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This Policy Brief examines the property tax as a critical source of revenue for public schools in the United States. It demonstrates the high proportion of public education funding provided by the property tax as well as the stability of the property tax compared to the three state taxes (sales tax, income tax, and corporate income tax). It explores current conditions that may lead to future reductions in state and federal aid. Finally, it recommends policies to improve the property tax, to build greater public support for the tax as a stable source of public school funding.
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Good-government advocates across the ideological spectrum are hoping a new accounting rule will shed light on the costs of property tax incentives for business, following years of public skepticism about the purported economic benefits of these tax breaks. Known as “GASB 77,” the Government Accounting Standards Board Statement No. 77 requires an estimated 50,000 state and local governments to report the total amount of tax revenue forgone each year because of incentives intended to attract or retain businesses within their borders.
Local governments have begun adhering to GASB 77 for the first time in their FY16 comprehensive annual financial reports (CAFRs), released in 2017. The disclosures will offer a vast new collection of data to elected officials, policy makers, researchers, and journalists looking to analyze the costs of business tax incentives and enable more accurate assessment of fiscal health in reporting jurisdictions.
Total business tax incentives have tripled since 1990, according to a report released in February by the W. E. Upjohn Institute for Employment Research (Bartik 2017). Author Timothy Bartik found that state and local governments spent $45 billion on total business tax incentives in 2015, including $12 billion a year on property tax abatements alone.
While many public officials offer business tax incentives for commendable reasons, critics claim these deals can conjure a brief illusion of prosperity but fail to offset the toll taken on fiscal health, both short- and long-term. Attracting new businesses to a jurisdiction can increase income or employment opportunities, expand the tax base, and revitalize distressed urban areas (Kenyon, Langley, and Paquin 2012). But opponents point to a growing body of research suggesting that incentives erode tax bases while spawning additional roads, sewers, and public services that governments must maintain and finance for the foreseeable future (Wassmer 2009, Marohn 2011).
“Right now, the story about incentives is largely focused on the potential benefits of bringing in business, without much attention to the tradeoffs,” said Adam Langley, senior research analyst for the Department of Valuation and Taxation at the Lincoln Institute of Land Policy. “Disclosure has definitely increased in the past decade, but in a lot of places there’s still so little public information about the tax revenue lost because of incentives.”
Government Accounting Standards Board (GASB) Reporting Requirements
All 50 state governments prepare their annual financial statements according to GASB’s Generally Accepted Accounting Principles, and about 70 percent of local governments comply, though not all are required. GASB is not a government entity like the Internal Revenue Service and its principles are not legislation, but the benefits are obvious enough to inspire broad compliance. The uniform disclosure of governments’ financial information enables easy fiscal comparisons among states and public agencies, and it can inspire public confidence that a given government is conducting business with transparency and accountability. This confidence helps build and sustain healthy credit ratings, which allow governments to borrow cheaply.
Before GASB 77, the amount of financial information that local governments provided on tax incentives varied by state, depending on state-specific tax expenditure reporting policies, but most did not require local governments to report lost revenue tied to property tax incentives.
Since GASB issued Statement 77 in December 2015, governments must report the total amount of estimated revenue forgone because of tax incentives, estimated revenue losses tied to another government body’s abatements, and job creation targets or other commitments made by subsidy recipients as part of the tax break deals. Governments also must explain their power to recapture forgone taxes. For example, some abatement deals include “claw-back” provisions, in case companies don’t meet commitments.
GASB defines a tax abatement as “an agreement between a government and an individual or entity in which the government promises to forgo tax revenues and the individual or entity promises to subsequently take a specific action that contributes to economic development or otherwise benefits the government or its citizens.”
GASB 77 does not require governments to name the companies that received tax breaks or quantify the number of tax breaks given. This makes it difficult to determine the average cost of deals or whether these agreements are becoming more or less common, notes Greg LeRoy, executive director of Good Jobs First. Crucially, GASB 77 also does not require disclosure of tax revenue lost in future years—a departure from other recent GASB disclosure requirements related to future pensions obligations.
It’s likely that more than 50,000 local governments will eventually disclose tax incentive numbers because of GASB 77, but many have not reported yet. LeRoy said, “The data will start trickling this April, flow strongly by June, and reach fire-hose proportions by November and December of 2017” (LeRoy 2017).
Langley cautioned that it’s premature to predict the impact of GASB 77. Reporting in the first year is likely to include errors and incomplete compliance, and GASB 77 will not cover all forms of tax increment financing (TIF), he said.
What’s at Stake
Before GASB 77 took effect in December 2015, public officials could return repeatedly to the tax incentive “cookie jar” under the radar of taxpayers, and sometimes at their expense. Tax breaks for economic development are easily the costliest job subsidies, according to the national policy resource center Good Jobs First, which tracks incentive deals and has strongly advocated for more transparency (GJF 2015b).
Businesses paid about $258 billion in property taxes nationwide in 2015, the largest share (36.5 percent) of total state and local business taxes, and more than half (53 percent) of all property tax revenue, according to the Council on State Taxation (COST 2016). Local governments are particularly reliant on property taxes, which made up 30 percent of all local revenue in 2014, according to the Lincoln Institute (Reschovsky 2014). In many places, the property tax is the primary source of funding for public education, road and sewer maintenance, and emergency services. It’s generally less susceptible to economic downturns than sales and income tax revenue, and it’s more progressive than the sales tax (Reschovsky 2014).
“GASB 77 will start a conversation about the real costs of these commercial tax abatements,” said R. Crosby Kemper III, executive director of the Kansas City Public Library. A former banker and frequent critic of corporate subsidies, Kemper said, “I think the numbers are going to scare the hell out of citizens, which is precisely why we haven’t seen them to this point.”
