The proliferation of informal and illegal forms of access to urban land and housing has been one of the main consequences of the processes of social exclusion and spatial segregation that have characterized intensive urban growth in developing countries. Given the absence of adequate housing policies and the failure of the land market to offer sufficient, suitable and accessible housing options, millions of urban poor have to create their own shelter, either by invading private or public land or by buying land illegally and constructing their own housing. This phenomenon has attracted the attention of many researchers, policy makers and others worried about the grave socioeconomic, environmental and political implications for the urban poor and society at large.

Peruvian economist Hernando de Soto is one of the most influential contemporary ideologues addressing this complex issue. His ideas and proposals regarding large-scale regularization programs, most recently presented in his book, The Mystery of Capital, have received extensive media coverage and have raised the level of public debate. His influence can be measured by the fact that an increasing number of countries and cities, in Latin America and elsewhere, have introduced regularization policies based on his ideas, and these programs have already had a significant impact on international and institutional approaches to property reform and good governance. In many countries, politicians who were never particularly interested in urban development concerns have now become vigorous defenders of de Soto’s ideas. Why?

A Review of Urban Settlement Trends

Before addressing de Soto’s work directly, a brief summary of the current situation is in order. In Latin America, the urbanization process has been especially significant: 380 million people, some 75 percent of the total population, lived in urban areas in 2000, making it the most urbanized region in the world. While the globalization of urban land markets has intensified in Latin America, the region has also seen poverty escalate. It is estimated that between 40 and 80 percent of the population lives illegally because they can neither afford nor gain legal access to land near employment centers. As a result, illegal tenure arrangements have become the main form of urban land development.

The violent evictions and forced removals of the 1970s have been gradually replaced by a relative tolerance of illegal occupations, culminating in some cases with the official recognition of such settlements. Responding to growing social mobilization, public administrators and policy makers in several countries have struggled to formulate regularization programs aimed at both upgrading informal areas and recognizing the land and housing rights of the dwellers, thus legalizing their status.

Most land tenure regularization programs have been structured around two intertwined objectives: to recognize security of tenure and to promote the sociospatial integration of informal communities within the broader urban structure and society. The definition of what constitutes security of tenure has varied in both theory and practice. The UN Global Campaign for Securing Tenure for the Urban Poor, for example, seeks to protect dwellers against eviction and achieve other basic objectives, such as contributing to sustainable livelihoods; improving access to basic services; securing urban citizenship; producing certainty and incentives for investment; mobilizing disparate communities; and empowering women.

Generally speaking, regularization programs in Latin America have been more successful in upgrading settlements through public investments in urban infrastructure and service provision than in legalization programs. The definition of the nature of the rights to be attributed to dwellers has varied greatly, ranging from titles (such as freehold and leasehold) to contracts (such as social rent and other rental mechanisms) and precarious administrative permits (such as temporary licenses and certificates of occupancy). Experiences based on the transfer of individual freehold titles have been largely unsuccessful, given the many existing legal, technical and financial obstacles.

de Soto’s Contributions to the Debate

Although he has claimed that he initiated the debate, de Soto instead has made an undeniably important contribution to a long-standing discussion of the need to confront the phenomenon of urban informality and illegality through public policies aimed at legalizing informal settlements and other extralegal economic activities. Since the 1970s, this debate increasingly has involved planners and policy makers, but de Soto has repackaged the discussion and, to some extent, contributed to widening its scope and reach.

What makes de Soto’s ideas so appealing is that, perhaps better than anyone else, he has been able to emphasize the economic dimension and implications of urban illegality. Most of the academic research, social mobilization and policy-making on the matter of informal settlements and land regularization have been supported by a combination of humanitarian, ethical, religious, sociopolitical and environmental arguments. de Soto’s approach, on the other hand, has stressed the significant impact that comprehensive regularization programs could have on the overall urban economy by linking the growing informal extralegal economy into the formal economy. Moreover, he has argued that such public policies can be instrumental in reducing social poverty.

In his view, small informal businesses and precarious shanty homes are essentially economic assets, “dead capital,” that should be revived by the official legal system and turned into liquid capital so people could gain access to formal credit, invest in their homes and businesses, and thus reinvigorate the economy as a whole. He has estimated the amount of dead capital in the developing world at about US$9.3 trillion, a staggering figure that has drawn the attention of many influential politicians, land developers, government officials and financial organizations (Bourbeau 2001). His argument has been summarized as follows:

“Most of the poor already possess the assets they need to make a success of capitalism…But they hold these resources in defective forms…They lack the process to represent their property and create capital…They have houses, but not titles…. It is the representation of assets in legal property documents that gives them the power to create surplus value” (Mammen 2001).

In his first book, The Other Path, de Soto advocated the formalization of informal settlements. In his new book, The Mystery of Capital, he has taken this argument one step further, advocating that property ownership is the reason “why capitalism triumphs in the West and fails everywhere else,” which is also the subtitle of the book. de Soto offers a three-part argument:

• People need to feel secure of their legal tenure status so they can start investing in housing and business improvements;
• Security of tenure and resulting access to credit can only be provided by the legalization of informal settlements and businesses;
• The way to proceed is to provide universal title ownership through individual freehold titles, with clear titles and enforceable rights, to enable third world countries to leverage themselves and thus eradicate poverty.

The recognition of property ownership in de Soto’s proposal is important because it would entail access to credit and finance. He argues that European countries and the U.S. improved their property systems, allowing economic actors to discover and realize the potential of their assets and thus to be in a position to produce the kind of noninflationary money necessary to finance and generate production. Following that logic, national and international organizations have proposed, and even imposed, the full legalization of businesses and the unqualified recognition of individual freehold titles for urban dwellers in some informal settlements as the “radical” way to transform decaying urban economies.

Critiques of de Soto’s Assumptions

Appealing as his ideas are, there are many flaws in de Soto’s arguments. Now that the dust raised by the initial media attention to his book has started to settle down, the debate has become increasingly critical. Such an appraisal is especially important because the regularization programs inspired by his ideas have had a significant impact on the daily lives of millions of people.

To begin with, there has been increasing criticism of de Soto’s methodological approach that led to the highly unlikely estimated figure of existing dead capital. Some analysts have pointed out that his grasp of the role and social construction of individual property ownership in European and U.S. economic history is not entirely correct (Payne 2001). Others have criticized de Soto for oversimplifying, if not totally misunderstanding, the complex dynamics of both informal and formal urban land markets (Bourbeau 2001). I have stressed the specific, perhaps unique, role of land ownership in developing countries, especially in Latin America, where historically the combination of weak capital markets, highly inflationary economies and deficient social security systems has turned land value appreciation into a fundamental capitalization mechanism, thus generating a culture of speculation that has long supported a heritage of patrimonialism and political clientilism. This process has, in its turn, deeply affected the conditions of access to urban land and housing and the spatial distribution of public equipment and services, as well as generating urban illegality.

Another related critical argument is that de Soto has failed to recognize that the poor, despite their poverty, have already amassed assets through access to credit, albeit not from formal institutions. In fact, de Soto has failed to provide evidence that banks and other official financial and credit institutions would be prepared to give systematic credit to the poor, even though there is historical evidence to the contrary. For example, in de Soto’s country of Peru very few people have been able to access official credit following a massive regularization program (Riofrio 1998; Calderon 2001). Moreover, existing research in Colombia and other Latin American countries has indicated that the poor would not even be interested or willing to obtain official credit, given the socioeconomic and fiscal implications of this process (Gilbert 2001). Recent studies also have questioned the urban and socioeconomic sustainability of settlements in Mexico, Peru, El Salvador and elsewhere that have been legalized by programs inspired by de Soto’s ideas (Duhau 2001; Kagawa 2001; Zeledon 2001). Such programs have focused exclusively, and artificially, on the formal legalization of informal settlements and have not included adequate upgrading and other socioeconomic programs, thus failing to promote any sociospatial integration.

From my perspective as a legal scholar, I see three main flaws in de Soto’s argument. First, while discussing the importance of legalizing informal settlements, he has failed to question the very nature of the legal system that has generated urban illegality in the first place. I believe that the discussion of laws and legal institutions has to be supported by a critical understanding of the nature of the law-making process, the conditions for law enforcement, and the dynamics of the process of social construction of urban illegality. In particular, I have argued that the legal treatment of property rights should be taken out of the narrow, individualistic context of civil law so the matter can be interpreted from the socially oriented criteria of redefined public urban law (Fernandes 2001).

