We know that infrastructure investments are critical to create healthy, resilient, equitable communities. The multiple and varied threats from a changing climate create not only a renewed sense of urgency to address our communities’ infrastructure needs, but also an opportunity to examine and shift how we approach solutions to these needs. Critical to this shift will be an examination of how communities can use municipal finance tools to advance their shared priorities and scale identified solutions. In this interview, municipal finance expert Lourdes German shares her excitement for the changes in the field and discusses the ways in which the fields of community investment and municipal finance can evolve jointly to more comprehensively solve our communities’ pressing issues.
Lourdes is a faculty member at the Boston College Carroll School of Management, and previously served as the Director of International and Institute-Wide Initiatives at the Lincoln Institute of Land Policy. She serves as Governor Baker’s appointed Chair of the Massachusetts State Finance and Governance Board, among other civic leadership roles.
You led the Lincoln Institute’s work on municipal fiscal health for many years, focusing on fiscal sustainability. What is municipal finance?
When I think about municipal finance, at a granular level, it is the framework that municipalities use to balance revenues, expenditures, and outside capital to pay for infrastructure, sustain their operations, and finance the implementation of their strategic priorities to achieve desired outcomes. The intergovernmental fiscal framework for each community is unique and rests on the laws and policies that govern its own-source revenue authority, the revenues that flow from higher levels of government, the municipality’s expenditure mandates, and the public finance tools the municipality can leverage to raise funds from outside sources when its own funds are insufficient such as bonds, public-private partnerships (P3s), land value capture, and others.
What are the biggest fiscal issues that cities and states are wrestling with today?
One issue I have noticed is the importance of capacity building for public officials. Municipal finance is often not widely taught in college, planning schools, law schools, or other graduate programs even though it is integral to carrying out economic development strategies and financing every program in a municipality. I have heard from highly competent leaders that they wish they could have a 101-crash course in public finance when they are faced with the need to do a bond deal or finance a project. Often these leaders have to build the expertise quickly to make effective decisions and we need channels for capacity building that are readily available.
Another challenge is bridging the global infrastructure gap: the quality and ability to repair existing infrastructure now and for decades to come. The McKinsey Global Institute finds that the world needs to invest an average of $3.3 trillion annually just to support currently expected rates of growth in the US and abroad. As we think about the solution, we have to remember that added to this are pressures to pay for operations of government – such as salaries and human service delivery – which are also present and significant and often can’t be capitalized through a bond deal, or financed through P3s. Finding ways to meet all these needs sustainably is a significant challenge for most communities and requires awareness and experience with a multitude of public finance instruments.
How do you think the ways cities and states approach finance needs to be changed to address our communities’ most pressing needs, including equitable development and climate adaptation?
Cities are beginning to look at development through an equitable development and climate adaptation lens and getting more creative with the instruments they are using to achieve these goals. One example is Environmental Impact Bonds, which are being used to fund capital projects. They’ve been issued in DC, and Baltimore also published what appears to be a notice of intent to go down that road. Cities are also using creative approaches to land value capture – Chicago’s Neighborhood Opportunity Fund serves as one example where land value capture can be used to fund needs in underserved areas. This willingness to be creative is exciting because the municipal finance market has often lacked innovation. However, the challenge that comes with expanding innovation is capacity building. Ensuring that public officials have education and training resources to make them aware of new instruments, help them assess if they are a fit for their community, and build their capacity to implement and sustain innovative approaches (particularly in new or untested markets) is critically important.
How do municipal officials make decisions about competing priorities for bond proceeds?