Ellen Harpel, founder of economic development consulting firm Smart Incentives, believes targeted subsidies can provide an economic stimulus and morale boost that compensate for the lost tax revenue. When deals go wrong, Harpel said, it’s often because communities lack coherent economic objectives or fail to communicate them—not because tax incentives are inherently flawed. She views GASB 77 as an opportunity to educate taxpayers on how responsible tax deals are just one way economic development groups help communities achieve their goals (Harpel 2016).
In a best-case scenario, attracting a large facility can increase worker productivity and draw related firms to the area, creating a positive feedback loop (Kenyon, Langley, and Paquin 2012). Ideally, targeted incentives lure businesses that in turn lure other companies, creating “agglomeration economies” with valuable spillover effects for the whole community. One high-tech industry job can create up to five more local jobs, according to a 2010 study by economist Enrico Moretti (Moretti 2010). This is an example of the multiplier effect—the idea that new jobs created at a firm receiving incentives will support additional jobs in the local economy because of increased purchasing from local suppliers and higher spending on local goods and services.
The greatest challenge for public officials, however, is figuring out whether a business is actually deciding between two or more locations or looking for a cherry on top of a done deal. Kenyon and Langley have found tax breaks are much more likely to affect a firm’s location decision within a metropolitan area—not between metropolitan areas. Studies by the Upjohn Institute have found that businesses sometimes negotiate for tax incentives after they have already made up their minds (Fisher 2007). Some governments require businesses to promise in writing that they would locate elsewhere if it weren’t for the tax break. Ultimately, though, officials have no surefire way to peer into this black box. And calling a business on its bluff can signal that a community isn’t “business friendly”; economic development officials believe this message can set a community back if similar or nearby metropolitan areas continue offering tax incentives.
Plenty of research indicates that incentive deals often pit two or more communities with a shared labor market against each other, rather than targeting communities in different regions. That means a corporation’s final location decision would have little effect on where its employees choose to live and socialize, nor would it create many, if any, additional jobs for the larger commutable region. In this case, abated property taxes divert dollars away from public services without actually spurring economic activity.
Kansas City, Missouri
Business tax incentives gave rise to such corrosive competition within the Kansas City metropolitan area, which straddles the Missouri-Kansas border. Business executives were pitting local governments within the region against one another by threatening to relocate to the municipality that offered the sweeter deal. A particularly extreme economic development war between political jurisdictions on each side of the border got so bad in recent years that 17 business leaders wrote to the two states’ governors in 2011 and begged them to end the rivalry.
“The states are being pitted against each other and the only real winner is the business that is ‘incentive shopping’ to reduce costs,” the letter read. “The losers are the taxpayers who must provide services to those who are not paying for them.”
Don J. Hall, Jr., president and CEO of Hallmark Cards, has been a particularly vocal advocate for reform, to little avail. The Hall Family Foundation has calculated that, as of this spring, Wyandotte and Johnson counties in Kansas have sacrificed a combined $161 million in taxes to spur businesses to relocate 6,003 jobs from Jackson County over the state line in Missouri. Meanwhile, Jackson County has spent $114 million to poach 4,474 jobs from Wyandotte and Johnson counties in Kansas.
None of the combined $275 million was spent creating truly “new” jobs for the larger metropolitan area, notes Angela Smart, vice president of the foundation. “It’s corporate welfare in many respects, at the expense of eroding tax bases,” she adds.
Kansas City also suffers from a lack of transparency related to Tax Increment Financing (TIF). With TIF, growth in property taxes or other revenues in a designated geographic area is earmarked to support economic development in that area, usually to fund infrastructure improvements. Unlike property tax abatements, TIF does not lower taxes on business, but earmarking property tax revenue is an option in all TIF programs (Kenyon, Langley, and Paquin 2012). Economic development officials in Kansas City did not respond to requests for comment.
Cities promote TIF districts as an effective tool for combating blight and encouraging redevelopment in impoverished areas (Rathbone and Tuohey 2014). But in Kansas City, eight times as many TIF deals were approved in low-poverty areas than in areas with poverty rates above 30 percent (Rathbone and Tuohey 2014), according to the Show-Me Institute, a think tank founded by Kemper.
Development proposals made to TIF commissions around Missouri must include a blight analysis and explain whether a given area would go undeveloped if it weren’t for the tax subsidy. But developer-hired consultants typically conduct these analyses; researchers in 2014 could not identify a single time such a consultant reached a conclusion that was unfavorable to the developer (Rathbone and Tuohey 2014). “We’ve created a fundamental right to real estate tax relief for developers and corporations in Kansas City,” said Kemper.
Michigan researchers Laura Reese and Gary Sands have found that tax incentives can actually perpetuate inequality between high- and low-income areas, because incentives go further in areas with higher income. The suburbs award tax breaks at a higher rate per capita than cities, promoting sprawl and making it harder for lower-income people living downtown to access the “new” jobs (Sands and Reese 2012). In Greater Cleveland, 80 percent of deals that followed the creation of community reinvestment programs involved businesses moving out of the city into Cuyahoga County suburbs, Good Jobs First found.
“I think GASB 77 will awaken some of the social justice warriors, because the inequality argument definitely has resonance,” said Kemper, who believes the annual dollar value of tax abatements and other government incentives in Kansas City could eventually hit $150 million.
“This is money that’s being taken away from social services—from the most socioeconomically deprived folks in the community—to subsidize the most profitable people and corporations in the community. How could that possibly be fair?”