In this context, far from being radical, de Soto’s argument is a very conservative one. His work has failed to qualify the discussion on property rights, and he seems to assume that there is a universal, a-historical, “natural” legal definition of such rights. However, in Latin American countries and elsewhere in the developing world, the state has treated differently the different forms of property rights (financial, industrial, intellectual, etc.) and the social relations around them, allowing for varying degrees of state intervention in the domain of economic property relations. It is only for a very specific form of property rights, land and real estate, that the state has failed to affirm the notion of the social function of property versus the dominant individualistic approach given to such rights by anachronistic civil legislation (Fernandes 1999). The historical and political factors that have allowed classical legal liberalism to survive in Latin America have to be addressed before any comprehensive legal reform, such as that proposed by de Soto, can be implemented. The intimate though dialectically contradictory relationship between legality and illegality cannot be ignored (Fernandes and Varley 1998). Such a critical approach to law would certainly serve to dismiss de Soto’s claim that formal, unqualified individual ownership can be used against crime and terrorism.

A second flaw is that research in many developing countries has indicated that, given a combination of certain social, political and institutional conditions, residents in informal settlements can share an effective perception of security of tenure, have access to informal (and sometimes formal) credit and public services, and invest in housing improvement, even without having legal titles (Payne et al. forthcoming).

Third, and more important, existing research has shown that while the recognition of individual freehold titles can promote individual security of legal tenure it does not necessarily entail sociospatial integration. Unless titling is undertaken within the context of a broader set of public policies that address urban, politico-institutional and socioeconomic conditions, legalization programs may actually aggravate the processes of exclusion and segregation. As a result, the original beneficiaries of the programs might not be able to remain on the legalized land, although that should be the ultimate objective of regularization programs, especially on public land.

Moreover, regularization programs have had little impact on social poverty, in part because the traditional banking and financial mechanisms have not embraced them, as de Soto has claimed. The root of the problem runs deeper because regularization programs have a remedial nature. They can only have a more direct impact on urban poverty if they are part of a broader set of preventive public policies aimed at promoting overall urban reform and supported by socioeconomic policies aimed at generating job opportunities and income. There is a fundamental role for the market economy in this process, but it also requires systematic intergovernmental relations, public-private partnerships, and above all renewed social mobilization. Furthermore, de Soto has failed to consider the essential gender and environmental implications of land legalization.

To prevent the production of these perverse effects, we must identify and understand the factors that have contributed to the phenomenon of urban illegality. These include not only the combination of land markets and political systems but also the elitist and exclusionary legal systems still prevailing in Latin America. To legalize the illegal requires the introduction of innovative legal-political strategies to promote the articulation of individual land tenure with the recognition of social housing rights compatible with keeping dwellers in their existing settlements. Housing rights cannot be reduced to individual property rights.

New tenure policies need to integrate four main factors: legal instruments that create effective rights; socially oriented urban planning laws; political-institutional agencies and mechanisms for democratic urban management; and inclusionary macro-socioeconomic policies. The search for innovative legal-political solutions also includes the incorporation of a long-neglected gender dimension and a clear attempt to minimize the impacts such policies have on the land market. The benefits of public investment should be captured by the urban poor, not by traditional and new private land developers, as has happened frequently in settlements regularized according to de Soto’s proposals.

In conclusion, I would argue that regularization programs should be group specific, taking into account the local historical, cultural and political contexts as well as the existing forms of tenure arrangements, both legal and customary and formal and informal. Public administrators and lawmakers should refuse the pressure to homogenize land and property laws. Individual property ownership will always be an attractive option that should be considered, but there are many other legal-political alternatives.

Hernando de Soto is absolutely right when he questions the legitimacy of exclusionary legal systems. However, while he has uncritically assumed that legitimacy would result from the widespread recognition of individual ownership, other research has proved that this is not necessarily the case. He is generally right when he says that lawyers lack an understanding of the economic process. However, many observers believe that his own understanding of the economic process may be deeply flawed, and that he could also learn a thing or two about the legal process.

Edesio Fernandes is an attorney, urban planner and lecturer in the Development Planning Unit of University College London. He is also coordinator of IRGLUS-International Research Group on Law and Urban Space. This article is based in part on his ongoing research and a lecture he presented at the Lincoln Institute in October 2001.

References

Bourbeau, Heather. 2001. Property wrongs: How weak ideas gain strong appeal in the world of development economics. Foreign Policy (November/December):78-79.

Calderon Cockburn, Julio A. 2001. Comparative analysis of the benefited and non-benefited population by the national formalization plan, in Has the well-being of the population improved?: A balance of the main social policies and programs. Lima: National Institute of Statistics and Information (INEI): 65-92.

Duhau, Emilio. 2001. Impacts of regularization programs: Notes on the Mexican experience. Paper presented at the Lincoln Institute workshop on Informal Land Markets: Land Tenure Regularization and Urban Upgrading Programs (October).

de Soto, Hernando. 1986. The Other Path. London: I.B. Tauris & Co Ltd.

_____. 2001. The Mystery of Capital. London: Bantam Press.

Fernandes, Edesio. 1999. Redefining property rights in the age of liberalization and privatization. Land Lines (November) 11(6):4-5.

_____. 2001. Law and the production of urban illegality. Land Lines (May) 13 (3):1-4.

Fernandes, Edesio and Ann Varley, eds. 1998. Illegal Cities: Law and Urban Change in Developing Countries. London: Zed.

Gilbert, Alan. 2001. On the mystery of capital and the myths of Hernando de Soto: What difference does legal title make? Paper presented at the N-AERUS Workshop in Leuven, Belgium (June).

Kagawa, Ayako. 2001. Policy effects and tenure security perceptions of Peruvian urban land tenure regularization policy in the 1990s. Paper presented at the N-AERUS Workshop in Leuven, Belgium (June).

Mammen, David. 2001. Roundtable discussion for the International Division of the American Planning Association. Interplan (June):2-9.

Payne, Geoffrey. 2001. The mystery of capital: Why capitalism triumphs in the west and fails everywhere else. Habitat Debate (September) 7 (3):23.

Payne, Geoffrey, et al. Forthcoming 2002. Land, Rights and Innovations: Secure Land for the Urban Poor. London: International Technology Development Group (ITDG).

Riofrio, Gustavo. 1998. Why have families mortgaged so little? Paper presented at the Lincoln Institute workshop on Comparative Policy Perspectives on Urban Land Market Reform in Latin America, Southern Africa and Eastern Europe (July).

Zeledon, Aida. 2001. De facto and legal regularization programs in El Salvador. Paper presented at the Lincoln Institute workshop on Informal Land Markets: Land Tenure Regularization and Urban Upgrading Programs (October).

Most jurisdictions require residential assessments to be proportional to market value, but in practice assessment ratios—assessed value divided by sale price—are often lower for high-priced than low-priced properties. This tendency for assessment ratios to fall as sales prices rise is termed regressivity, because it means that property taxes are a higher percentage of property value for lower-priced properties. Regressive assessments have been identified in many jurisdictions and times (such as Cornia and Slade 2005; McMillen and Weber 2008; and Plummer 2010).

Assessment regressivity is an important issue because it has the potential to undermine support for a property tax system. Consider a simple system in which taxes are 1 percent of a home’s assessed value, with no exemptions or deductions. For example, a $100,000 home should have a $1,000 tax bill, and a $1 million home a $10,000 tax bill. However, it is not uncommon to find that a $1 million home is actually assessed at $800,000 or $900,000, resulting in effective tax rates of 0.8 or 0.9 percent rather than the statutory 1 percent.

Having lower-than-prescribed assessment rates for some high-priced properties may result in greater variability in assessments within price groups. One owner of a high-priced home may accept a $1 million assessment as an accurate measure of market value, while another owner may appeal and win a lower assessment. Different tax bills for identical properties can cause taxpayer resistance and resentment.

The Assessment Process in Illinois

I have analyzed data from two counties in the Chicago metropolitan area that provide quite different perspectives on assessment regressivity. In suburban DuPage County, assessment ratios decline uniformly with sales prices and there is no marked difference in the degree of variability in assessments across the range of sales prices. In the City of Chicago, which is part of Cook County, the degree of variability in assessment ratios is greater than the degree of regressivity. Notably, assessment ratios in Chicago are highly variable at low and very high sales prices, while not varying greatly with mid-range sales prices.

Illinois has a simple flat-rate property tax, but the homestead exemption produces a degree of progressivity. This exemption is generally a flat amount that does not vary by price, although Cook County has an “alternative general homestead exemption” that can make the exemption higher in areas with rapid price appreciation. The basic homestead exemption is designed to produce much lower effective tax rates for low-priced properties—where the exemption is often high relative to market value.

