Pittsburgh Mayor Bill Peduto’s second-term blueprint, unveiled on Jan. 3, calls for the establishment of an “urban wealth fund,” or a UWF.
But how this might work – or even if it works – is a huge question mark. And the president of the Allegheny Institute for Public Policy has some serious doubts about such a policy prescription.
“Another blue ribbon panel and several consultant hires would seem to be imminent,” Jake Haulk, the think tank head, wryly notes.
Modeled after programs in Europe and Asia, an “urban wealth fund” would be designed to leverage city assets to, supposedly, give the city a larger bolus of investment income.
Or as Peduto characterized it, “a new holding company to turn liabilities into assets.”
Or as the Post-Gazette explained it:
“Pioneered in Europe, urban wealth funds are government-owned entities that hold publicly owned property, but use private-sector management to ensure taxpayers receive maximum value through leasing or other arrangements.”
It is a way, the P-G continues, citing supporters, to “offer a middle course between full government control and outright privatization – helping taxpayers realize revenue from public assets without forfeiting ownership.”
Some analysts have likened urban wealth funds to sovereign wealth funds, writ small. But, more simply put, it’s more akin to private-public partnerships, more “equalized” to the benefit of taxpayers, observers have said.
And, perhaps, also as a sop to help preserve public sector unions?
Dag Detter has been the darling of the “urban wealth fund” idea since last year when the Brookings Institute published his book “The Public Wealth of Cities: How to Unlock Hidden Assets to Boost Growth and Prosperity.”
From a recent Financial Times commentary that Detter co-authored with Willem Buiter, the chief economist at Citigroup:
“It is often claimed that there is this great wall of money searching for assets – but a dearth of investment opportunities.
“Yet at the same time there are commercial assets owned by the public sector – transportation, airports, ports, water and electric utilities, communications, as well as vast portfolios of real estate that represent a veritable gold mine.
“Unfortunately, much of it is hidden from the public view, without professional management and impaired by rent-seeking activities of the insiders controlling and often mismanaging these assets.”
They write that “urban wealth funds” are “necessary not only to be able to unlock the value hidden in these public commercial asset portfolios but also to avoid giving away public value through the many unsuccessful (and badly designed) attempts to cooperate with the private sector in a variety of public-private partnerships.”
Detter and Buiter say that while public-private partnerships have their place, “Too often they have been no more than vehicles to avoid public sector budgetary and balance sheet constraint, in the process transferring most of the gains to private partners.”
Others see the creation of “urban wealth funds” as a way to keep politics at “arms-length” from the operation of such government functions.
But, exactly what are the mechanics of these UWFs? The Financial Times’ Matt Klein offers this tutorial:
“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.
“Independent managers with experience in real estate and finance would be charged with maximizing the value of the portfolios. Cities would receive dividends from their stakes in these commercial properties and have the option to borrow against or sell their shares if desperate for cash.”
Klein even broaches public officials having to decide whether it makes sense to pay fair market rents to stay in their properties. “Moving offices might be inconvenient for government workers but the potential gains for taxpayers and citizens who depend on government services would be far greater.”
To say the least, it’s an interesting concept. However, there appears to be a dearth of scholarly literature casting any sort of critical eye on UWFs.
And after reading several articles by Detter, the Allegheny Institute’s Haulk says he’s not at all sure how, or if, the UWF can or would work.
“It seems to me the process is aimed at allowing city properties to be leased to private businesses or city services to be sold to other municipalities or private customers,” he says. “How else could the buildings or land generate more revenue than in their current municipal use?”
In that case, Haulk says the city would, in fact, be creating competition for private companies. And, he adds, the notion that city assets are worth far more than the historical cost can only be meaningful if they could be put to a higher use.
“If the city has real estate that it no longer needs, it should sell it—a better way to raise money. Or as we have recommended for years, outsource services to private firms that can do the work more cheaply.”
But the Ph.D. economist reminds that never happens because it would mean cutting city jobs. Pittsburgh garbage collection, for example, should have been outsourced/privatized years ago, he reminds.
That said, Haulk says he can’t wait to see how the Peduto administration begins assembling the assets to put in the fund and how it will go about entering into a contract with a private manager.
Past being prologue, that likely means yet another “blue ribbon panel” stacked with the usual suspects and lots of paid “consultants,” he says.
To test the usefulness of the “urban wealth fund” idea, Haulk says the mayor should put one of the city’s building or vacant lots up for sale and see how much it will fetch – then hire a private sector manager to operate it to see which works out better.
“Here is the reality,” Haulk says: “The city government spends too much, taxes too much, has too many employees and is absolutely committed to keeping all its employees and running the city as a ‘progressive’ paradise. I just do not see it moving toward a meaningful partnership with the private sector.
“What the city needs is not to engage in some scheme that seems to be very complicated and might come a cropper. The city needs to adopt a much friendlier business climate, cut spending and taxes.
“Can you imagine the constraints and limitations the city will place on a private manager of city assets? Minimum wage, health care, sick leave, etc. It’s enough to scare off really entrepreneurial managers.”
And, indeed, human nature being what it is, it’s likely a stretch to think politicians would act any more responsibly or business-like with proceeds from “urban wealth funds” than they would from taxpayer coffers.
Colin McNickle is a senior fellow and media specialist at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinstitute.org).