Franklin County, Ohio
Officials in Franklin County, Ohio, have also made plentiful use of property tax abatements and TIF, but officials there are seeing the benefits of greater transparency. The total amount of property value in an abatement or TIF zone increased from about $1.4 billion in 1999 to about $6.7 billion in 2014, according to the Columbus Dispatch (Bush 2014). This escalation occurred, Franklin County Auditor Clarence Mingo notes, with “very little public awareness about the consequences.”
“I was alarmed,” Mingo said in April, “by the fact that governments keep awarding abatements with no data on hand to measure the impact on the community.”
In 2016, Mingo commissioned the Lincoln Institute to conduct an evaluation of property tax abatements. The conclusions of the analysis, released in March 2017, suggested abatements have actually had a modest positive impact in Franklin County. The study revealed that a one-percentage-point increase in the share of total property value that is abated in a given school district is correlated with slightly lower property tax rates and marginally higher property values (Kenyon, Langley, Paquin, and Wassmer 2017).
But Lincoln researchers, including Kenyon and Langley, criticized the lack of reliable information about property tax abatements that Franklin County taxpayers have at their disposal. The issue isn’t the quantity of combined data released by local governments, the county, and Ohio state agencies; it’s the quality, especially when it comes to calculating forgone revenue.
For example, seven cities in the county provide basic information on incentive programs, such as eligibility criteria and benefits, but none report the cost of abatement programs. Others participate in Ohio’s Online Checkbook, a transparency initiative where governments can report every expenditure and check issued. But it doesn’t include property tax abatements or any other tax expenditures. The State of Ohio publishes a tax expenditure report, but it does not include property tax abatements.
Mingo would like to see tax incentives evaluated every few years. He hopes Franklin County can partner with surrounding counties in central Ohio to create a regional version of the Congressional Budget Office.
“Municipalities would do well to hire an independent authority to provide a cost-benefit analysis before awarding an abatement,” he said. “That is a worthy spend on behalf of taxpayers.”
The City of Columbus, Franklin’s county seat, has offered a preview of the GASB 77 debates to come. In April 2017, Columbus became the second large municipality after New York City to release its annual financial report with disclosures required by GASB 77. The report revealed that 2016 tax abatements cost Columbus $1.9 million in forgone tax revenue (City of Columbus, 2017). But this figure did not include the nearly $31 million that was redirected last year to the city’s TIF districts.
City Auditor Hugh Dorrian said, “Governments, ours included, should disclose these various incentives. The more open governments are, the better they function. That’s why I’m very supportive of the principle behind GASB 77, even if there is disagreement over how to interpret it.”
Good Jobs First Executive Director Greg LeRoy noted that Dorrian, Columbus’s auditor since 1969, had a stellar reputation for disclosing costs of tax subsidies long before GASB ever intervened. But in a written statement released last April, Good Jobs First chided the city for not counting the TIF payments and tax rebates as abatements in its 2016 CAFR.
“Columbus is the state capital and Ohio’s largest city,” LeRoy wrote. “If it sets a flawed example, other jurisdictions might avoid disclosure of tax abatements and undermine this landmark transparency reform” (GJF 2017).
Regional Cooperation and Transparency in Denver, Colorado
Economic development officials in Denver have been devoted to transparency since the 1980s, and their experience suggests that GASB 77 may help public officials regain control over counterproductive business tax incentives by institutionalizing respect and trust on a regional level.
The guiding principle of Metro Denver’s Economic Development Corporation (MDEDC) is “more information is better than less.” Members are kept in the loop about economic development activity without compromising the confidentiality of business clients. The tradition dates to the oil collapse of 1986, which triggered an economic development fracas that had businesses essentially moving back and forth across the street, said Laura Brandt, economic development director for the MDEDC.
That experience drove a small group of local officials to decide that communities would work together under a common entity—what would eventually become the MDEDC—to promote the entire region first and individual communities second.
Members sign a Code of Ethics that has hardly been revised since the late 1980s. It’s a legally nonbinding document that acknowledges its own limitations. The preamble includes this sentence: “We fully realize that no Code of Ethics is of value without an inherent level of trust in the integrity of one another and a commitment from each of us to conduct ourselves at the highest levels of professional conduct” (MDEDC 2004).
Believe it or not, the Code of Ethics has worked. The MDEDC today includes more than 70 governments, economic development organizations, and industry groups. “People call all the time and ask, ‘How did you do this?’” Brandt said. “It wasn’t easy at first. But now it’s become a habit.”
Members who sign the code promise to notify another member community if a company located in the latter expresses an interest in relocating. Per the code, “Violation of this commitment shall be viewed as the single most serious breach of our membership pledge.” Breaking the code warrants a sit-down intervention of sorts with an MDEDC committee.
Companies interested in the Denver area are directed straight to the MDEDC, which then provides all member communities information about the type of property the company is looking for without revealing the company. The MDEDC introduces business decision makers to local officials only after it has narrowed potential sites to less than a handful.
“The model relies upon trust,” Leigh McIlvaine wrote in a 2014 Good Jobs First report. “Its members believe that the system will serve their communities fairly and feel confident that investments in neighboring communities will benefit their own as well” (McIlvaine and LeRoy 2014).
Improving Tax Incentive Programs
Besides promoting greater transparency and more regional cooperation, communities can improve tax incentive programs by taking a few clear steps, experts say.