Assessment practices in DuPage County are similar to those in all but one of the 102 counties in Illinois, where properties are assessed on a four-year cycle at 33 percent of market value. In DuPage County, properties were most recently assessed in 2007 and new assessments will be established in 2011. Cook County alone has a classified system with varying statutory assessment rates. Prior to 2009, the statutory rates were 16 percent for residential properties, 38 percent for commercial, and 36 percent for industrial, although actual assessment rates were much lower. In 2009, the statutory rates were “recalibrated” to 10 percent for residential and 25 percent for commercial and industrial properties. Cook County assesses its properties on a rotating, three-year cycle. The City of Chicago was last reassessed in 2009, and all city properties will be reassessed again in 2012. Properties in the north suburban part of Cook County were reassessed in 2010, and south suburban properties will be reassessed in 2011.

Traditional Measures of Regressivity

The importance of assessment regressivity has led the International Association of Assessment Officers (IAAO 2007) to recommend that an analysis of regressivity be included as part of any study of assessment accuracy. One common procedure recommended by the IAAO to evaluate assessment regressivity is a descriptive statistic, the price-related differential (PRD), which is the ratio of the simple mean assessment ratio to a comparable statistic that places more weight on higher-priced properties. Typically this ratio is greater than one, which implies that higher-priced properties have lower average assessment ratios than lower-priced homes.

Table 1 presents traditional IAAO measures of residential assessment performance for the most recent reassessment year for which I have data—2006 in Chicago and 1999 in DuPage County. The data on sales prices and assessed values come from the Illinois Department of Revenue, which is responsible for monitoring assessment performance for all counties in the state. I focus on Chicago rather than all of Cook County to keep the sample size more manageable, to focus on a single assessment year, and to avoid combining the county’s three assessment districts.

Chicago’s average assessment rate (mean) of 9.4 percent differs significantly from the statutory value of 16 percent. In DuPage County, the average assessment rate of 29.8 percent is much closer to the statutory 33 percent rate, and it would likely be even closer if the timing of the sales prices and assessment origination dates were closer. The value-weighted mean is calculated by weighting each observation by its sale price. The finding that the value-weighted mean is less than the arithmetic mean implies that higher-priced properties tend to have lower than average assessment ratios in both counties.

The price-related differential (PRD), which is the ratio of the value-weighted mean to the arithmetic mean, formalizes this measure. IAAO standards call for the PRD to be no higher than 1.03; by this standard, DuPage County’s degree of regressivity is acceptable while Chicago’s is not. The coefficient of dispersion (COD) is the traditional measure of assessment variability. By IAAO standards for residential properties, the COD should not exceed 15. Again, Chicago’s COD indicates excessive variability while DuPage County’s degree of variability is within IAAO’s acceptable range.

Statistical Analysis of Regressivity

A second IAAO-recommended procedure to measure regressivity is a statistical regression of a sample of assessment ratios on sales prices, which typically produces a negative coefficient for the price variable, i.e., a downward sloping line. This type of analysis provides estimates of the conditional expectation of the assessment ratio for any given sale price. Although several approaches exist in the literature, the basic idea is to estimate a function that produces a simple relationship between sales prices and assessment ratios. If the function implies that assessment ratios decline with sales prices, the assessment pattern is said to be regressive.

Figure 1 shows the estimated functions when assessment ratios are regressed on sales prices using data from Chicago and DuPage County. The straight lines are simple linear regressions. The curved lines are a nonlinear estimation procedure—a locally weighted regression technique that estimates a series of models at various target values, placing more weight on values closer to the target points. For example, to estimate a regression with a target point of $100,000, one might use only observations with sales prices between $75,000 and $125,000, with more weight placed on sales prices closer to $100,000.

The linear and locally weighted regression estimates are much more discrepant for Chicago’s data set than for DuPage County’s. While both approaches indicate that assessment ratios fall with sales prices, the nonlinear procedure indicates that expected assessment ratios are extremely high in Chicago at very low sales prices—but still below the statutory rate of 16 percent.

The regression lines imply precise relationships, but they do not address differences in the degree of variability at different sales prices. It may be that both unusually high and unusually low prices are simply hard to assess accurately. If so, assessment ratios could have high variances at both low and high sales prices while being tightly centered on statutory rates near the mean sale price. Neither the traditional PRD statistic nor standard regression procedures are well-suited for analyzing a situation where the accuracy of the assessment process varies with sales prices.

Quantile Regressions Using Simulated Data

Another statistical procedure, quantile regression, provides much more information on the relationship between assessment ratios and sales prices by showing how the full distribution of ratios varies by price. The easiest way to understand quantile regression is to imagine two data sets, A and B, where both have 10,000 observations. Each observation represents a sale price and assessment ratio pair, but sales prices are constrained to integers between 1 and 10 (figure 2).

In constructing data set A, a sale price is assigned, and then an assessment ratio is drawn from a normal distribution with a mean (and median) of 0.33 (the statutory rate in DuPage County). Data set A then matches the assumptions of a classical regression model, where the variance of the assessment ratios is constant across all values of sales prices. In constructing data set B, however, the variance of the assigned assessment ratio is higher for lower sale price levels, but the mean is constant and equals 0.33 at each price.

In both data sets the mean is equivalent to the estimated linear regressions in this case, indicating no relationship between sale price and assessment ratio. If these regressions were estimated using real data, they would be interpreted as indicating that assessment ratios are proportional to sales prices, i.e., assessments are neither regressive nor progressive. Despite this finding, figure 2 clearly shows that in data set B assessments converge on the statutory 33 percent rate at high sales prices, whereas homes with low sales prices run the risk of having extremely high assessment rates.

Quantile regression estimates reveal the differences between data sets A and B in the degree of assessment ratio variability, and this approach can be estimated at any target value of the assessment ratio distribution. For example, since the 10 percent and 90 percent quantile lines are converging as sales prices increase, the quantile regression reveals what standard regression procedures do not—low sales prices have highly variable assessments and high sales prices have more precise assessments.

Quantile Regressions for the City of Chicago and DuPage County

In practice, linear regression, locally weighted regression, and a linear version of quantile regression all proved too restrictive to represent accurately the relationship between assessment ratios and sales prices in Chicago and DuPage County, especially for extremely low and extremely high sales prices. Instead, a nonlinear version of quantile regression provides the most accurate representation of the underlying relationship.

Figure 3 shows the results of nonlinear versions of the quantile regressions, which can be estimated at a series of target points, with more weight given to observations that are near the targets. From bottom to top, the graphs show the estimated 10, 25, 50, 75, and 90 percent quantile regression lines.

Chicago’s results suggest that assessment ratios are relatively high at all quantiles for quite low prices, but the high variability is evident in the large spread between the 10 and 90 percent quantile lines. However, as the sale price increases from about $250,000 to nearly $800,000, the regression lines are close to horizontal. The variability is also low in this range. The quantile lines begin to have a downward slope again for prices above $800,000, with a moderate increase in the variance. Thus, the Chicago results suggest that the standard analysis of regressivity is misleading in that most of the regressivity is concentrated at low sales prices where the variance is also quite high.

In contrast, DuPage County has relatively high assessment ratios and lower variances in the $100,000–$200,000 range of prices where most sales took place in 1999. Assessment ratios decline with sale price for all prices beyond about $100,000, while the variance is increasing. The pattern of results for DuPage County is closer to what is implicitly assumed in a standard regression analysis of assessment regressivity.

Assessment Ratios Distributions at Alternative Sales Prices

An alternative to quantile regression is to examine the actual distribution of assessment ratios at a variety of different target values for sales prices to see how assessment ratios vary at given sales prices. Since most of the interesting patterns occur at low sales prices, figure 4 shows estimated conditional density functions for sales prices ranging from $50,000 to $200,000. The density function for Chicago has a huge variance at a sale price of $50,000. As the price increases to $100,000, $150,000, and finally $200,000, the density function moves to the left, meaning that lower assessment ratios become more common—an indication of regressivity. The distribution is also much more tightly clustered around the mean value of 9–10 percent, which indicates that the variance is reduced substantially.

In the contrasting case of DuPage County, the conditional density functions simply shift to the left as the target sale price increases with no pronounced change in variance. This parallel leftward shift of the conditional density function shows what would be predicted by a classic regression analysis of a regressive assessment system.

