component of the discussion about how services are provided and paid for concerned the nature of the relationship between the city and nonprofit actors that can help plug gaps in municipal resources, planning, and capacity. As one panelist pointed out, nonprofits can be amongst the largest employers in any state and are often anchored in big cities; thus their presence must be factored into any discussion of how cities are to steer their way through the fiscal crisis. The tenor of the discussion rested on the idea that even as nonprofit actors provide valuable strategic direction or funding for much needed social programs, tensions remain over the limited role they may have in the policymaking process. The European perspective on this relationship was especially revealing: the executive director of a foundation in Germany, who himself was a former mayor, expressed frustration at being treated, as he so candidly put it, like “useful idiots” by municipal officials in search of no-strings-attached funding for government programs. It was a sentiment echoed by representatives from the U.S. foundation world, where philanthropic interests must be carefully reconciled with government priorities in order to maximize the intended effect of social or infrastructure improvement programs. Increased philanthropic influence, however, is a double edged- sword: since foundation activity is not accountable to any government entity, how can philanthropy be executed in a way that is in the best interests of a city or region?

The ideas drawn out from the discussions outlined above prompted a concluding conversation that bleakly summarized the financial mess in which local governments find themselves. The dire straits of city finance will not be overcome by short-term fixes or one- off solutions alone. Deficits, particularly in America’s older cities, are structural and thus require large-scale interventions that fundamentally change the way municipalities deliver and prioritize services and raise revenue. In the service delivery sphere, these interventions should be holistic and thereby drive down dependency through a comprehensive restructuring of how citizens interface with their government. The same goes for initiatives to raise revenue: cities should, for example, adhere to a single development framework where localized political interests are marginalized in favor of the whole, with decisions about where and how to attract jobs and businesses made accordingly. The answers that comprise this approach are not easy to come by and often even harder to implement. But, to echo another consistent theme from the day, city leaders are finding themselves more and more often in a position to make once difficult, now necessary decisions as result of the financial crisis.

Photo credit: Jess Zimbabwe

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