Limit the length of the tax abatement. Property tax deals tend to span more than 15 years, according to Bartik—considerably longer than other types of government-sponsored incentives. The longer the abatement deal, the less likely the government involved will ever collect full taxes on the property at hand. Plus, business executives are generally focused on a relatively short time frame—think stock prices and company revenue targets—and discount the future when making business location and expansion decisions, Bartik said. One dollar’s worth of tax incentives provided 10 years from now is worth an estimated 32 cents to businesses today (Bartik 2017). A few extra years of a tax deal, in other words, makes little difference to a participating business while costing the local government.
Structure abatement deals so that the percentage abated decreases as the deal unfolds. Kenyon said this can help businesses avoid sticker shock when the deal runs out, driving them to negotiate with another municipality across town for a whole new deal.
Establish wage and employment targets in abatement deals as well as claw-back provisions if businesses fall short of such targets. Public officials could require incentive recipients to offer a certain percentage of full-time jobs or wages greater than or equal to the region’s average wage, as a precondition for the agreement. Or deals can stipulate that local residents are hired for at least a portion of the jobs. Deals should include claw-back provisions or penalties in case firms do not meet those targets.
In a 2009 Lincoln Institute report, Robert Wassmer offered four questions for public officials to consider when deciding whether or not to grant a tax abatement to a business (Wassmer 2009):
GASB isn’t the first effort to improve transparency around tax incentives, nor does it offer a final answer to the question of whether they build or destroy value in places. But it does help communities with tax abatement programs answer these questions with more than gut instincts or wishful thinking.
Will additional exposure sway public opinion enough to spur meaningful reform? Or are local leaders and taxpayers hooked on the promise of incentives? Time will tell.
Andrew Wagaman is a business reporter for The Morning Call newspaper in Allentown, Pennsylvania. He can be reached by email at wagamanandrew@gmail.com.
Photograph: peeterv
References
Bartik, Timothy J. 2017. A New Panel Database on Business Incentives for Economic Development Offered by State and Local Governments in the United States. Prepared for the Pew Charitable Trusts. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. http://research.upjohn.org/reports/225.
Bush, Bill. 2014. “Property Tax Breaks Have Quadrupled in Franklin County.” The Columbus Dispatch, September 3. http://www.dispatch.com/content/stories/local/2014/09/03/whos-not-getting-a-property-tax-break.html.
City of Columbus. 2017. “Comprehensive Annual Financial Report for the Fiscal Year Ended December 31, 2016.” https://www.columbus.gov/auditor/cafr/.
COST (Council on State Taxation). 2016. Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2015. Washington, DC. (December.) http://cost.org/WorkArea/DownloadAsset.aspx?id=94697.
Dorrian, Hugh J. 2017. “City of Columbus Ohio Comprehensive Annual Financial Report for the Fiscal Year Ended December 31, 2016.” https://www.columbus.gov/uploadedFiles/Columbus/Elected_Officials/City_Auditor/Reports/CAFR/2016_CAFR.pdf.
Fisher, Peter S. 2007. “The Fiscal Consequences of Competition for Capital.” In Reigning in the Competition for Capital, edited by Ann Markusen, 57–86. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.
GJF (Good Jobs First). 2015a. “GASB Launches a New Era of Subsidy Transparency.” Washington, DC. www.goodjobsfirst.org/blog/gasb-launches-new-era-subsidy-transparency.
GJF. 2015b. “GASB Statement No. 77 Data is Official and Coming! Finally, a Price Tag on Corporate Welfare!” Washington, DC. www.goodjobsfirst.org/gasb-statement-no-77.
GJF. 2015c. “Shortchanging Small Business: How Big Businesses Dominate State Economic Development Incentives.” Press release. Washington, DC. www.goodjobsfirst.org/news/releases/shortchanging-small-business-how-big-businesses-dominate-state-economic-development-in.
GJF. 2017. “Good Jobs First Cites Problems with Columbus Tax Abatement Disclosures.” Press release. Washington, DC. www.goodjobsfirst.org/news/releases/good-jobs-first-cites-problems-columbus-tax-abatement-disclosures.
Harpel, Ellen. 2016. “New Disclosure Rules and the Future of Incentives: Preparing for Transparency as the New Norm.” Economic Development Journal (Summer): 19–25.
Kenyon, Daphne A., Adam H. Langley, and Bethany P. Paquin. 2012. Rethinking Property Tax Incentives for Business. Policy focus report. Cambridge, MA: Lincoln Institute of Land Policy.
Kenyon, Daphne A., Adam H. Langley, Bethany P. Paquin, and Robert W. Wassmer. 2017. Evaluation of Real Property Tax Abatements in Franklin County, Ohio. Cambridge, MA: Lincoln Institute of Land Policy. (May.) www.lincolninst.edu/publications/other/evaluation-real-property-tax-abatements-franklin-county-ohio.
LeRoy, Greg. 2017. “2017: A Landmark Year for Transparency on State and Local ‘Corporate Welfare.’” Arlington County, VA: Bloomberg BNA. January 27.
Marohn, Charles. n.d. “The Growth Ponzi Scheme.” Brainerd, MN: Strong Towns. https://www.strongtowns.org/the-growth-ponzi-scheme/.
McIlvaine, Leigh, and Greg LeRoy. 2014. Ending Job Piracy, Building Regional Prosperity. Washington, DC: Good Jobs First. (July.) http://www.goodjobsfirst.org/publications/ending-job-piracy-building-regional-prosperity.
MDEDC (Metro Denver Economic Development Corporation). 2004. “Code of Ethics.” http://www.metrodenver.org/about/partners/code-of-ethics/.
Moretti, Enrico. 2010. “Local Multipliers.” American Economic Review, Papers and Proceedings 100(2): 373–377.
Pew Charitable Trusts. 2015. “Tax Incentive Programs: Evaluate Today, Improve Tomorrow.” Issue brief. http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2015/01/tax-incentive-programs.