Implications for Property Taxes

Assessment regressivity has important implications for individual tax bills, as exemplified in a simplified analysis of residential taxes in Cook County. Though not a literal representation of the county’s tax system, the analysis is a close approximation. The starting point for table 2 is the estimated market value, which we assume to be accurate. Although the statutory assessment rate in Cook County was 16 percent prior to 2009, I use an assessment rate of 10 percent because it is closer to the actual rate and it matches the recent recalibration. Thus, the proposed assessed valuation for the property is $10,000.

However, Illinois also requires that assessments across the state must average 33 percent of market value. If assessments average less than 33 percent—as is mathematically a near certainty under Cook County’s classification system—the Department of Revenue calculates an equalization factor by which all assessments are multiplied. Using a representative value of 2.7 for the multiplier in table 2, the $10,000 assessment turns into an adjusted equalized assessment value of $27,000. Finally, the standard homestead exemption of $5,500 (again, a representative value) is subtracted to produce the base for the homeowner’s property tax bill. Thus, the sample tax rate of 10 percent and the adjusted equalized assessed value of $21,500 produce a tax bill of $2,150.

Table 3 compares house values and property tax rates under the assumption that assessments are regressive and are more variable for $100,000 houses than for $500,000 houses. Due to the homestead exemption, the property tax is somewhat progressive even when assessments are proportional to market value. Thus, a $100,000 house that is accurately assessed at 10 percent of market value ($10,000) ends up with a tax bill of $2,150 or an effective tax rate of 2.15 percent, while a $500,000 house that is assessed correctly at $50,000 has a tax bill of $12,950, or 2.59 percent of market value.

But, suppose that assessment rates for $100,000 homes actually range from 9 to 14 percent, while the range for $500,000 homes is only 8 to 12 percent. In this case, the progressivity of the homestead exemption can be reversed completely. Owners of low-priced homes who are “unfortunate” in receiving high assessments end up with effective tax rates of 3.23 percent, which is much higher than the average 10 percent value for owners of $500,000 homes, and is even higher than the 3.13 percent tax rate paid by owners of high-priced homes assessed at 12 percent.

Moreover, actual tax payments vary significantly for otherwise identical homes—from $1,800 to $3,230 for $100,000 houses and from $10,250 to $15,650 for $500,000 homes. In other words, a homeowner may receive a tax bill that is nearly 80 percent higher than the neighboring house even if both have a market value of $100,000.

Conclusion

Because assessment accuracy is the key to an equitable property tax, statistical measures of regressivity are essential tools for evaluating property valuation systems. Standard measures of regressivity can present an incomplete or even misleading picture of the range of assessment ratios in a jurisdiction. Newer analytic tools such as quantile regression can improve our understanding of the distribution of tax burdens and in this way help improve assessment equity.

Note: The statistical tools used in this article are included in a contributed extension package for the statistical program R. The package (aratio) is designed to be accessible to people who have limited knowledge of the R program but are familiar with other statistical software packages. Both R and aratio can be downloaded at no charge from www.r-project.org.

About the Author

Daniel P. McMillen is a professor at the Institute of Government and Public Affairs and in the Department of Economics at the University of Illinois. He is also a visiting fellow of the Lincoln Institute’s Department of Valuation and Taxation in 2010–2011.

References

Cleveland, William S., and Susan J. Devlin. 1988. Locally weighted regression: An approach to regression analysis by local fitting. Journal of the American Statistical Association 83(403, September): 596–610.

Cornia, Gary C., and Barrett A. Slade. 2005. Property taxation of multifamily housing: An empirical analysis of vertical and horizontal equity. Journal of Real Estate Research 27(1, (January/March): 17–46.

International Association of Assessing Officers (IAAO). 2007. Standard on ratio studies. Kansas City, MO: IAAO.

McMillen, Daniel P., and Rachel Weber. 2008. Thin markets and property tax inequities: A multinomial logit approach. National Tax Journal 61(4, December): 653–671.

Plummer, Elizabeth. 2010. The effect of land value ratio on property tax protests and the effects of protests on assessment uniformity. Working Paper. Cambridge, MA: Lincoln Institute of Land Policy.

Even as the economy begins to recover from the greatest recession since the 1930s, the worst may be yet to come for state and local governments because their fiscal situations typically lag the general economy by two to three years. State budget deficits for FY2010 totaled more than 25 percent of general fund budgets—the largest budget gaps on record.

Making matters worse is the impending “stimulus cliff,” which arises because most of the roughly $135 billion in federal stimulus aid to state governments and school districts was used to help close state budget gaps in FY2010, leaving a small fraction of the aid for FY2011 (Lav, Johnson, and McNichol 2010). Even before the current recession, states faced substantial structural deficits. The U.S. Government Accountability Office (2007, 1) predicted state and local governments would face “large and growing fiscal challenges” within a few years time, and continuing through 2050.

These grim forecasts for state and local budgets have led some analysts and policy makers to call for reducing the size of state government, consolidating local governments, restructuring tax systems, and even changing state constitutions. According to Rob Gurwitt (2010, 18) of Governing magazine, the “fundamental assumptions about how state government operates need rewiring.”

Given the likelihood of a long-term state and local government fiscal crisis, property tax relief is an important state government function that is now more critical than ever. This article argues that most efforts to provide property tax relief, such as assessment limits and homestead exemptions, are inefficient and create substantial unintended consequences. Circuit breaker programs—a property tax relief mechanism first developed in the 1960s—deserve renewed attention in an era of streamlined state government because they target aid to those who need it most.

Alternative Approaches to Property Tax Relief

The property tax accounts for the largest share of own-source revenues for local governments, and is particularly suitable for funding local services for at least two reasons. First, it is a stable revenue source: property tax revenues do not fall dramatically during recessions as income tax and sales tax collections generally do. Second, property taxes are imposed on an immobile tax base: while people may have the option to buy the same goods in a nearby town with lower sales taxes, or move across state lines for lower incomes taxes, they cannot move their land across city lines to seek lower property taxes.

The property tax is not without problems, however. Chief among them are the disparities in property values across communities, an inexact relationship to taxpayers’ ability to pay, and the long-standing unpopularity of the tax. Its revenue importance means that improvement rather than elimination is the best way to address these problems.

Property tax relief can be provided in many ways, some of which are more effective and equitable than others. Wealth disparities among communities make locally funded property tax relief programs inherently problematic. Funding property tax relief at the state level is a better option, since communities with large concentrations of needy taxpayers are unlikely to have the resources to fund local-option tax relief programs. State funding also eliminates inequities in property tax relief among communities.

Assessment caps are used as a property tax relief measure in 20 states, and other states regularly examine proposals to employ such measures. A recent comprehensive study on assessment limits found, however, that “30 years of experience suggests that these limits are among the least effective, least equitable, and least efficient strategies available for providing property tax relief” (Haveman and Sexton 2008, 37). Assessment caps provide the greatest tax reductions to homeowners whose property values have increased the most. Even though such gains in housing wealth are not a liquid asset, tax relief should not be structured to provide the greatest benefit to those with the greatest increase in wealth.

Assessment limits also create horizontal inequities in cases where two homeowners with identical incomes and homes in the same community face dramatically different property tax bills solely because one owner has lived in the home longer. Fixed-dollar homestead exemptions are better, but still do a poor job of targeting homeowners with the highest property tax burdens, because they provide the same dollar value of property tax relief to all homeowners facing a particular tax rate, regardless of their income.

Residential property tax relief programs across the United States are seldom targeted by income—the best measure of a household’s ability to pay taxes. Of the 216 residential property tax relief programs in effect in 2006, only 81 took income into account when setting benefits by using an income ceiling, and only 37 programs set tax relief benefits that varied by income (Significant Features of the Property Tax 2010). Given the fiscal crisis, states should consider replacing untargeted property tax relief with circuit breaker programs that can provide relief to more households in need, without spending more money.

The Case for the Property Tax Circuit Breaker

When applied to property tax relief, the term circuit breaker is used to describe programs that provide benefits directly to taxpayers, with benefits increasing as claimants’ incomes decline. As an electrical circuit breaker stops the flow of electrical current to protect a circuit from overload, a property tax circuit breaker is a policy mechanism designed to stop property taxes from exceeding a claimant’s ability to pay, protecting the taxpayer from property tax overload.

A clear definition is critical since most states with true circuit breaker programs do not use that term to describe them. For example, Maine calls its circuit breaker program the Maine Property Tax and Rent Refund Program. Meanwhile, some states use the term to refer to property tax relief programs in which relief does not vary with income. In Indiana, a program is called a circuit breaker even though the program ties relief to property value, not to income.

