Category Archives: City Life

Boom towns and bust policies

Stephen Walters, Professor of Economics at Loyola University Maryland, has written a new book called Boom Towns. I’ve written a review for the Library of Law and Liberty. Here is the beginning:

Capital, in the 21st century, has a bad rap. Many say that because it is the source of “passive income,” it does nothing but pad the pockets of the idle rich, driving a wedge between the haves and the have-nots. It’s helpful, then, to be reminded that capital in all its forms is the source of human betterment. Capital is the accumulated stock of stuff (financial assets, physical equipment, human knowhow, even social connections) that helps us make and do more stuff. So policies that drain capital from a community or discourage its formation in the first place are likely to leave a trail of destruction. This is the central lesson of Stephen J.K. Walters’ Boom Towns: Restoring the Urban American Dream.

Here is another excerpt:

In some cases, reformers’ cures for urban decay have been worse than the disease. Title I of the Housing Act of 1949 is a case in point. It made federal dollars available to cities that bulldozed property in blighted areas and turned it over to private developers. While earlier reforms had sought to replace tenements with public housing, Title I allowed funds to be used for “shiny new office towers, upscale apartments, convention centers, or hotels.” By 1967, some 400,000 housing units had been razed, but only 10,760 low-rent dwellings had been built to replace them. The result was “an intra-urban diaspora” as about two million, mostly Black, residents were displaced. Though it is impossible to quantify precisely, Walters rightly emphasizes the significance of this unfathomable loss in social capital as people were driven from the communities that had sustained them for generations.

After I wrote this, a friend pointed me to this moving Reason video, written and produced by Jim Epstein and narrated by Nick Gillespie:

Municipalities in fiscal distress: state-based laws and remedies

The Great Recession of 2008 “stress tested” many policies and institutions including the effectiveness of laws meant to handle municipal fiscal crises. In new Mercatus research professor Eric Scorsone of Michigan State University assess the range and type of legal remedies offered by states to help local governments in financial trouble.

“Municipal Fiscal Emergency Laws: Background and Guide to State-Based Approaches,” begins with some brief context. Most municipal fiscal laws trace their lineage through the 1975 New York City fiscal crisis, the Great Depression and the 19th century railroad bankruptcies. Writing in 1935, attorney Edward Dimock articulated three pieces to addressing municipal insolvency:  1) oversight of the municipality’s financial management 2) stop individual creditors from undermining the distressed entity and 3) put together a plan of adjustment for meeting the creditor’s needs.

These general parameters are at work in state laws today. The details vary. Some states are passive and others much more “hands-on” in dealing with local financial troubles. Scorsone documents these approach with a focus on the “triggers” states use to identify a crisis, the remedies permitted (e.g. can a municipality amend a collective bargaining agreement?), and the exit strategies offered. Maine has the most “Spartan” of fiscal triggers. A Maine municipality that fails to redistribute state taxes, or misses a bond payment triggers the state government’s attention. Michigan also has very strong municipal distress laws which create, “almost a form of quasi-bankruptcy” allowing the state emergency manager to break existing contracts. Texas and Tennessee, by contrast, are relatively hands-off.

How well these laws work is a live issue in many places, including Pennsylvania. In 1987 the state passed Act 47 to identify distressed municipalities. While Act 47 appears to have diagnosed dozens of faltering local governments, the law has proven ineffective in helping municipalities right course. Many cities have remained on the distressed list for 20 years. Recent legislation proposes to allow a municipality that can’t “exit Act 47” the option of disincorporating. Is there a middle ground? As the PA State Association of Town Supervisors put it, “If we can’t address the labor issues, if we can’t address the mandates, if we can’t address the tax exempt properties, we go nowhere.”

Municipalities end up in distress for a complex set of reasons: self-inflicted policy and governance failures, uncontrollable social and economic shifts, and external shocks. Unwinding the effects of decades of interlocking problems isn’t a neat and easy undertaking. The purpose of the paper isn’t to evaluate the effectiveness various approaches to helping municipalities out of distress, it is instead a much-needed guide to help navigate and compare the states’ legal frameworks in which municipal leaders make decisions.