Rathbone, Michael, and Patrick Tuohey. 2014. “Urban Neglect: Kansas City’s Misuse of Tax Increment Financing.” St. Louis, MO: Show-Me Institute. (December 11.) http://showmeinstitute.org/publication/subsidies/urban-neglect-kansas-city%E2%80%99s-misuse-tax-increment-financing.
Reschovsky, Andrew. 2014. “The Future Role of the Property Tax in the Funding of K–12 Education in the United States.” In Education, Land, and Location, edited by Gregory K. Ingram and Daphne A. Kenyon, 154–183. Cambridge, MA: Lincoln Institute of Land Policy.
Sands, Gary, and Laura A. Reese. 2012. Money for Nothing: Industrial Tax Abatements and Economic Development. Lanham, MD: Lexington Books.
Stafford, Diane. 2017. “Cerner Officially Opens Big Innovations Campus in South Kansas City.” The Kansas City Star, March 9. www.kansascity.com/news/business/article137402178.html.
Roberts, Rob. 2013. “TIF Commission Advances $4.3B Cerner Campus.” Kansas City Business Journal, September 11. http://www.bizjournals.com/kansascity/news/2013/09/11/tif-commission-advances-43-billion.html.
Wassmer, Robert W. 2009. “Property Tax Abatement as a Means of Promoting State and Local Economic Activity.” In Erosion of the Property Tax Base: Trends, Causes, and Consequences, edited by Nancy Y. Augustine et al., 221–259. Cambridge, MA: Lincoln Institute of Land Policy
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Strong local leadership, a shared community vision, inclusive growth, creative problem solving, cross-sector collaboration, and placemaking are all important ingredients for success in America’s smaller legacy cities.
For generations, these industrial centers were essential to building American middle-class prosperity. Places like Scranton, Pennsylvania, and Worcester, Massachusetts, created job opportunities that enabled massive numbers of rural migrants and foreign immigrants to achieve a comfortable life through relatively low-skilled work. Yet as the national economy has transitioned away from manufacturing, many of these communities have struggled with entrenched poverty, neighborhood disinvestment, and a workforce with skills that do not match employers’ needs.
With traditional economies built around manufacturing and populations that peaked in the 20th century then declined to 30,000 to 200,000, America’s small to midsize legacy cities are found nationwide but concentrated most heavily in New England and the Great Lakes region, from Gary, Indiana, to Lowell, Massachusetts (figure 1). In national conversations, they frequently fall under the shadow of their larger counterparts. While researchers and community leaders have identified strategies to revitalize places like Pittsburgh and Baltimore, less attention has been paid to how these approaches might transfer to communities like Dayton, Ohio, or Binghamton, New York. Smaller legacy cities often lack major corporate headquarters or significant anchor institutions, assets that have been leveraged successfully in larger cities, meaning that even proven strategies will require creative adaptation in places like Camden, New Jersey, or Youngstown, Ohio.
In Regenerating America’s Legacy Cities, a 2013 report from the Lincoln Institute of Land Policy, Alan Mallach and Lavea Brachman posit that the surest way to revitalize legacy cities is through strategic incrementalism—or “melding a long-term strategic vision with an incremental process for change.” Establishing a path for success, they suggest, requires a shared community vision for the city’s future and sustained efforts by local leaders to further that long-range view. This process may be especially important for smaller cities, which have fewer local assets and resources, leaving even less room for risk.
Through the Greater Ohio Policy Center (GOPC), we recently completed a study of 24 smaller legacy cities in seven midwestern and northeastern states to assess how well they were performing and determine which strategies might contribute to their vitality. We analyzed economic, social, and demographic data from three years: 2000, 2009, and 2015. We also interviewed local leaders in each city to learn what helped some of them thrive and what contributed to poor performance in others.
That research builds on Mallach and Brachman’s report to show that strong local leadership, a shared community vision, inclusive growth, creative problem solving, cross-sector collaboration, and placemaking are all important ingredients for success. How cities get there—the factors that increase the likelihood of success—is the focus of this article, which derives from our forthcoming Policy Focus Report, Revitalizing America’s Smaller Legacy Cities: Strategies for Postindustrial Success from Gary to Lowell, scheduled for publication by the Lincoln Institute of Land Policy in August 2017.
Methodology
To gain a broad perspective on how well small and midsize legacy cities are faring, the Greater Ohio Policy Center (GOPC) collected data on 65 cities in seven states throughout the Midwest and Northeast that had a population of 30,000 to 200,000 in 2013; had a substantially smaller population in 2000 compared to its peak, even if it had rebounded to some extent; had a strong history of manufacturing; and was not primarily a college town or a suburb of a larger city.
After selecting 24 representative cities to study in greater depth, we analyzed data from each place’s 2000 U.S. Census as well as from American Community Survey five-year estimates for 2009 and 2015 in the following categories: population, foreign-born population, young professional population, percentage of residents working in the city, unemployment rate, labor-force participation rate, median household income, poverty rate, college-degree attainment, long-term housing vacancy rate, owner-occupancy rate, percentage of home sales with a mortgage, median home value, median rent, employment industries, and occupations.
We calculated the percentage changes in each category for 2000–2015 and then in two subsets, 2000–2009 and 2009–2015, to gain a clearer sense of the Great Recession’s impact on each city’s trajectory. In addition, GOPC collected data on employment and jobs in 2002 and 2014 from the U.S. Census Bureau’s OnTheMap website. Using that data, we categorized places as high-, moderate-, and low-performing, based on their current conditions and trajectories over time. These groupings helped to convey how the cities’ trajectories compared to one another and to identify continued challenges and factors contributing to revitalization.