Over the last 40 years, two-thirds of the states and the District of Columbia have adopted state-funded circuit breaker programs (see figure 1). Each of these programs satisfies the circuit breaker definition described above. However, the design of these programs, and consequently their effectiveness, varies considerably. Properly designed circuit breakers can target property tax relief more precisely and with less expense than broad-based mechanisms such as homestead exemptions and assessment caps.

Recommendations for a Circuit Breaker Program

We offer seven recommendations designed to obtain maximum benefit when creating or reforming a circuit breaker program. The New York case study presents the efforts of one state trying to reform its circuit breaker program (box 1).

Box 1: New York’s Effort to Provide Targeted Property Tax Relief

Policy makers in New York state are considering adopting a new, expanded circuit breaker program to provide more targeted property tax relief because the existing circuit breaker program does not provide adequate assistance. It currently excludes households with incomes above $18,000, and provides an average annual benefit of only $109 per claimant (Bowman et al. 2009).

The state’s primary means of providing direct property tax relief to households is the School Tax Relief program (STAR), which has three components. Basic STAR is available to all taxpayers on their primary residence, and exempts the first $30,000 in property value from school district taxes, with adjustments for municipalities where assessed values diverge from market values and for downstate counties with high real estate prices. Enhanced STAR exempts a higher value, and is available only to homeowners over age 65 with limited incomes. Middle Class STAR provided a rebate check that depended on households’ income and their other STAR benefits, but was repealed in 2009 for 2009–2010 and subsequent fiscal years.

STAR is an expensive program—the three property tax components cost about $3.9 billion in 2008–2009. However, because benefits are spread so widely, many homeowners still face excessive property tax burdens. According to the 2006 American Community Survey, even after accounting for reductions under the Basic and Enhanced STAR programs, 20.1 percent of New York homeowners paid more than 10 percent of their income in property taxes, while 52.6 percent paid less than 5 percent. By providing such generous relief to the second group, the state is not able to provide enough for the first. Also, by providing larger exemptions for counties with high house prices, STAR largely subsidizes households in property-wealthy communities, which makes the state’s property tax system more regressive (Duncombe and Yinger 2001).

To provide more targeted relief, several proposals have been introduced to establish a new circuit breaker program. During the 2005–2006 legislative session, Assemblywoman Sandy Galef and Senator Betty Little sponsored a plan with many desirable features: a multiple-threshold formula to make the distribution of tax relief more progressive; an income ceiling high enough to include all middle-income households; and a copayment requirement to discourage excessive spending by local governments. The cost would have been limited by making homeowners choose either circuit breaker benefits or Middle Class STAR.

The Omnibus Consortium put forward a proposal similar to the Galef–Little plan, but with two improvements. First, it includes renters. Second, it uses a graduated structure for the income brackets, so that a small income increase that moves a claimant from one bracket to the next does not result in a much larger decrease in circuit breaker benefits.

The consortium’s proposal was introduced in spring 2009 by Senator Liz Krueger and Assemblyman Steve Englebright; it is cosponsored by Galef, Little, and many other legislators. Once fully implemented this plan is estimated to cost $2.3 billion annually, which is 65 percent less than the cost of the 2008–2009 STAR property tax programs, even though the new plan would provide much more generous relief to households facing the largest property tax burdens.

Plans to pay for the circuit breaker have been clouded by the state’s repeal of the Middle Class STAR rebates in response to the 2009–2010 budget deficit. Governor David Paterson has also proposed a circuit breaker plan, which would tie circuit breaker benefits to a spending cap for state government. Annual spending growth would be restricted to inflation growth. When revenues exceed this limit, the surplus would be returned to homeowners via a circuit breaker. While this plan may seem attractive, it would accentuate budget cycles and result in unpredictable year-to-year fluctuations in tax relief for homeowners.

Given the state’s fiscal crisis, creating a new circuit breaker program now seems more difficult than when the Galef–Little bill was being actively debated in the 2006–2008 period. Still, it is a positive sign that many legislators and the governor are all advancing targeted and cost-effective circuit breaker proposals, and have repealed the expensive and untargeted Middle Class STAR program.

Provide property tax relief to owners and renters of all ages. Currently, more than two-thirds of state circuit breakers do not cover nonelderly households, and a quarter of programs do not cover renters. Restricting eligibility to seniors is based on the false assumption that age is a good proxy for property tax burden. In fact, while the elderly have higher property tax burdens on average, Census data show elderly and nonelderly homeowners both devote about 35 percent of their incomes to all home ownership costs combined (Bowman et al. 2009, 11).

Furthermore, circuit breakers eliminate the need to use age as a rough proxy for property tax burdens since they target relief based on each household’s income and property tax liability. States should also provide circuit breaker benefits for renters, because they pay property taxes indirectly as part of their rent and they generally have lower incomes than homeowners. States that cover renters typically estimate renter property tax payments by specifying a percentage of rent equivalent to property taxes, most commonly 20 percent.

Avoid low income ceilings and restrictions on maximum benefits.

Many circuit breakers fail to provide meaningful tax relief because they have low income ceilings that exclude middle-income households, or low limits on maximum benefits that result in inadequate relief. For example, Oklahoma’s circuit breaker program restricts eligibility to claimants with incomes below $12,000 and caps relief at $200. In 2008, almost three-quarters of state circuit breaker programs had income ceilings below the national median household income of $50,223. In the current fiscal crisis, states should take care to set appropriate limits to restrain the cost of circuit breaker programs without rendering these programs ineffective.

Use a multiple-threshold circuit breaker formula.

States use three basic types of circuit breaker formulas: threshold, sliding-scale, and quasi circuit breakers. Threshold circuit breakers are the only type that bases tax relief directly on property tax burdens—that is, the percentage of income spent on property taxes. Using multiple thresholds will result in a more progressive distribution of benefits.

Threshold formulas provide a benefit for the portion of a claimant’s property tax bill that exceeds set percentages of income. For example, the Massachusetts circuit breaker, which is limited to taxpayers over age 65, uses a 10 percent single-threshold formula. The taxpayer is responsible for the entire tax bill up to 10 percent of household income, while the circuit breaker benefit offsets the tax bill above this threshold, up to a maximum benefit of $960.

Multiple-threshold formulas set multiple threshold percentages that increase from the lowest income bracket to the highest, with these thresholds usually applied incrementally like a graduated income tax. Maryland uses four threshold percentages: the circuit breaker benefit offsets any property tax liability above 0 percent of income for the first $8,000 of income, above 4 percent for the next $4,000 of income, above 6.5 percent for the next $4,000 of income, and above 9 percent for income of $16,001–$60,000.

Sliding-scale formulas reduce property taxes by a set percentage for each income bracket, with lower relief percentages for higher income brackets. All claimants in a given income bracket receive the same percentage of relief regardless of their property tax bill.

Quasi circuit breakers use multiple income brackets to target benefits to low-income households; benefits are determined without reference to a claimant’s property tax bill, except that they cannot exceed the actual property tax paid. A few states use hybrid circuit breakers that employ elements of all three types of formulas.

Ensure reliable state funding.

Even generous circuit breakers can become ineffective without reliable state funding. Circuit breaker benefits should be treated as an entitlement, rather than relying on budget appropriations that can result in pro-rated benefits (as in Iowa), unpredictable annual changes in formulas (as in New Jersey), or elimination of benefits in some years (as in California). Unpredictable fluctuations in circuit breaker benefits are difficult for taxpayers to manage and can have potentially dire consequences on household budgets.

Given the disparities in property wealth across municipalities, it is important for circuit breakers to be funded by the state, rather than at the option of local governments. Because of differences in program design and participation levels, the costs to state governments of existing circuit breaker programs vary considerably, ranging from .004 percent to 6.3 percent of property tax collections among 14 states where program cost data are readily available (Bowman et al. 2009, 20).

Use copayment requirements with threshold circuit breakers.

States that use threshold formulas should relieve only a portion of property taxes exceeding the threshold. The remaining difference between the taxes exceeding the threshold and the circuit breaker benefit may be considered a copayment. Copayment requirements are important for avoiding inefficient increases in local spending. If a circuit breaker shields taxpayers from 100 percent of any property tax increase, they have no incentive to scrutinize increased local spending since they will benefit from better public services without any increase to their tax bill.

Deliver circuit breaker benefits in a timely and visible way.

States use three methods of distributing circuit breaker benefits: rebate checks, income tax credits, and property tax credits or exemptions. A property tax credit reduces the tax bill based on a property’s full assessed value, while an exemption reduces a property’s assessed value.