 

 

 

Municipal pension news: Baltimore to offer DC plan

Earlier this month, Baltimore’s city council approved a measure to give the city’s workers a choice between a defined contribution or defined benefit plan plan. According to Pensions and Investments, new hires will contribute 5 percent of their salary to whichever plan they choose, a significant increase from the 1 percent that workers were required to begin contributing to the city’s pension system last year. (Previously, workers had not contributed to their pension). As the article notes, the choice between a DB and a DC plan is a compromise. Mayor Rawlings-Blake preferred to move all newly hired employees to a DC plan, but this was not agreed upon by unions. In total, Baltimore two pension systems have an unfunded liability of $1.4 billion on a GASB-basis.

Baltimore’s proposed reforms are a bit stronger than the plan currently considered by Chicago mayor Rahm Emanuel, which is largely focused on filling in very daunting funding gaps in the city’s multiple plans. The Wall Street Journal reports that the mayor’s plan to raise property taxes by $250 million represents an increase of about $50 a year for the owner of a $250,000 home. And, it’s not enough to cover the gap. The state will demand an additional $600 million in annual payments for the city’s police and fire funds by 2016. In addition, Mayor Emanuel proposes benefit cuts, such as  increased employee contributions and reduced COLAs. But structural reforms aren’t being pushed too strongly, instead, the focus in Chicago appears to be a search for more revenues. Consider a proposal floated by The Chicago Teachers Union. They would like to see a per-transaction tax levied on futures, options, and stock trades processed on the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange.  Both the CME and Mayor Emanuel oppose the idea recognizing that it will simply drive the financial industry out of town.

 

Hercules, California’s Herculean debts

What lead the city of Hercules, California to default on its debts? Guest poster Marc Joffe, Principal Consultant at Public Sector Credit, finds a case of mission-creep in the “dynamic city on the Bay’s”  decision to issue debt to finance power plants and affordable housing.

(For more of Marc Joffe’s research on modeling credit risk, read his 2013 Mercatus Working paper comparing Illinois and Indiana)

Hercules, California Public Power Failure Leads to Default

by Marc Joffe

Cities can default on obligations to their creditors without filing for Chapter IX bankruptcy protection.  This is the lesson of Hercules, California – a 25,000-resident San Francisco suburb whose finances are not quite as mighty as its name implies. Hercules experience is also illustrative of the risks that cities take when they expand beyond their core functions of public safety and public works.

The city is threatening to default on $12.8 million of municipal bonds as early as this August.  In a tender offer issued earlier this month, Hercules offered holders of these bonds 90% of their securities’ face value. According to the bondholder notice, “If an insufficient number of bonds are not tendered, the City anticipates it will soon default on the bonds.” Offering bondholders 90 cents on the dollar in order to avoid facing the risk of non-payment is, for all intents and purposes, a default.

In fact, it is the city’s third default in recent years. In 2011, Hercules failed to repay a $3.75 million loan from the California Housing Financing Agency (CHFA). The state loan was intended to support a mixed use development Hercules planned to build. The development, which included a large affordable housing component, was stymied by neighborhood opposition to low income housing and the City’s inability to acquire a portion of the intended construction site from a nearby homeowner’s association. Earlier this year, Hercules sold the site to a developer who plans to build market rate housing. It has also agreed to repay the CHFA loan in installments through 2026 at a reduced interest rate.

Hercules’ second default occurred on February 1, 2012, when it failed to make a $2.4 million interest payments on Redevelopment Agency (RDA) bonds. The default was absorbed by Ambac, the agency’s municipal bond insurer. Ambac filed suit against the city claiming it had failed to remit RDA related property tax collections to the bond trustee as required. In March 2012, Ambac and the City settled the litigation with the City pledging two parcels of land to the insurer. The City further agreed to place these two properties on the market, apparently to offset the $4.05 million property tax remittance the city had failed to make earlier.

