The public wealth of cities is substantial, but under-pricing public assets is rampant
There’s an old saw among economists. Two economists are walking along, and one of them says, “Look, there’s a hundred dollar bill on the sidewalk.” The second economist says, “It can’t be a hundred dollar bill; if it was, somebody would have picked it up by now.”
The point is the economists tend to believe that markets work perfectly, and there are few, if any opportunities to get something for nothing. That old adage came to mind when we read a new story about how municipalities apparently have billions of dollars of hidden assets that they’re just not using.
We were drawn to Governing‘s write-up of a new book called “The Public Wealth of Cities.” It argues that cities everywhere are sitting on huge asset bases, and if they could just monetize the value of those assets they’d have the resources the badly need, to maintain civic infrastructure, provide services and pay down pension debts. Philadelphia’s Jeremy Nowak and Brookings’ Bruce Katz have both chimed in with their endorsement of the concept. And Transportation for America is even holding web conference on recycling public assets, that aims to show how to do this.
The authors, Dag Detter and Stefan Folster of Denmark, argue that many public assets are under-valued. Pre-1980 assets in many cities aren’t valued at all; and many assets are carried on the municipal books at their historic cost, not their current value. If you correctly valued these assets (at their market value or replacement cost) they’d be worth tens or hundreds of billions of dollars. In theory, if you could just earn a very modest rate of return on these assets–as you would from a portfolio of stocks or bonds–they’d generate lots of revenue. Here’s Governing:
If Cleveland put its assets into an urban wealth fund, a modest yield of 3 percent on a fund with a market value in the neighborhood of $30 billion could amount to an income of $900 million a year. That’s nearly double what the city earned in tax revenue in 2014 and is money that could be spent on infrastructure, health care and other critical needs.
Sounds pretty appealing.
But how do you earn a rate of return on a public asset, like a library, convention center or road? The return has to come from the fees that you charge for its use. And that’s the problem. For a variety of reasons, some very good and others not so good, we dramatically under-price the use of some assets relative to their market value. Take parks: they occupy huge amounts of very valuable land, but are mostly free to use, and even those parts of park systems that do charge fees typically only partly cover operating costs, and pay nothing in the form of a cash return on the asset. Getting a market rate of return would require charging users not just for operations, but an amount that would return net income to the asset owner.
What’s at fault here is both public sector book-keeping and public sector management. The public sector generally pays little attention to the balance sheet, and to correctly valuing assets. Public sector budgets are overwhelmingly focused on the income statement: does money coming in equal or exceed money going out? Seldom do public sector books accurately account for assets, make allowance for depreciation, or pay an explicit financial return on invested capital. But this isn’t just a book-keeping issue, it also comes down to management. The public sector almost always under-prices the user fees it charges for the use of its assets, in part because the users (citizens) are also the stockholders.
For some things, it makes little sense to charge users a price. In the case of parks, we generally imagine them to be a public good. We’re more than happy to discount their use as way of providing widely shared benefits that are potentially available to all citizens regardless of income. And because many aspects of park use are “non-rivalrous” there’s a good argument to be made that we don’t want to discourage use by charging fees. And with many such public goods, the transaction cost of collecting revenue would be prohibitive.
But in the case of other public assets underpricing, though politically entrenched, is at the root of bad outcomes. Take parking. The portion of the public right of way dedicated to parking is enormous, and quite valuable. Its value is seldom reflected in the municipal financial reports, and except in a few places where we install parking meters or have neighborhood parking district, we generally give it away for free. Monetizing this asset would require charging users for its value–which in the case of parking would dramatically improve the efficiency of its use. Parking spaces are “rival” goods, and there’s a strong economic argument for asking users to pay their full costs.
As we all know, that’s the rub: Many people have become accustomed to having roads and parking spaces be “free” and are loathe to pay for them. If turning some public assets, like parking spaces over to the private sector would facilitate better pricing, it may be a road to realizing the hidden value of infrastructure. But the trick here is not so much public vs. private management, or whether we classify these things as “public wealth,” but whether we charge the correct price. At the end of the day, what’s required is the steely-eyed determination to charge a market price to customers who’ve become accustomed to getting something free or at a very deep discount.