A towering challenge: Habitat III must promote municipal fiscal health

Around the world, local governments are going broke — and nearing a crisis point.

Sworup Nhasiju

At next year’s Habitat III conference on cities, the world’s leaders will come together in Quito to set a new urbanization strategy for the coming two decades. In the run-up to that event, there is perhaps no greater challenge: If we seek a New Urban Agenda and envision a more balanced and equitable future for the world’s cities, we must be more innovative in financing that bright new future.

The subject of financing isn’t always a prominent feature in planning conferences. But it needs to be. As part of a new campaign launched by the Lincoln Institute of Land Policy promoting municipal fiscal health, we hope to make financing tools and practices a pillar in the proceedings in Quito next fall.

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The immediate problem is that local governments are going broke around the world. In addition to the well-established cases of fiscal insolvency in the United States — Detroit, Stockton, Vallejo, alongside some 200 municipal bankruptcies since 1980 — the over-extension of credit to Chinese localities, now estimated at USD 3.3 trillion, is reaching a crisis point. The fact is, there are virtually no local revenue sources in place in China for repayment.

Elsewhere around the world, the devolution of responsibilities from central to local governments is creating intractable challenges. Cities are struggling both to deliver the goods and services needed by local citizens and to finance the infrastructure required to improve their sprawling informal settlements.

Too often, several important structural elements are aligning to imperil the fiscal health of cities. These include irregular and uncertain revenue streams, unpredictable obligations and the vulnerability of local governments to events outside of their control.

In turn, this financial peril is being exacerbated by large external challenges — demographic shifts, macroeconomic cycles, economic restructuring and unfunded mandates, among others. Likewise concerning are tax “revolts” by citizens and the private sector, as well as tax limitations or unpredictable changes in revenue-sharing schemes imposed by higher levels of government.

The most alarming ramifications accrue in capital accounts, most notably around infrastructure. In the United States, we are all well aware of infrastructure deficiencies brought on by deferred maintenance and delayed investment. When fiscal challenges pile up over years, it can result in catastrophic failures, like when an interstate highway collapses into the Mississippi River, or when buildings in Harlem explode because of leaking century-old gas lines, or when levees fail and a hurricane turns into a month-long flood.

Only by maintaining fiscal health will we be able to invest in the new infrastructure needed to accommodate the unprecedented urban growth of the next quarter-century.

Primacy of land

Putting municipal fiscal health front and centre on national and international agendas clarifies a pathway toward more sustainable and successful urbanization.

How does this happen? First, municipalities need public finance personnel who know how to plan, with multi-year budgeting, capital budgets and diversified revenue bases that include counter- and pro-cyclical revenue elements.

“Only by maintaining fiscal health will we be able to invest in the new infrastructure needed to accommodate the unprecedented urban growth of the next quarter-century.”

Conversely, planners need to be trained in public finance so that they can design projects that are financially feasible, in coordination with public finance efforts. This allows for key investments to be better timed and for a full-cost accounting of projects to be carried out, so that maintenance expenses are built in from the beginning.

In addition, the world’s growing cities need to coordinate multiple levels of government so that the higher levels do not push the lower levels into insolvency. This requires establishing better early-warning systems so that all can act before a situation becomes critical at the municipal level.

Drilling further down to specific tools to promote municipal fiscal health and more stable financing of infrastructure and more equitable urban development, we at the Lincoln Institute of Land Policy are calling for a more expansive view — going beyond traditional approaches and incorporating innovation and creative thinking, especially in the promising realm of land-based financing methods.

For instance, in our contribution to Habitat III’s preparatory negotiations in Nairobi this spring, we underscored our belief that land and land policy is a foundation for municipal fiscal health. These elements are also central to efforts to alleviate poverty, create good urban form and promote sustainable human settlement.

To this end, the Lincoln Institute believes that Habitat III and the New Urban Agenda must address the following three issues.

First, the Habitat process will need to increase awareness of the opportunities to tap into what’s known as land-value increments — the documented increase in property values resulting from public actions and investments. This is an opportunity to strengthen sources of financing for urban development, after all, as well as a means to facilitate the promotion of more socially inclusive land uses.

Innovative examples in this regard can be found particularly in the practice of value capture, in widespread use in Latin America. In Sao Paulo, for instance, building rights in well-defined redevelopment zones are publicly auctioned, with great acceptance from developers.

Elsewhere, contributions toward betterment clarify the relationship between new development and the surrounding community. The basic recognition is that the costs of infrastructure have long been socialized, while the benefits have been privatized. Making a modest adjustment in that equation is a step in the right direction.

Second, the New Urban Agenda will need to recognize the critical importance of a fair and well-functioning property tax as an anchor for financing local governments and improving their ability to provide vital services to their citizens. Property taxes should be embraced as an instrument of land policy as well as a means of achieving fiscal goals.

The property tax is efficient and democratic, providing a direct link to services that city residents receive. But today it is treated like a pariah, with a proliferation of tax caps or other limitations; sometimes it utterly melts down, as was the case, until only recently, in Detroit. On the other hand, policymakers in China are recognizing that a strong property-tax system will be invaluable for the fiscal stability and long-range planning of burgeoning cities.

And third, there is great potential in coordinated land-use planning and fiscal policies to mitigate informality and housing crises, and to provide much-needed physical and social infrastructure. This approach is grounded in a more nuanced understanding of urban informality — that it is the result of dysfunctional urban land markets and policies, not simply a manifestation of poverty.

Prompting action

The Lincoln Institute also supports multilateral and collaborative efforts to promote the real-time monitoring of urban expansion and the opportunities that such monitoring offers to interrogate existing land-use regulations and urban policies at a global scale.

In partnership with New York University and UN-Habitat, for instance, we are updating the Atlas of Urban Expansion, with a new representative sample of 200 cities that vividly illustrate the rapid growth that is resulting in the basic challenges we’re seeing. By the time Habitat III takes place, as part of an envisioned Urban Observatory initiative that will provide better metrics for the years ahead, the atlas will include new features — an analysis of informal versus formal development, housing affordability, and the impact of regulatory regimes on growth, especially at the periphery.

We stand ready to share expertise on land policy, urban economics, taxation and valuation, and urbanization from the United States, Latin America, China and Eastern Europe, to inform the promotion of municipal fiscal health in the Habitat III process and the New Urban Agenda. Recognition of the current fiscal crisis facing the world’s cities, and the promotion of sound fiscal policies and land-based financing tools, can form the basis for turning innovative ideas into action — and improving the lives of residents of metropolitan regions around the world.

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George W. McCarthy

George W. McCarthy is president and CEO of the Lincoln Institute of Land Policy, a member of the World Urban Campaign, U. S. National Committee and General Assembly of Partners, representing civil society organizations including research and academic institutions. In his prior position at the Ford Foundation, he engaged extensively with UN-Habitat and the World Urban Forum. The Lincoln Institute, a think tank based in Cambridge, Massachusetts, is a leader in guiding more equitable and sustainable urbanization worldwide.