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Ideas for Mayor-elect Kenney

Hey Jim Kenney: You won!  So . . . now what?

The mayor-elect says he wants to implement zero-based budgeting.  Here’s hoping he has the guts to pull it off.

Trash is always a big issue in Philadelphia.  Here are some ideas for Kenney to tackle the issue.

Payments in lieu of taxes (PILOTs) is a touchy subject for Kenney to take on.  How about solutions in lieu of taxes instead?

Jim Kenney’s Money Challenge

Jim Kenney’s Money Challenge

Four Suggestions

Philadelphia’s new Mayor arrives with policy aspirations and promises to keep. He inherits positive headwinds and a mixed bag of programs and contractual obligations.

Mayor Kenney wants to continue the progress of the Nutter administration while investing in new initiatives, from pre-K and community schools, to the Port of Philadelphia, to a new generation of neighborhood parks and river fronts.

He comes to the position with powerful political allies that need him to succeed, a Philadelphia skyline loaded with cranes, and evidence of population growth for eight consecutive years.

But he is also the Mayor of a high poverty city that is over-taxed, that has pension fund woes, and contains a remarkable amount of deteriorated real estate both private and publicly owned. In terms of public safety, Philly numbers are holding steady but still trail among the largest 10 cities in the United States (neck and neck with Chicago).

Mayor-elect Kenney has spoken eloquently about the need to reduce poverty and remain a tolerant city that continues to welcome new immigrants. He also wants to be the neighborhood Mayor in terms of services and safety.

So how does he pay for new programs and projects while increasing the quality and quantity of public services? That will be the challenge.

Every government has the ability to offset the cost of new investments by getting rid of duplicative agencies, ineffective work processes, and exemptions that no longer make economic sense. Kenney will have to show a willingness to trade off elements of the past for the future.

To generate revenue, Mayors look to local taxes (or fees) and inter-governmental transfers (contributions from the Feds and the State).  It will be hard to get much more from those two areas, at least over the next several years. 

Like Nutter, Kenney understands the problem of the Philadelphia tax system: high taxes on what moves—our people and businesses, for example— and low taxes on what cannot—our real estate. Hopefully Kenney will lead more forcefully on this matter than his predecessor. 

But he recognizes that net new tax increases cannot be on the agenda. That is, certain taxes can increase—but only if other taxes go down. The overall effect has to be to stimulate growth by expanding the tax base.

New money for the city is not likely to come pouring in from Washington D.C., where budget deficits, threats of government shutdowns, and sequestration rule the day.

You can see the effect that has had on Obama Administration urban policy, which has increasingly become Seinfeld-like (the show about nothing) in the post-stimulus period.

The Promise Zone and the Strong Cities, Strong Communities Initiative are largely about priority access to existing programs and stressing coordination among local actors. Coordination as public policy is a shell game. If you have no new ideas and no new resources, you plead for better coordination.

On an inflation adjusted basis, Federal funding for city economic growth and neighborhood recovery continues to decline, with the exception of tax incentive programs, such as the New Markets Tax Credit, Historic Tax Credits, or the Low-Income Housing Tax Credit, none of which run directly through City Hall. But all of which can be influenced by a smart and engaged City Hall.

On the State side, there will be some good news in terms of money for education but it is hard to see all that much more coming down the line, as long as the stalemate math of the executive and legislative branches remain as they are. And it will remain so, at least until the 2017-2018 State budget.

As Kenney looks at the script being handed to him, he will need to press hard on other options. Here are four ideas the new Administration would be wise to consider:

Collect What Is Owed: There is disagreement on how much back property taxes can be recouped but even the low-ball number is in the $250 million range. Use tax lien sales to get the job done. Newly elected Councilman Alan Domb has floated the idea of using a New York City style bulk lien sale. The city bundles the most valuable properties into a trust and sells it as a security to investors, who in turn are repaid through outsourced collections. The city gets an upfront payment and a potential back end payment from value that exceeds the repayment to investors and collectors. There is a lot of detail to be worked out here including what properties to protect (e.g. seniors, active duty veterans). But this is the kind of big idea that we need to move properties off the deadbeat roll. At present the moral hazard of having so many people not make tax payments, with little or no consequence, is way too high.

Cut to Invest: This is a phrase that I first heard in a series of Brookings Institution articles. Bruce Katz, from Brookings, has often framed his approach to housing policy in that way, particularly when speaking about the need to reform the home mortgage interest deduction. The point is that every government has the ability to offset the cost of new investments by getting rid of duplicative agencies, ineffective work processes, and exemptions that no longer make economic sense. Kenney will have to show a willingness to trade off elements of the past for the future. This is not just about getting rid of  waste in government (nobody runs on a pro-waste platform) but identifying one or more big structural moves that provide real capital for new initiatives.  The time to do this is when political capital is strongest.

Organize Impact Investors: There is a substantial movement nationally among philanthropies, wealth advisors, family offices and private companies to demonstrate that economic investments can also have a social impact. Capital that is looking to balance social and economic returns need entities to create a structure into which they can reliably invest. Sometimes that capital needs de-risking, or a liquidity guarantee. This is the ideal time for a city administration to become active in this movement. The city’s lead economic development agency (PIDC) is skilled at structuring complex transactions, Philadelphia has several community development financial institutions (e.g. The Reinvestment Fund) with national stature, and organization’s like Ben Franklin Technology Partners are expert equity investors.

Newly elected Councilman Alan Domb has floated the idea of using tax lien sales to move properties off the deadbeat roll. The moral hazard of having so many people not make tax payments, with little or no consequence, is way too high.

The city can work with these and other organizations to leverage more social capital than it currently does. While traditional philanthropy in Philadelphia wants to avoid controversy, there are significant, non-controversial opportunities for them to invest in parks, libraries, and other cultural institutions. (Trees rarely complain and never write op-eds.) For cities like Philadelphia, philanthropy can be a bridge to capital markets.

Increase the value of public assets: The public sector owns a massive amount of real estate that has to be monetized over and above the collection of back taxes. The city has been in the slum landlord business for five decades rather than converting its housing agencies into a professional real estate marketing enterprise that can unload properties to responsible buyers. The city also controls major infrastructure from the Gas Works to the airport that can be run more effectively by private managers. We just did this with our Convention Center and turned the whole thing around. But we have gotten so bogged down in fears of privatization that we have lost any understanding of what we mean by public, and instead conflate it with government management and work rules. Every time we walk along the revitalized Dilworth, Franklin Square, and Sister Cities plazas we would be wise to remember they are publicly owned–but privately managed. All of them now produce more private and public wealth then they did when they were fallow spaces, dead to enterprise and foot traffic.

The point here is philosophical and economic. What is the value of the city’s public assets and what if we were able to increase that value by even a small amount? What would the result mean for the city budget?

Two Swedish economists–Dag Detter and Stefan Folster–wrote an important new book on this subject titled The Public Wealth of Nations.  Among their observations is that very few nations (let alone smaller units of government) accurately produce a balance sheet of their public assets. Let’s do that in Philadelphia and do real scenario planning regarding how to create more value from those assets.

These four suggestions are only a small part of a bigger menu. There are many other things that can be done through capital markets and by adopting pro-entrepreneurial strategies. And none of it works all that well unless spiraling legacy costs like pensions are addressed. Last week’s Auditor General’s report on the city pension funds will hopefully galvanize some action. Moreover, it is all linked to the overall rates of national and local growth. Hopefully it will be stronger for this administration than the deep recessionary cycle that Nutter had to endure.

But for now we are at the start of a new administration and it’s a good time for everyone to rethink the normal playbook. Otherwise those promises will get hard to keep.

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