—Torey Hollingsworth and Alison Goebel
Collaboration for a Global Economy
Small and midsize legacy cities, perhaps even more than their larger peers, must plan to determine how they can fit into the changing global economy. Legacy cities generally do not benefit from the pattern of increasing consolidation, in which corporations move to thriving global cities. A smaller city’s economic niche—one that will allow it to thrive—depends on local assets including geographic location, economic drivers, demographics, and local leadership. This means that the right niche for one city might not be right for another.
Some smaller legacy cities were once able to function independently in the global market, but that is much less likely in the future. For some cities, long-term success will hinge on aligning economic growth with that of other small cities in their region. In the Capital District of New York—which includes Albany, Schenectady, and Troy—the individual cities have maintained their own identities while building on synergies. They’ve branded themselves as the Tech Valley and they’re working to promote the region’s assets, such as strong technology companies, vibrant neighborhoods, and a relatively low cost of living.
Other smaller cities may align with larger legacy cities, the way Akron and Canton have aligned with Cleveland, to compete for national and global employers to relocate there. If the larger legacy city is not a strong economic engine on its own, several smaller cities may be able to collaborate to create a regional identity that helps draw new businesses and residents.
Some states, such as New York and Indiana, have embraced a regional model for economic development in which cities must work together to compete for state grants and incentives. These relatively new programs could help drive smaller legacy cities to focus on competing for jobs and residents alongside their neighbors.
If a smaller legacy city is near a large metropolis that is successfully competing on the global level, it can carve a niche as a logistics hub, staging ground, or bedroom community for a major market. A number of smaller legacy cities on the East Coast serve in these roles, including Bethlehem, Pennsylvania, which repositioned itself as a shipping and logistics hub for the Philadelphia and New York markets after the closure of the Bethlehem Steel plant.
Common Factors in Success
Our research revealed several factors that help determine progress or persistent struggle in small to midsize legacy cities:
Location, Location, Location
The greatest predictor of a city’s performance is the region in which it is located: cities in the Northeast consistently fare better than their peers in the Midwest, according to nearly all indicators. Within those regions, cities in certain states also appear to fare better or worse. All the Ohio cities in our study struggled, particularly in the years following the Great Recession; even those cities with very positive trajectories between 2000 and 2009, such as Hamilton, slipped to the bottom of the rankings from 2009 to 2015. Akron and Hamilton were among the top performers in 2000, but by 2015 they had slipped into the moderate-performing group.
The two regions’ histories explain a great deal of their relative strengths today. Many of the midwestern cities’ economies were based on auto manufacturing, which had been declining for decades as jobs moved offshore or to other parts of the country, hitting its lowest point during the Great Recession. In many northeastern cities, manufacturing had bottomed out many decades earlier. According to the Federal Reserve Bank of Chicago, the two regional economies began to diverge substantially in the 1980s, as the Northeast continued to move away from manufacturing while the Midwest experienced a short-lived renaissance in that sector. The longer transition period may have placed midwestern cities at a disadvantage, as their northeastern counterparts had more time to focus on attracting new kinds of jobs and retraining their workforces to compete in the 21st-century economy. Many midwestern cities also were historically more reliant on manufacturing than their peers on the East Coast, meaning that their economies needed—and may still need—a more fundamental restructuring.
This situation may have some positive aspects. Although many midwestern cities lag behind those in the Northeast, they have the opportunity to learn from the successes and mistakes their peers experienced while remaking their cities for the new economy. Experimentation and innovation are necessary for revitalization, but small and midsize cities in the Midwest can adapt proven strategies from the outset instead of relying on trial and error.
Nearness to Larger Cities and Markets
Cities near major East Coast markets have benefited economically and demographically more than cities in the Midwest because the East Coast markets are larger, stronger, and form a critical mass. Camden, New Jersey; and Scranton, Allentown, and Bethlehem, Pennsylvania, have all shown the economic power of positioning themselves as support locations for New York City and Philadelphia. Worcester and Lowell benefit from their proximity to Boston, especially via commuter rail. According to local leaders, 1,300 people commute from Worcester to Boston every day, linking the two cities’ economies and talent pools.
Researchers call the economic benefit of location “place luck,” noting that cities near strong markets do see some quantifiable economic benefits. However, place luck alone is not enough. Local public policies related to crime, education, and public services are the most important factors in shaping a city’s economic health.
Hitting Rock Bottom
Turning around a struggling city is certainly difficult, but some small and midsize legacy cities are doing just that. Interviews with local stakeholders revealed a common theme: Cities had to hit “rock bottom” before they could manage a turnaround.
Stakeholders in Lowell said that the city was too poor in the 1950s and 1960s to undertake traditional urban-renewal programs, which would have demolished parts of the historic downtown and neighborhoods. Eventually, this proved to be a boon for the city. When the empty downtown textile mills were designated a national historic site, the city hoped to revitalize through tourist activity. However, high levels of tourist traffic never materialized, and in the 1980s a major local employer went into bankruptcy. At that point, Lowell slid into very hard times. But in the late 1990s, the city decided to take the risk of acquiring the mills and putting out bids to redevelop them as housing. Years later, Lowell has shaped its renewal around that strategy, turning millions of square feet of vacant industrial space into apartments, artists’ studios, and retail stores. Lowell’s success in adaptive reuse of historic buildings shows that successful revitalization efforts can take hold, even from the depths of economic distress.