The most recent default (or, more euphemistically, the current tender offer) involves bonds issued to finance a failed public power scheme. In 2001, the City established a public power company – the Hercules Municipal Utility (HMU) – on the assumption that it could replace the area’s for-profit utility, Pacific Gas & Electric (PG&E). The expectation was that HMU would generate a similar rate of profit to PG&E, but under public ownership, those profits could fund other city spending priorities. Unfortunately for Hercules creditors and taxpayers, things did not work out as planned.

In a 2011 expose, the Huffington Post reported that HMU was serving only 840 customers, charging rates 17% higher than PG&E and had lost money in every year since its 2003 inception. In 2010, the City issued $13.5 million in new bonds to finance HMU, but the proceeds were never invested. Now the City has agreed to sell its power plant to the local utility – Pacific Gas & Electric. Unfortunately, PG&E’s bid was insufficient to retire the $12.8 million in 2010 bonds still outstanding and (for reasons discussed below) the city lacks reserves that could be used to fully redeem these remaining bonds. Thus the need for a 90% tender offer.

Municipal bond analysts often assess a city’s fiscal well-being by reviewing its audited financial statements. Unfortunately, Hercules routinely files its audited financials on a delayed basis. Currently, the latest available statements for Hercules are for the fiscal year ended June 30, 2011. Many California cities have already filed their 2013 audits. The failure to file audited financials on a timely basis is part of a larger financial management issue in Hercules. In May and November 2012, the State Controller’s Office issued three audits highly critical of the city’s fiscal controls. One report “found the City of Hercules’ administrative and internal accounting control deficiencies to be serious and pervasive.” These insufficient controls may explain why RDA tax revenues could be directed away from debt service, thereby subjecting the city to costly litigation.

As shown in the accompanying table, Hercules has persistently run large General Fund deficits since 2008.  The city’s inability to balance its books has resulted in the depletion of its financial reserves. According to Hercules most recent budget, the city had a negative unassigned General Fund balance at the end of FY 2012 and FY 2013, meaning it had no reserves that had not already been earmarked for one purpose or another. Despite having borrowed over $150 million, the city thus lacked liquid assets to cover contingencies.

Hercules General Fund Performance (FY 2008-FY2013)

Year

Revenues

Expenditures

Surplus/(Deficit)

2008

13,927,154

15,238,000

(1,310,846)

2009

14,738,289

17,274,960

(2,536,671)

2010

16,422,677

20,683,147

(4,260,470)

2011

11,823,076

16,232,313

(4,409,237)

2012

10,754,530

12,893,983

(2,139,453)

2013

11,151,014

12,288,943

(1,137,929)

Sources: Hercules Audited Financial Statements (FY 2008-2011), FY 2014 Budget.
FY 2012 and FY 2013 are unaudited estimates.

 

Hercules fiscal straitjacket appears to be the result of government overreach. Instead of focusing on efficient delivery of basic services and providing effective financial oversight, City leaders ventured into enterprises attractive to many of their Progressive constituents: publicly owned power and publicly-financed affordable housing. Lacking the skills to properly manage these undertakings, city leadership squandered large sums of borrowed money and ran down their financial reserves. The result for Hercules will be years of higher taxes, subpar real estate performance and reduced access to the municipal bond market.

 

The “pension tapeworm” and Fiscal Federalism

In his annual report to shareholders, Warren Buffett cites the role that pension underfunding is playing in governments and markets:

“Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made. During the next decade, you will read a lot of news –- bad news -– about public pension plans.”

He zones in on pension mathematics – “a mystery to most Americans” – as a possible reason for accelerating liabilities facing state and local governments including Puerto Rico, Detroit, New Jersey and Illinois. I might go further and state that pension mathematics remains a mystery to those with responsibility for, or interest in, these systems. It’s the number one reason why reforms have been halting and inadequate to meet the magnitude of the problem. But as has been mentioned on this blog before: the accounting will eventually catch up with the economics.

What that means is unrelenting pressure building in municipal budgets including major cities. MSN Money suggests the possibility of bankruptcy for Los Angeles, Chicago and New York City based on their growing health care and pension liabilities.