Providing benefits through a property tax credit or exemption has two key advantages over rebate checks or income tax credits. First, taxpayers receive an immediate reduction in their property tax bills instead of facing a delay between the date they pay their property taxes and the date their circuit breaker application can be processed. Second, taxpayers observe the benefit as property tax relief instead of mistaking an income tax credit for income tax relief. Since renters do not pay property taxes directly, their circuit breaker benefits can be dispersed through a rebate check.

Use a public outreach campaign.

Low participation is a common problem among existing circuit breaker programs. Taxpayers will not apply for benefits if they are not aware of the program, or if they do not believe they qualify for benefits. To increase awareness and participation, states may promote programs through print advertising, broadcast media, and/or speaking tours. The Internet is a particularly useful and low-cost tool for circulating up-to-date program details including deadlines, contact information, printable claim forms, or online applications. Some states are able to enlist the help of nonprofit organizations in promoting participation if the group views the circuit breaker program as supporting its mission. For example, the Gerontology Institute at the University of Massachusetts promotes that state’s program as part of its efforts on behalf of the elderly.

Conclusion

The current fiscal crisis may usher in a new era for state governments under intense pressure to redesign programs to “do more with less.” Property tax relief is a core function of state governments, and it can be made more fair and cost-effective by using a circuit breaker program. This policy tool is designed to stop the property tax from exceeding a taxpayer’s ability to pay by targeting tax relief to those who need it most.

A majority of the states currently employ circuit breakers, but most programs fall short of ideal leaving ample room for improvement. New York’s poorly targeted property tax relief system, for example, could be replaced with an expanded circuit breaker that provides more help to taxpayers overburdened by the property tax, but costs less than the current program. Circuit breaker programs can also help strengthen the property tax itself as a mainstay of local government finance.

About the Authors

Daphne A. Kenyon is principal of D.A. Kenyon & Associates, a public policy consulting firm in New Hampshire, and a visiting fellow at the Lincoln Institute of Land Policy.

Adam H. Langley is a research analyst at the Lincoln Institute of Land Policy and a graduate student in economics at Boston University.

Bethany P. Paquin is a research assistant for D. A. Kenyon & Associates and the Lincoln Institute.

The authors thank Frank Mauro of the Fiscal Policy Institute in New York State and Joan Youngman of the Lincoln Institute of Land Policy for helpful information and comments on previous drafts.

References

Bowman, John H., Daphne A. Kenyon, Adam Langley, and Bethany P. Paquin. 2009. Property tax circuit breakers: Fair and cost-effective relief for taxpayers. Cambridge, MA: Lincoln Institute of Land Policy.

Duncombe, William and John Yinger. 2001. Alternative paths to property tax relief. In Property taxation and local government finance, Wallace E. Oates, ed., 243–294. Cambridge, MA: Lincoln Institute of Land Policy.

Gurwitt, Rob. 2010. Broke and broken. Governing 23 (4): 18-23.

Haveman, Mark and Terri A. Sexton. 2008. Property tax assessment limits: Lessons from thirty years of experience. Cambridge, MA: Lincoln Institute of Land Policy.

Lav, Iris J., Nicholas Johnson, and Elizabeth McNichol. 2010. Additional federal fiscal relief needed to help states address recession’s impact. Washington, DC: Center on Budget and Policy Priorities, January 28. www.cbpp.org

Omnibus Consortium. 2010. Summary of Omnibus Bill Circuit Breaker. http://omnibustaxsolution.org/overview.html

Significant Features of the Property Tax. 2010. Residential property tax relief programs. www.lincolninst.edu/subcenters/significant-features-property-tax/Report_ResidentialRelief.aspx

U.S. Government Accountability Office. 2007. State and local governments: Persistent fiscal challenges will likely emerge within the next decade. July 18. GAO-07-1080SP.

A critical aspect of the property tax, but one that is rarely addressed in public debate, is its “economic incidence,” or who actually bears the burden of the tax, as opposed to its statutory incidence, or who literally pays the tax. For example, a landlord might pay a property tax bill, but if some of the tax is offset with a rent increase, then the tenant bears that part of the tax burden. Not surprisingly, estimates of the economic incidence of taxes depend on the relative responsiveness of supply and demand to tax-induced price changes—factors that explain the extent to which consumers and businesses can change their behavior to avoid the tax.

The economic incidence of a tax is also affected by the phenomenon of “capitalization”—changes in asset prices that reflect the discounted present values of the economic effects of future tax and/or public expenditure changes. For example, an increase in property taxes, holding expenditures constant, might be capitalized into land or house values. The prices of these assets might fall by the present value of the projected increase in future taxes, whereas increases in expenditures, holding property taxes constant, might have offsetting effects.

These capitalization effects should include the effects of other tax-induced price changes, such as changes in future housing or land rents. In principle, the economic incidence of all of these capitalization effects is on the owners of land and housing at the time of the imposition of the tax, when the effects are “capitalized” as one-time changes in the prices of these assets. These price changes also significantly affect the ultimate economic burden of the tax on subsequent purchasers.

Benefit Tax versus Capital Tax Views

The complexity of measuring all of these effects implies that determining the economic incidence of taxes is one of the most difficult problems in public finance, and the property tax is no exception. Indeed, the debate over the incidence of the residential property tax has raged for at least the last thirty years, and is still far from resolved. Professional opinion on the incidence of the tax is generally divided between the “benefit tax” view and the “new” or “capital tax” view (Zodrow 2001).

Under the benefit tax view, the property tax is considered a user charge for public services received. It thus serves the function of a local head tax or benefit tax as envisioned by Tiebout (1956) in his celebrated analysis of how interjurisdictional competition coupled with consumer mobility can lead to the efficient provision of local public services. The implications for taxpayers are threefold. First, as a benefit tax the property tax is simply a payment for public services received, analogous to purchases of goods and services for private markets. Second, because the property tax functions as a market price, its use implies that local public services are provided efficiently. Third, the property tax, like all benefit taxes, results in no redistribution of income across households and thus has no impact on the distribution of income.

By comparison, under the capital tax view derived by Mieszkowski (1972) and elaborated by Zodrow and Mieszkowski (1986b), the property tax is a tax on the use of capital and thus inefficiently distorts resource allocation by driving capital investment out of high tax jurisdictions and into low tax jurisdictions. The capital tax view divides the incidence of the property tax into two components. The national average tax burden is in effect a “profits tax” borne by all capital owners, including homeowners, businesses, and investors. The local or “excise tax” components of property tax rates that fall above or below the national average are borne locally through changes in land rents, wages, or housing prices.

The incidence effects of local taxes that are higher and lower than the national average tend to cancel one another in the aggregate. Therefore, the profits tax effect is the main factor determining the incidence and distributional effects of the property tax. From the perspective of any single taxing jurisdiction, however, the burden of local expenditures financed by the property tax tends to be borne primarily by local residents.

The capital tax view has different implications for taxpayers in all three of the areas noted above for the benefit tax view. First, the tax has some significant benefit aspects in that local tax increases tend to be borne by local residents. Second, the tax inefficiently distorts housing consumption decisions; moreover, use of the local property tax can also lead to inefficient underprovision of local public services if government officials, concerned about tax-induced loss of investment, then reduce the level of public services (Zodrow and Mieszkowski 1986a). Third, because the primary effect of nationwide use of the property tax is a reduction in after-tax returns to capital owners, it is a highly progressive tax. Nevertheless, from the perspective of a single taxing jurisdiction, the local tax is not borne by capital owners as a whole but rather by local residents and is a roughly proportional tax. (See Table 1 for a summary of these two views.)

Capitalization and the Incidence of the Property Tax

My recent research sponsored by the Lincoln Institute has focused on a single but critical aspect of this long-standing debate. Dating back to the seminal work of Oates (1969), empirical evidence of the interjurisdictional capitalization of the discounted values of local property taxes and public services into house prices has been interpreted as offering support for the idea that property taxes can be viewed as payments for local public services received, consistent with the benefit tax view.

This notion was extended to the case of intrajurisdictional capitalization in the pathbreaking work of Hamilton (1976). In this model, which is characterized by perfectly mobile households with heterogeneous demands for housing and fixed housing supplies, intrajurisdictional fiscal capitalization converts the local property tax into a pure benefit tax, even though all houses are not identical. Specifically, high-value homes sell at a discount that reflects the capitalized present value of their “fiscal differential”—the present value of the excess of future taxes paid relative to public services received.