Revitalization Strategies
Revitalization begins with an honest assessment of the city’s situation, grounded in data and facts as well as residents’ perceptions, positive and negative, about how the city is faring. Using this realistic picture, cities can make decisions grounded in where they are right now and can begin to create a vision for the future.
In our study, interviews with local leaders helped us to identify eight revitalization strategies that small and midsize legacy cities have deployed successfully. Each strategy is built around existing assets and a realistic acknowledgment of limitations. None of these strategies should be seen as a “silver bullet” that can rescue a seriously challenged city. The strategies are paired with examples of best practices to illustrate how legacy cities can develop priorities for revitalization, given their limited resources.
1. Build civic capacity and talent.
Charting a new path requires strong leaders who can envision and work toward change. Small and mid-size legacy cities must focus on retaining local talent while also drawing new leaders from outside to fill critical roles such as city manager, economic development director, and head of a major anchor institution. Efforts should include cultivating a pool of talented younger individuals who can step into leadership roles as they arise. A healthy population of young professionals is one indicator that a city is replenishing its pool of civic leadership.
In Hamilton, Ohio, leaders had long treated the city as if it were a walled garden, allowing little collaboration and few external influences to catalyze creativity. As major employers left and the Great Recession took hold, some city-council members decided an infusion of outside energy could help put the city back on track. They recruited a city manager from outside, who focused on building a culture of collaboration within city government, between the private and public sectors, and among regional governments and organizations. Hamilton also focused on attracting talent and supporting leadership development. A 2011 public-sector program, the Russell P. Price Fellowship draws talented recent college graduates to take on management-level projects within the city government. The fellows are provided with housing downtown and encouraged to become part of the fabric of the community professionally and personally. Many have remained in Hamilton after their terms ended, adding to a new generation of local leaders.
2. Encourage a shared public- and private-sector vision.
Local government officials and private-sector leaders must jointly “own” the need for urban revitalization and work collaboratively to find solutions. Research by the Federal Reserve Bank of Boston on resurgent smaller legacy cities found a common denominator: cross-sector leaders who recognized that “it was in their own interest to prevent further deterioration in the local economy” and took responsibility for improvement. Turnaround stories demonstrate that a committed group of local leaders, including elected officials, business leaders, civil servants, grassroots advocates, philanthropic partners, can chart a new direction for the city and work together to advance their vision.
In 1984, the RCA Corporation, Campbell Soup Company, and City of Camden, New Jersey, came together to discuss redeveloping the downtown waterfront land they owned. Together they launched the nonprofit Cooper’s Ferry Development Association (CFDA) to create a vision and master plan that would allow for public access to the waterfront and promote revitalization. CFDA attracted and coordinated more than $600 million in private and public investment and established the building blocks for a vibrant mixed-use waterfront community, anchored by family entertainment venues, office buildings, and residential lofts. CFDA then began working with residents to direct private and philanthropic investment in the city’s neighborhoods. In 2011, CFDA merged with the Greater Camden Partnership to form the Cooper’s Ferry Partnership, the city’s lead organization for collaborative efforts in economic development, arts and culture, and the preservation and creation of open space.
3. Expand opportunities for low-income workers.
Revitalization efforts won’t succeed if they focus only on higher-income residents. Cities must create greater access to opportunity for all, including lower-income residents who need jobs. Visible poverty and inequality create a negative image that can scare businesses away from the city’s urban core, leading to lost tax revenues and a massive drag on city finances to pay the long-term costs of reducing blight.
Syracuse has demonstrated how urban revitalization and poverty reduction can be addressed together. CenterState CEO, a regional chamber of commerce and economic development organization, created the Work Train Collaborative with a “dual client” approach: finding good jobs for low-income workers and training good employees for local businesses. With the help of grassroots efforts, CenterState CEO led a workforce development strategy that tied a redevelopment project near a local hospital to high-paying jobs and skills training. Since that pilot project, the program has expanded from construction into healthcare jobs, added employers, and increased its geographic reach.
4. Build on an authentic sense of place.
Placemaking—creating interesting places where people want to spend time—is a proven economic development strategy for many cities. Michigan, which has a number of smaller legacy cities, has embraced placemaking as an economic development tool at the state level. Placemaking should build on existing assets like historic neighborhoods, compact and walkable downtowns, and legacy cultural institutions. Cities should consider which demographic groups might be particularly interested in these assets, such as young people who have moved away but want to return home to start families or take care of aging parents, regional residents attracted to urban living, immigrants looking for inexpensive housing, and rehabbers who can’t afford to buy a home in a larger city. Highly skilled workers are likely to first choose where they want to live and then look for a job in that place. Smaller legacy cities can build on their authentic sense of place to attract workers and the jobs that follow them.
When the Bethlehem Steel plant closed in 1999, the city of Bethlehem, Pennsylvania, braced for devastating economic impacts. However, the mill site, which was the largest brownfield in the country, offered developable land along the riverfront. A group of local partners, including Bethlehem Steel, Lehigh University, the City itself, and a local arts nonprofit called ArtsQuest, collaborated to create a new vision for the site. In 2007, the Sands Casino Resort purchased land zoned for a mixed-use entertainment district, remediated the site, and opened a casino and hotel, keeping one of the mill’s blast furnaces as a nod to the city’s past. ArtsQuest now maintains an arts and cultural campus there, including an outdoor amphitheater. The campus has become a significant regional draw, with one million visitors in the first five years of operation. It also provides a new venue for Musikfest—the nation’s largest free music festival, estimated to produce $55 million annually for the region’s economy.