In the context of this recent news and open talk of big municipal bankruptcy, I found an interesting analysis by Paul E. Peterson and Daniel J. Nadler in “The Global Debt Crisis Haunting U.S. and European Federalism.”(Brookings Institution Press, 2014).

In their article, “Competitive Federalism Under Pressure,” they find a positive correlation between investors’ perception of default risk on state bonds and the unionization rate of the public sector workforce. While cautioning that there is much more at work influencing investors’ views, I think their findings are worth mentioning since one of the biggest obstacles to pension reform has been the reluctance of interested parties to confront the (actual) numbers.

More precisely, it leads to a situation like the one now being sorted out in federal bankruptcy court in Detroit. Pensioners have been told by Emergency Manager Kevyn Orr that if they are willing to enter into a “timely settlement” with the city and state, they may see their pensions reduced by less than the 10 to 30 percent now suggested. Meanwhile bondholders are looking at a haircut of up to 80 percent.

If this outcome holds for Detroit, then Peterson and Nadler’s findings help to illuminate the importance of collective bargaining rules on the structure of American federalism by changing the “rules of the game” in state and local finances. The big question for other cities and creditors: How will Detroit’s treatment of pensions versus bonds affect investors’ perception of credit risk in the municipal debt market?

But there are even bigger implications. It is the scenario of multiple (and major) municipal bankruptcies that might lead to federalism-altering policy interventions, Peterson and Nadler conclude their analysis with this observation:

[public sector] Collective bargaining has, “magnified the risk of state sovereign defaults, complicated the resolution of deficit problems that provoke such crises, heightened the likelihood of a federal intervention if such crises materializes, and set the conditions for a transformation of the country’s federal system.”

New York’s Population Challenge

Last week at City Journal, Aaron Renn explored the New York region’s loss of domestic residents since 2000. He demonstrates that one of the world’s economic powerhouses is falling victim to the trend of domestic outmigration that New York state is seeing. Between 2000 and 2010, the New YOrk region lost 2 million domestic residents and they took with them billions of dollars of income. In Freedom in the 50 States, Will Ruger and Jason Sorens rank New York as the country’s least-free state based on its regulatory and tax regimes. They point to its tax burden — the highest in the nation —  and indebtedness as a factors contributing to the state losing 9-percent of its domestic population on net since 2000. Renn also posits that high tax rates are a leading cause for residents leaving New York City, many of them moving to Sun Belt states.

While the New York City region is only maintaining a positive population growth rate through births and international immigration, it’s far from the case that no one is willing to suffer its high tax rates in exchange for the city’s economic dynamism and cultural amenities. Rather the city’s exorbitant rental rates demonstrate that millions of people are willing to pay a premium to live in the region in spite of city and state policies that hamper economic development.  The vacancy rate for apartments is below 2-percent, well under many estimates for the natural vacancy rate. While lower taxes at the state and municipal levels in the New York region would reduce the flow of domestic outmigration at the margin, they would also increase competition for the city’s coveted apartments.

Are New York City’s amenities so desirable that its policymakers don’t need to worry about losing more residents to other states than they’re gaining? Its own not-so-distant history indicates that even the Big Apple is susceptible to the ravages of population loss. From 1950 to 1980, the city’s population fell from 7.9 million to 7 million, with most of that loss occurring in the 1970s. This time period corresponded with sharp increases in crime and the city’s famous default. These are predictable consequences of urban population decline, particularly in indebted cities where a decrease in tax base equates with inability to meet obligations to creditors .

While pursuing policy reforms designed to boost the state’s competitive standing to attract businesses and residents is a key piece of ensuring the city does not fall prey to population exodus, perhaps most importantly, city policymakers should examine their land use restrictions that limit would-be residents from moving to the city. Over the past decade, New York’s housing stock has grown only 5.3% in the face of the highest rental rates in the country for much of this time period. Historic preservation, density restrictions, and an onerous review process prevent the city’s housing stock from growing to meet demand.

