July 28, 2017

What’s Land Got to Do With It: Local Government Solvency and Pension Finance



Matt Klein has a fascinating piece in the Financial Times exploring the idea that local governments should set up Urban Wealth Funds, a sort of Sovereign Wealth funds for local government, to unlock some of the massive wealth they are sitting atop.

… ownership of these assets [would be transferred] to what Detter and Fölster call an “urban wealth fund”. Ideally, all publicly owned assets in a given city would be placed in the fund, regardless of whether they technically belong to the county, the city, the school system, the state or some other entity. The local governments would each have shares in the fund proportionate to the value of the assets they contributed. These shares would be reported as assets on the municipal balance sheets.

The idea is that local government entities currently sit on top of massively valuable land. The same is true with the Federal Government. Federal agencies in downtown D.C. and in the surrounding suburbs occupy enormously valuable real estate. At the Federal level, relief could mean moving many of these agencies to drastically cheaper markets, such as in the Midwest. The IRS, for example, currently has one of its largest facilities in Kansas City, where it serves as a pillar of the local economy and saves taxpayers millions relative to a similar facility in the District.  Relocating federal agencies outside of the District is something that Matt Yglesias at Vox has written about, and it’s one of my favorite ideas.

Urban wealth funds have similar goalsbringing market urbanist principles to government owned real estatebut operate somewhat differently. The funds would provide a way for local governments to sell off their existing assets, invest the proceeds, and then rent office space at market rates. According to Dag Detter and Stefan Fölster, authors of “The Public Wealth of Cities,” local governments have potentially $25 trillion dollars in land assets as compared to $3.5 trillion in debt, and $7.5 trillion in pension obligations.

What this suggests is that despite fears of widespread municipal bankruptcy, state and local governments in the United States are sitting on a gold mine of wealth. Far from being bankrupt they are flush with assets. Those assets are simply illiquid. This reminds me of a similar loss of perspective that was on display during the European Sovereign Debt crisis.  Fallout from the Subprime debt crisis in the United States caused investors around the world to reduce nearly all forms of lending. Southern European nations, who had been heavily dependent on foreign investment, suddenly found it difficult to borrow enough money to cover their basic costs.

Commentators have repeatedly suggested that nations like Spain and Italywith strong tourists industries and hot property markets which served as a destination for wealthy retireeswere fundamentally bankrupt. These claims aren’t entirely accurate. A government’s fundamental source of wealth comes from the desire for people to live under its jurisdiction. In efficiently governed countries with strong property rights, individuals flock to the jurisdictions to establish businesses and further expand upon the nation’s wealth. Admittedly, Spain and Italy were less attractive on governance and property rights.  Nonetheless, they were attracting visitors and retirees because of their deep cultural and environmental assets. Those cultural and environmental assets are just as real and a fundamental source of wealth.

In the same sense, it is difficult to look at the metropolises in the U.S. Northeastern Corridor or along the Pacific Coast and see a set of governments that are anywhere near bankruptcy. They may be poorly managed on all sorts of fronts. They may be constraining growth and sapping their economic potential with overly stringent regulations and bureaucratic red tape.

Nonetheless, they are teeming with workers and residents. Their rents are high and their home prices are higher. This is not a bankrupt jurisdiction, no matter what the accounting sheets say. The question will be how to practically unlock the enormous wealth these jurisdictions are sitting on. The urban wealth fund is one such idea, and I implore my fellow market urbanist to search for and popularize more.

Karl Smith is the Director of Economic Research at the Niskanen Center