Similarly, low-value homes should sell at a premium that reflects the capitalized present value of the extent to which future taxes paid are less than the value of public services received. As a result, all households “pay for what they get” in public services, and the property tax is an efficient benefit tax. Capitalization thus implies that it is futile to follow the conventional strategy of buying a low-value home in a high-value community in order to receive local services at relatively low cost.

In supporting the idea that the combination of strict zoning regulations and fiscal capitalization converts the property tax into a benefit tax, Fischel (2001) interprets the extensive literature on the capitalization of property taxes and public services as demonstrating that fiscal “capitalization is everywhere.” He concludes that empirical support of fiscal capitalization provides compelling evidence that the benefit tax view accurately describes the effects of the property tax. Fischel makes this argument in the context of a model in which local governments are analogous to municipal corporations that maximize the house values of “homeowner-voter shareholders” who strive to protect their housing investments.

The central result of my research is that even if empirical evidence of the phenomenon of fiscal capitalization implies that it is indeed “everywhere,” such evidence does not establish the validity of the benefit tax view. Rather, my model shows that if one adopts all of the admittedly stringent assumptions of the benefit tax view, complete intrajurisdictional land value fiscal capitalization is also entirely consistent with, and indeed predicted by, the capital tax view of the property tax.

When combined with earlier results that demonstrate that interjurisdictional capitalization is also consistent with the capital tax view, my research results imply that the widely observed phenomenon of property tax capitalization provides little if any grounds for distinguishing between the capital tax and benefit tax views. That is, capitalization does not tell us whether the property tax should be viewed primarily as a progressive tax on all capital that inefficiently distorts decisions regarding housing consumption (the capital tax view), or an efficient user charge that has no effects on the distribution of income (the benefit tax view).

A Reconstruction of the Benefit Tax View

My research begins by reconstructing the Tiebout-Hamilton benefit tax view within the context of a partial equilibrium version of the standard differential tax incidence model, which focuses on the effects of use of the property tax in a single taxing jurisdiction. This approach is necessary because the derivations of the benefit tax and capital tax views of the property tax are based on somewhat different theoretical approaches.

Hamilton’s benefit tax view model characterizes the properties of an economy in equilibrium, with local public services financed by residential property taxes rather than the head taxes assumed by Tiebout. In contrast, the derivations of the capital tax view, such as those in Mieszkowski (1972) and Zodrow and Mieszkowski (1986b), are based on the differential tax incidence analysis pioneered by Harberger (1962). Under this approach, the effects of the property tax are analyzed by first constructing an initial equilibrium with either no taxes or only nondistortionary lump-sum taxes, and then introducing property taxes and analyzing their effects.

To facilitate a comparison of the two views, my analysis begins by deriving all of the benefit tax view results obtained in Hamilton’s model of intrajurisdictional fiscal capitalization within the context of a differential tax incidence model, one that is typical of the capital tax view but nevertheless makes the essential—and admittedly rather stringent—assumptions characteristic of derivations of the benefit tax view. In particular, households are perfectly mobile across competing local jurisdictions with an exogenous source of income, and there are a sufficient number of jurisdictions to satisfy all tastes for local public services.

Following Hamilton, the model has two different types of households, one of which demands relatively larger houses. Initially, the local economy is assumed to be in a Tiebout equilibrium, with local public services as well as housing and the composite good provided at efficient levels, and with local public services being financed by uniform head taxes per household. The fixed supply of land within a jurisdiction is used either for large houses for “high demanders” or small houses for “low demanders.”

Property taxes on all land and capital within the jurisdiction are then introduced into the model, with the revenues used to reduce the level of head taxation while holding the level of public services per capita fixed. Zoning is also introduced, by assuming that the amounts of land used for large and small houses are fixed. This is a weak version of the approach followed by Hamilton, who assumes fully developed communities and thus precludes any change in land or capital allocated to the two types of housing. Indeed, some form of land use zoning is required for any capitalization to occur since, in the absence of zoning, all land within the jurisdiction would in the long run sell for the same price and there would be no capitalization (Ross and Yinger 1999). In this derivation of the benefit view, housing capital is also assumed to be fixed, as in Hamilton’s analysis.

The effects of introducing property taxes on both housing capital and land in this initial equilibrium are identical to those predicted by Hamilton. First, for large homes, which experience a disproportionately larger increase in property taxes, the resulting negative fiscal differential is fully capitalized into lower housing prices. Similarly, small houses sell at a premium that exactly reflects the negative fiscal differential between total property taxes paid and the associated benefits of the tax change as measured by the reduction in head taxes.

Second, the net change in land values due to capitalization in a heterogeneous jurisdiction is zero; that is, the aggregate amount of the discount in land prices for larger homes equals the aggregate amount of the premium in land prices for smaller homes. Third, the price of each type of housing rises by just enough to offset the cost of the public services that must be financed with property taxes.

To sum up, all of the benefit tax view results obtained by Hamilton are obtained within the context of a partial equilibrium differential tax incidence model of a single taxing jurisdiction that is comprised of households that are homogeneous with respect to demands for public services, but heterogeneous with respect to demands for housing. Once again, capitalization implies that the property tax is a benefit tax. Accordingly, the combination of property tax payments and capitalization effects implies that (1) taxpayers pay for all their local public services; (2) both housing and local public services are consumed at efficient levels; and (3) the property tax results in no redistribution of income.

Capitalization Under the Capital Tax View

Converting this model to accommodate a version of the capital tax view is straightforward. Recall, however, that this approach considers the effects of the property tax from the perspective of a single taxing jurisdiction, which is modeled as a small open economy that faces a perfectly elastic supply of capital. Since the net rate of return to capital is fixed by assumption, the effect of nationwide use of the property tax on the return to capital cannot be analyzed. Nevertheless, within the single taxing jurisdiction framework the effects of the property tax on the allocation of housing capital, as well as the effects of this tax-induced reallocation on all other variables, including the changes in land prices that are the focus of the analysis, can still be derived.

The key distinction between the benefit tax and capital tax views of the property tax is that under the latter approach the stocks of housing capital are not assumed to be fixed (although the zoning assumption of fixed land supplies for the two types of housing is maintained). That is, under the capital tax view, which clearly reflects a relatively long-run view of incidence, households can reduce their housing consumption in response to an increase in the property tax.

Given these assumptions, the implications of the capital tax version of the model are as follows. First, capital flows out of the production of large houses where property taxes are high relative to benefits received, and into the production of smaller homes where the property tax bill is low relative to benefits received. This reallocation of housing capital is an important factor in determining incidence—who ultimately pays the property tax. The analysis shows that land rents unambiguously increase for land used for small houses and decrease for land used for large houses, and it is these changes in land rents that are capitalized into land prices. The key result is that these land value capitalization effects under the capital tax view are precisely the same as those calculated previously under the benefit tax view. Thus, the existence of capitalization does not help resolve the critical issue of whether the benefit view or the capital tax view more accurately describes the incidence and economic effects of the property tax.

The other results derived in Hamilton’s model obtain in this capital tax model as well. The net effect of property tax capitalization on aggregate land value within the taxing jurisdiction is zero. Similarly, the effects of the property tax on housing prices—which rise by an amount just sufficient to offset the value of public services received—are also identical under the two models, implying that housing prices for smaller homes increase proportionately more than prices for larger homes.

Despite this distortion of the allocation of housing capital under the capital tax view, the local effects of use of the property tax still have some very important features that are characteristic of a benefit tax. For example, residents pay for net local public services received (those not financed with head taxes) in the form of higher housing prices. Simultaneously, fiscal differentials are capitalized into land values, so that the net effect of the property tax burden and land value capitalization is that future purchasers of both types of houses effectively pay for what they get in public services.

Thus, the essential difference between the two views of the property tax is that, under the capital tax view, land value capitalization occurs due to capital reallocations across housing types, implying inefficiency in the housing market. Under the benefit tax view, capitalization occurs with respect to fixed housing capital stocks, and there is no distortion of the allocation of housing capital. For example, if a local government finances an increase in public expenditures with additional property taxes, the resulting capitalization effects are the same under both views (and cause the same gains and losses at the time of implementation). However, the capital tax view implies that in the long run housing demands will decline, while housing consumption remains unchanged under the benefit tax view.

My model also shows that under the capital tax view per capita housing consumption declines unambiguously for both types of households, which is the standard result that the property tax causes an inefficient reduction in housing consumption. In addition, the number of households that purchase small houses unambiguously increases, while the net effect on the number of households that purchase large houses is theoretically ambiguous, and the total population in the jurisdiction increases.