Renn points out that most of New York’s domestic inmigration comes from midwestern cities and college towns across the country. Presumably many of these new residents are early in their careers and are on the margin of being able to afford New York rents. If New York housing were more attainable, more American young people would select the city as the starting place for their careers and it would attract more of the foreign immigrants essential to maintaining the city’s diversity and innovation. Ed Glaeser explains that those states that are successfully attracting more residents, like Texas and Georgia, are also those in which developers are able to build more housing with fewer restrictions. By allowing more housing in New York City and the surrounding areas, policymakers would both protect their tax base and help to maintain the city as a center of innovation and economic growth. In their effort to retain citizens — and particularly high-income retirees — New York City and New York state policymakers will need to revisit their punishing tax schemes. But at least as importantly they should focus on allowing those residents who would like to move to the city for economic and cultural opportunities to be able to afford to do so.

 

 

 

 

To merge or not to merge?

Princeton Image

Consolidating municipalities is a common policy prescription from across the political spectrum. In New Jersey in particular, many democratic and republican elected officials have thrown their support behind merging municipalities. In part, this support is based on the experience of Princeton. In 2011, Princeton Borough and Princeton Township moved, the first New Jersey municipalities to do so:

New Jersey GOP Gov. Chris Christie as well as governors in Ohio and Pennsylvania have been urging local governments to seek savings by eliminating unneeded costs. Christie endorsed the Princeton plan and offered to pay 20% of the $1.7-million unification cost, Bloomberg News reported.

The forecast is that Princeton taxpayers will save $3.1 million annually by consolidating services, including those for police and fire protection.

“We have redundancy in government,” borough resident Cole Crittenden told NJ.com in explaining why she supported the merger.

Framing municipal mergers as a way to get more bang for the taxpayer buck makes the proposal difficult for anyone to oppose except for those municipal employees who are redundant after a merger. However, the cost savings of consolidation are not well-understood. In an article in Governing Magazine earlier this week, Justin Marlowe writes:

It turns out that consolidations rarely save money. In fact, for the majority of citizens directly affected in these cases, consolidation has meant higher taxes and spending. Some cities consolidated because a larger government could improve local infrastructure. This has usually meant new debt and new taxes to repay that debt. Others offered generous pensions and health-care benefits to employees pushed out in the consolidation, thus saddling the new government with expensive legacy costs. In the consolidated town of Oak Island, N.C., per capita spending is two or three times higher than before consolidation, and that’s by design. Consolidation allowed this coastal community to offer new services needed to build a vibrant tourist economy.

Superficially, municipal consolidation looks like an opportunity to reduce taxes or to provide increased services for a given level of revenue. However, as Marlowe indicates, larger jurisdictions do not always result in anticipated efficiencies. As policymakers’ gain control of larger jurisdictions and in turn the ability to access more funds from revenue from the state and federal level, they may spend more, rather than less, per capita.

Burden of DC’s Wal-Mart Minimum Wage would be Borne by City’s Poor

Plans to bring six Wal-Marts to the District of Columbia may fall through over city requirements for the big box store to pay an hourly wage of $12.50, more than a 50-percent increase over the District’s $8.25 minimum wage. Yesterday, the DC City Council voted 8-5 to approve this higher minimum wage, creating a higher wage requirement for stores with over 75,000 square-feet and retailers that make over $1 billion annually.

The council passed Large Retailer Accountability Act under the rhetoric that raising the minimum wage would benefit the District’s workers and that Wal-Mart can afford to pay higher wages:

Vincent Orange was one of the most vocal supporters of the bill. “We don’t need Wal-Mart, Wal-Mart needs us,” he said. “The citizens of the District of Columbia demand that we stand up for them.”

While supporters of higher minimum wages say that they are helping their least well-off constituents, in fact raising the minimum wage for Wal-Mart will hurt the very members of the city’s labor force that  council members say they are trying to help. That raising a minimum wage raises unemployment is uncontroversial among most economists. When the employment rate falls with a higher minimum wage, those left without a job will be lowest-skilled workers with the fewest job choices. While a higher minimum wage will benefit a group of employees who keep their jobs and otherwise would have made the lower minimum wage, policymakers must acknowledge the tradeoffs involved in a minimum wage law and that by supporting a minimum wage, they are hurting society’s least well-off members.