5. Focus regional efforts on rebuilding a strong downtown.
Numerous studies have found that strong regions are built around strong central cities, and strong cities are built around strong downtowns. One great asset in many small and midsize legacy cities is a historic downtown. Even when they no longer serve as the center of business and commerce, downtowns are the public face of the entire region. New technologies, suburbanization, and car-centric commuting patterns mean that many economic functions will take place outside of the downtown. But downtowns can still be vibrant regional centers as mixed-use residential and entertainment areas.
Muncie, Indiana, chose to focus on attracting young professionals specifically because Ball State University, with more than 20,000 students, is located there; as a result, the city saw significant growth in its young professional population between 2009 and 2015. In other places, a different demographic group, such as empty nesters, may be a better target for residential development; that group, because of higher incomes related to downsizing from homes in the suburbs, can often pay more to live downtown. Regardless of the demographic, building mixed-use downtowns with bars, restaurants, retail, and housing appears to be a winning strategy for many cities.
Akron, Ohio, and its regional partners have worked together to attract businesses to the region. Officials from the city, county, and regional chamber of commerce created a partnership that has drawn foreign businesses to the area. But the city’s policies did not encourage businesses to locate downtown or within Akron proper, so suburban office and industrial parks became the default location for many new employers. This made it difficult for transit-dependent workers to take jobs outside the city and increased office vacancy rates in the downtown. While regional economic growth is valuable for the city as a whole, much of the new business growth has occurred at Akron’s expense. The downtown organization and other stakeholders have now developed a strategic plan for the city’s urban core, and some new political leaders understand the value of focusing economic development activities there. This renewed focus on downtown as a business, residential, and entertainment center is likely to pay long-term dividends for the city.
6. Engage in community and strategic planning.
One great advantage of smaller legacy cities is that their scale allows for greater community-wide consensus building about the city’s future. But the scarcity of resources means that not all visions can take root. Careful, data-driven planning is still necessary to allocate resources effectively and ensure community support for revitalization strategies.
Grand Action, a coalition of community and civic leaders in Grand Rapids, Michigan, spearheaded the visioning and implementation of much of the city’s downtown revitalization. The city planning department made sure that community members were included in discussions about downtown and their neighborhoods. The city creates “neighborhood pattern workbooks” with zoning overlays that capture community needs and desires. Both city staff members and developers appreciate that the process provides a clear sense of neighborhood concerns and reduces the likelihood of facing challenges in the public-approval process.
7. Stabilize distressed neighborhoods.
One of the greatest liabilities for smaller legacy cities is neighborhood disinvestment, resulting in the decay of physical structures and a decline in the quality of life. In some cities, the Great Recession caused severe declines, not just in neighborhoods that were already stressed but also in once-stable middle- and working-class areas as foreclosures and vacancies reduced property values and kicked off a cycle of disinvestment. Stabilizing a distressed neighborhood is no small task. Multiple interventions are needed just for housing: critical repairs of occupied homes, rehabilitation of vacant homes, and, in some cases, targeted demolition. Beyond housing, stabilization requires interventions to address the neighborhood’s systemic problems.
In Youngstown, Ohio, more than one in ten homes was vacant and likely abandoned when the city and the Raymond J. Wean Foundation created the nonprofit Youngstown Neighborhood Development Corporation (YNDC). The program, which focuses on targeted neighborhoods, pairs targeted housing rehabilitation and demolition with activities like business development, community organizing, and urban farming. Housing values are extremely low, making market-rate development very difficult without subsidies. YNDC collects extensive data to analyze which neighborhoods might support market-rate development and which will require additional interventions. In some, YNDC uses HOME Investment Partnership or Community Development Block Grant dollars to make repairs on occupied homes. In others, it works with the county land bank to acquire vacant properties for rehabilitation and resale. YNDC has its own construction crew, which lowers costs and allows rehabilitation without subsidy beyond the donation of homes. The for-sale units are very popular and are sold primarily to prequalified buyers on a waiting list. All homes are entered on the Multiple Listing Service, even if they are presold, to build comparable data for future appraisals in the neighborhood. The private market has moved in, furthering revitalization efforts.
8. Strategically leverage state policies.
Few successful smaller legacy cities have been able to revitalize without some assistance from their states via direct resources, economic incentives, or capacity-building programs. The Massachusetts Gateway Cities program, for example, provides resources to create communities of choice and attract entrepreneurs to cities with populations between 35,000 and 250,000 that have median incomes and educational attainment levels below the state average. The Clean Ohio Revitalization Fund made grants to municipalities for cleanup and redevelopment of brownfield sites. GOPC found that cities were able to leverage the state’s investments into significant financial benefits in annual tax revenues, economic outputs, and job creation. We found that while state policies and funding alone cannot turn cities around, state programs have helped revitalization, and local leaders have used these resources strategically for the most catalytic projects.
Conclusion
Remaking small and midsize legacy cities for the 21st century means accepting and embracing that these places will not look the way they did in the 1950s. Creating stable, vibrant places for the long term requires vision, risk-taking, and patience. Some of the strategies for success require addressing equity challenges while supporting economic expansion. Some stronger cities have already made important strides by building the next generation of leaders across sectors, making investments in training low-skilled workers, or reimagining their downtowns. In the most challenged cities, local leaders will need to work together to determine the best path forward. This process may be painful as it becomes apparent that older ways of doing things and earlier visions of the city are no longer realistic. But, for many cities, this process is the only way to build a strong community and achieve a brighter future.
Torey Hollingsworth is manager of research and policy, and Alison Goebel is executive director of Greater Ohio Policy Center (GOPC), a statewide nonprofit organization that champions revitalization and sustainable growth in Ohio through research, advocacy, and education.
Rendering courtesy of: Industrial Realty Group, LLC