Before a bond is issued, the decision is made on what to fund with the bond proceeds and it’s a matter of prioritization and what the law will allow you to do. Public officials tend to think about “must-haves” and “nice-to-haves” when weighing the needs of the community when deciding what to issue bonds for. They also often consider essential purposes (such as water, sewer, replacing a school roof that reaches its useful life) versus things that may not be essential but can be promising or impactful to the future of the community (i.e. a stadium, or other economic development project). Once that decision is made, most communities have to follow a public process to authorize the bonds and make a statement of purpose via that process and in the disclosure documents related to the sale of the bonds. After a bond is authorized and issued, the use of proceeds is limited by what was specifically stated as the purpose of the bond issue in the bond authorization process. Additionally, there are limitations on use of proceeds that come from federal law – if the bonds are tax-exempt, for example, you have to also carefully monitor the use of proceeds to ensure a public purpose for the duration of the bond issue and also track changes in use until the bonds are paid. You can also have limitations on the types of expenses you can finance (capital expenses versus operating expenses, for example) as project costs unfold.
How can the community investment system be better integrated with municipal finance to become more effective?
One benefit of taking an integrated approach to community investment and municipal finance is that it can enhance the way that public officials think about projects in the context of broader community outcomes. Many times, projects are considered in a vacuum. If instead of thinking of projects in isolation they are considered within the context of a larger vision for how to address community priorities, it opens a door to think about other revenue paths, including community investment partners. Questions like whether there’s a role for a CDFI can more easily surface. In this way, the community investment and municipal finance systems can uncover every opportunity to achieve holistic community outcomes rather than just project-based outcomes. It also positions projects for long-term sustainability when you consider the broader community vision from the start and helps set it up for sustained success.
What should community investors know about how to work with municipal officials?
For the most part, most municipal officials work hard with limited resources and at times with limited capacity. Many do the best that they can to get things done while operating within many limitations. Community investors can be sensitive to that and approach their role as partners who can bring valuable educational resources to bear that can enhance the capacity of municipal officials. They can also offer deep expertise from a market perspective that helps public officials see the range of alternative avenues available to finance a project and help craft a deal that achieves the lowest cost of capital by exploring new and emerging approaches alongside tried and true ones to help leaders make decisions. Community investors can also push communities to elevate the conversation to include a visioning process where that is lacking. By challenging and engaging municipal officials to discuss how projects can be considered to address community needs and drive forward the broader vision for a community, it can reinforce place-based goals and set up a community (not just a project) for success.
What are common mistakes or misunderstandings about municipal finance that you would want people to avoid or understand?
One of biggest misconceptions is that lack of capital is the biggest challenge to municipal fiscal health. Studies done by McKinsey, the United Nations, and others speak to this issue in the infrastructure finance context for example. Evidence in this area suggests that there is ample capital available for infrastructure funding within bank and institutional investors when one looks at the level of global assets under management available for infrastructure finance. The biggest challenge is access to capital, often due to: 1. lack of bankable projects; 2. lack of bankable communities; and 3. lack of capacity to assess and understand the range of public finance instruments available that could be fit for a project and community.
Given that, what are you most excited about?
A few things:
- The Capital Absorption Framework: A lot of the work you’re doing to provide a framework to think about community investment has immense potential. There are many benefits to helping communities think about the broader vision and outcomes they want to achieve for the community as they finance specific projects.
- Emerging innovation in the social impact bonds landscape: Even though there are still a lot of questions and challenges that are very real with respect to the social impact bonds market, it is exciting to see innovations that are adapting that instrument for use on capital projects. Time will tell how the market will mature, but early emerging cases demonstrate the potential to tackle climate change and equitable development via this instrument. Solutions to our cities’ challenges will require creative thinking and I’m excited that public officials are showing a willingness to try new things.
- Land Value Capture: Land is one of the biggest assets our communities have. Cities that recognize this are using “land value capture” – a policy approach that offers an array of instruments that enable communities to recover and reinvest land value increases resulting from public investment and other government actions. There are so many great examples of this in the US and abroad from communities that are using exactions, linkage fees, inclusionary housing, the sale of development rights, special assessments, density bonuses and others. The activity demonstrates the potential to raise significant revenues via these avenues and to do so in ways that can be sustainable and capable of supporting infrastructure investments over the long term while contributing to the strong fiscal health.