Furthermore, by discouraging Wal-Mart from opening stores, DC’s council is doing another disservice to residents by reducing availability of low-cost goods. Again, the burden of this policy decision falls hardest on the city’s lowest-income residents. Because those with lower incomes tend to spend a higher percentage of their income on food and other basic goods sold at Walmart, discouraging the company from opening DC locations is a regressive policy. Even for those who don’t choose to shop at Wal-Mart, the retailer’s low prices create pressure for other city stores to reduce their own prices to compete, benefiting an even wider net of consumers.

Mayor Vincent Gray has the option to veto the bill, which would require a ninth vote from the Council to overturn. If the DC City Council actually wants to benefit the city’s low-income residents, allowing Wal-Mart to provide jobs and affordable goods would create broader, lasting benefits to the community than a restrictive minimum wage. Requiring large stores to pay a higher minimum wage than other retailers would limit consumer choice, especially for consumers who have few choices, and it would eliminate job opportunities for the least-skilled workers.

WMATA’s failures are institutional, not personal

Chris Barnes who writes the DC blog FixWMATA  is supporting a petition to replace the Board of Directors of the Washington Metropolitan Area Transit Authority. Frustration with the transit agency is growing among Washington-area residents as ongoing system repairs have made the system’s weekend service increasingly unusable. The situation has led to the birth of multiple blogs documenting WMATA’s failures. As an intern in DC from the Czech Republic recently summed up the situation, “Metro is both terrible and expensive.”

While the need for reforms at WMATA is clear, replacing the Board of Directors is unlikely to lead to significant improvements in the system. Rather, WMATA’s problems are institutional, and new actors facing the same incentives as the current WMATA Board are unlikely to produce better results. Some of the institutions preventing a Metro of reasonable quality and cost include:

1) Union work rules. Stephen Smith, my co-blogger at Market Urbanism, has done an excellent job of explaining how union work rules make transit needlessly expensive. One of the biggest culprits is requiring shifts to be at least eight hours and preventing the hiring of part-time workers. WMATA rationally runs trains and buses more often during morning and evening rush hours, but it is not permitted to staff these time periods at levels above mid-day staffing because of the eight-hour shift requirement. Combined with the above-market wages and benefits that WMATA employees make, these bloated employee costs prevent WMATA from achieving a higher farebox recovery rate and having more resources to dedicate to needed capital improvements.

2) Intergovernmental transfers. Over half of WMATA’s current capital improvement budget comes from the federal government, meaning that while the benefits of the system are narrowly bestowed on riders, a large share of the capital improvement costs are spread across U.S. taxpayers. This large dispersal of costs permits much more expensive transit than would be tolerated if all funding came from the localities that benefit from the system. Furthermore, with funds coming from the District, Maryland, Virginia, and the federal government, the flypaper effect comes into play. This means that a $100 million infusion from the federal government to WMATA will not reduce the cost born by local taxpayers by $100 million; rather, total spending on the project will increase with grants from higher level of government. Absent incentives to spend this money well, WMATA demonstrates that high levels of federal funding will not necessarily result efficiently carried out capital improvements.

At Pedestrian Observations, Alon Levy provides a comparison of transit construction costs across countries, and finds that U.S. construction costs are exorbitant. The reasons for these cost disparities are many and not well-understood. One reason for high costs in the U.S., though, may be that the prevalence of  federal funding comes with the strings of costly federal regulations.

3) Accountability. While all U.S. transit systems suffer inefficiencies from intergovernmental transfers and union work rules, DC’s Metro has a unique governance structure that seems to produce particularly bad and costly service. WMATA has the blessing and the curse of being multijurisdictional. On the one hand, the Washington region is not plagued with the agency turf wars that New York City transit sees. Several of the system’s rail lines run through Virginia, DC, and Maryland, providing many infrastructure efficiencies and service improvements over requiring transfers between jurisdictions.

Despite these opportunities to provide improved service at a lower cost, WMATA’s lack of jurisdictional control seems to do more harm than good. No politician can take full credit for running WMATA efficiently, so none prioritize the agency’s performance. It’s a tragedy of the political commons.

Josh Barro has recommended directly electing the Board of Directors of WMATA to create elected officials with an incentive to improve service. This institutional change would be more likely to improve outcomes than replacing the current Board with new members who would face the same incentives. Clearly, WMATA’s Board of Directors is failing in its job to oversee quality and cost-effective transit for the region; however, replacing the board members without changing the institutions that they work under will not likely improve outcomes. Intergovernmental transfers and union work rules limit transit efficiency across the country, but WMATA’s interjurisdictional status exacerbates inefficiencies and waste.

Detroit’s Art is Not the Key to its Revival

This post originally appeared at Market Urbanism, a blog about free-market urban development.

Detroit’s art assets have made news as Emergency Manager Kevyn Orr is evaluating the city’s assets for a potential bankruptcy filing. Belle Isle, where Rod Lockwood recently proposed a free city-state may be on the chopping block, but according to a Detroit Free Press poll, residents are most concerned about the city auctioning pieces from the Detroit Institute of the Arts’ collection.

I’ve written previously about the downsides of publicly funding art from the perspective of free speech, but the Detroit case presents a new reason why cities are not the best keepers of artistic treasures. Pittsburgh’s Post-Gazette contrasts the Detroit Institute of Art’s situation with the benefits of a museum funded with an endowment:

As usual, Andrew Carnegie knew what he was doing.

The steel baron turned philanthropist put the City of Pittsburgh in charge of operating the library he gave it in 1895, but when he added an art museum to the Oakland facility just one year later, he kept it out of city hands.

“The city is not to maintain [the art gallery and museum],” Carnegie said in his dedication address. “These are to be regarded as wise extravagances, for which public revenues should not be given, not as necessaries. These are such gifts as a citizen may fitly bestow upon a community and endow, so that it will cost the city nothing.”

Museums and other cultural amenities  are a sign of a city’s success, not drivers of success itself. The correlation between culturally interesting cities and cities with strong economic opportunities is often mistakenly interpreted to demonstrate that if cities do more to build their cultural appeal from the top down, they will encourage job growth in the process. Rather, a productive and well-educated population both demand and supply these amenities. While an art museum may increase tourism on the margin, it is unlikely to draw additional firms or individuals away from other locations. Detroit is sitting on an estimated $2.5 billion in art, enough to put a dent in its $15 billion long-term obligations.

On a recent episode of Econtalk, Ed Glaeser explains that over investing in public amenities relative to demand is a sign of continued challenges for municipalities:

It is so natural and so attractive to plunk down a new skyscraper and declare Cleveland has ‘come back.’ Or to build a monorail and pretend you are going to be just as successful as Disney World, for some reason. You get short-term headlines even when this infrastructure is just totally ill-suited for the actual needs of the city. The hallmark of declining cities is to have over-funded infrastructure relative to the level of demand in that city.

Similarly, cities throwing resources at museums and other amenities designed to attract the “creative class” are highly likely to fail because bureaucrats are poorly-positioned to learn about and respond to their municipalities’ cultural demands. When cities do successfully provide cultural amenities, they are catering primarily to well-educated, high-income residents — not the groups that should be the targets of government programs.

I think it’s highly unlikely that Detroit will sell off any taxpayer-owned art to pay down its debts based on the media and political blow back the possibility has seen. However, seeing the city in a position where it owns enough art to cover a substantial portion of its unsustainable long-term debts demonstrates why municipalities should not be curators. Tying up municipal resources in art is irresponsible. The uncertainty that the city’s debt creates for future tax and service provision is clearly detrimental to economic growth. While assets like museums are nice for residents, they do not attract or keep residents or jobs.

Detroit does have an important asset; new ideas need cheap rent. Detroit’s affordable real estate is attracting start ups with five of the metro area’s young companies making Brand Innovator’s list of American brands to watch. While these budding businesses could be key players in the city’s economic recovery, top-down plans to preserve and increase cultural amenities for these firms’ employees will not.