Conclusion

This analysis shows that, within the context of a partial equilibrium analytical framework characterized by assumptions typical of the benefit view of the property tax, intrajurisdictional capitalization into land values of fiscal differentials is entirely consistent with, and indeed predicted by, the capital tax view of the property tax. Earlier results demonstrate that interjurisdictional capitalization is also consistent with the capital tax view (Kotlikoff and Summers 1987). Together, these results suggest, counter to the claims of benefit tax proponents, that empirical evidence supporting full capitalization of property taxes in land values—either within or across jurisdictions—provides little if any evidence that allows researchers to distinguish between the capital tax and benefit tax views.

Instead, the key issue is whether the zoning restrictions or other mechanisms stressed by proponents of the benefit tax view are sufficiently binding to preclude the long-run adjustments in housing capital predicted by the capital tax view. This issue promises to be a fertile topic for future research, which may help clarify the answer to the long-standing and critical question of who pays the residential property tax.

George R. Zodrow is professor of economics and Rice Scholar in the Tax and Expenditure Policy Program of the Baker Institute for Public Policy at Rice University in Houston, Texas.

References

Fischel, William A. 2001. Municipal corporations, homeowners and the benefit view of the property tax. In Property taxation and local government finance, Wallace E. Oates, ed., 33–77. Cambridge MA: Lincoln Institute of Land Policy.

Hamilton, Bruce W. 1976. Capitalization of intrajurisdictional differences in local tax prices. American Economic Review, 66 (5): 743–753.

Harberger, Arnold C. 1962. The incidence of the corporate income tax. Journal of Political Economy, 70 (3): 215–240.

Kotlikoff, Laurence J., and Lawrence H. Summers. 1987. Tax incidence. In Handbook of Public Economics, Volume I, Alan J. Auerbach and Martin S. Feldstein, eds., 1043–1092. Amsterdam: North Holland.

Mieszkowski, Peter. 1972. The property tax: An excise tax or a profits tax? Journal of Public Economics 1 (1): 73–96.

Oates, Wallace E. 1969. The effects of property taxes and local public spending on property values: An empirical study of tax capitalization and the Tiebout hypothesis. Journal of Political Economy, 77 (6): 957–961.

Ross, Stephen, and John Yinger. 1999. Sorting and voting: A review of the literature on urban public finance. In Handbook of Regional and Urban Economics, Volume 3, Paul Cheshire and Edwin S. Mills, eds., 2001–2060. Amsterdam: North Holland.

Tiebout, Charles M. 1956. A pure theory of local expenditures. Journal of Political Economy, 64 (5): 416–424.

Zodrow, George R. 2001. Reflections on the new view and the benefit view of the property tax. In Property taxation and local government finance, Wallace E. Oates, ed., 79–111. Cambridge MA: Lincoln Institute of Land Policy.

Zodrow, George R. and Peter Mieszkowski. 1986a. Pigou, Tiebout, property taxation and the under-provision of local public goods. Journal of Urban Economics, 19 (3): 356–370.

———. 1986b. The new view of the property tax: A reformulation. Regional Science and Urban Economics, 16 (3): 309–327

High land costs are an obstacle to developing and securing affordable housing for lower-income families. One way to address this issue is to purchase a house without the land, and a community land trust is one mechanism that allows this arrangement. This article reports on a roundtable attended by researchers, policy analysts, technical assistance providers, funders, and community land trust staff members to discuss the community land trust model and related research needs.

The community land trust model is an extremely attractive mechanism for maintaining and expanding the stock of affordable housing. Currently there are approximately 160 community land trusts operating in every region of the country. These community land trusts are nonprofit, community-based organizations whose mission is to provide affordable housing in perpetuity by owning land and leasing it to those who live in houses built on that land. In the classic community land trust model, membership is comprised of those who live in the leased housing (leaseholders); those who live in the targeted area (community members); and local representatives from government, funding agencies and the nonprofit sector (public interest) (Burlington Associates 2003).

A lease within a community land trust also includes a resale formula intended to balance the interests of present homeowners with the long-term goals of the community land trust—balancing the interest of homeowners and the interest of the community land trust to provide affordable housing for future homeowners.

This article addresses some of the questions surrounding the community land trust model;

• Do community land trusts provide long-term affordable housing?
• Do community land trusts contribute to individual asset building?
• How effective are public and nonprofit sector funds when used to produce community land trust housing?
• Do community land trusts provide access to urban services and/or regional opportunities for leaseholders?
• Do community land trusts contribute to community building?
• Why have some community land trusts excelled and others failed?

This article also examine the Sawmill Community Land Trust, located near downtown Albuquerque, New Mexico. In partnership with the City of Albuquerque, Sawmill Community Land Trust’s has created a permanent stock of affordable housing in the neighborhood with housing units as well as a plaza, park, community center, commercial space and open space connected with trails. The plan calls for expanding the Sawmill Community Land Trust model to other neighborhoods to ensure a permanent stock of affordable housing and a mixed-income community for the long term.

For many households experiencing lagging wages or underemployment, the purchase and financing of a house is increasingly difficult. High land costs are another obstacle to developing and securing affordable housing for lower-income families in some markets. One way to address this second issue is to purchase a house without the land, and a community land trust (CLT) is one mechanism that allows this arrangement. This article reports on a roundtable attended by approximately 25 researchers, policy analysts, technical assistance providers, funders and CLT staff members to discuss the CLT model and related research needs. The December 2004 program was sponsored by the Lincoln Institute in partnership with the Institute for Community Economics (ICE), based in Springfield, Massachusetts.

What are community land trusts and How Do They Function?

The community land trust model has evolved in the United States over the last 40 years (ICE 1991). Currently there are approximately 160 CLTs operating in every region of the country and in 38 out of the 50 states and the District of Columbia. These CLTs are nonprofit, community-based organizations whose mission is to provide affordable housing in perpetuity by owning land and leasing it to those who live in houses built on that land. Complementing their status as nonprofit corporations, as defined in the U.S. tax code, and their formal rights and responsibilities codified in the ground lease, CLTs are governed by a board of directors with membership from the community. In the classic CLT model, membership is comprised of adults who live in the leased housing (leaseholders); adults who live in the targeted area (community members); and local representatives from government, funding agencies and the nonprofit sector (public interest) (Burlington Associates 2003).

The community land trust and the homeowner agree to a long-term ground lease agreement (typically 99 years) that spells out the rights and responsibilities of both parties. Among the homeowner’s rights are the rights to privacy, the exclusive use of the property, and the right to bequeath the property and the lease. The CLT has the right to purchase the house when and if the owner wants to sell.

The community land trust’s abiding interest, as the landowner, as the party with the option to purchase the improvement, and as a community-based organization, is to maintain a stake in the relationship long after the original house purchase and lease signing. For example, if buildings become deteriorated, the CLT can force repairs; if the homeowners are at risk for default the CLT can and does act to forestall the default.

The ground lease also includes a resale formula intended to balance the interests of present homeowners with the long-term goals of the community land trust. The intent of affordability in perpetuity is in conflict with the desire of most owner-occupants in the U.S. to reap real estate gains. Thus, the resale formula is designed to balance the interest of individual homeowners to benefit from the use of their home as a real estate investment and the interest of the CLT to provide affordable housing for future homeowners.

Research Agenda

The community land trust model is an extremely attractive mechanism for maintaining and expanding the stock of affordable housing. While the stories one hears from and about CLTs are encouraging and inspiring, little research exists regarding their effectiveness. Furthermore, despite their many attractive attributes, CLTs are neither well known nor extensively used in the U.S. During roundtable discussions, the participants exchanged perspectives and identified six clusters of questions that would constitute a short-term CLT research agenda to help inform future action.

Do community land trusts provide long-term affordable housing?

The separation of ownership of land and buildings is the mechanism by which long-term affordability is achieved. Much of the value in structures comes from their functionality, the materials used and the level of maintenance. These are the contributions of the builder and owner. Much of the value in land comes from its location with respect to natural elements, urban services such as transportation and public schools, and disamenities such as solid waste dumps or prisons. Many of the factors that contribute to land value increases are due to the economic expansion that occurs in metropolitan areas. In strong markets the pace of value increases in land exceeds that of structures. Thus, if the land is excluded from the price of housing, affordability ought to be assured over time. Research is needed to evaluate the effectiveness of the CLT tool in providing long-term housing affordability and to evaluate CLTs as compared to other affordable housing programs.

Do community land trusts contribute to individual asset building?

community land trust housing provides residents with shelter, security of tenure, access to credit and access to urban services, among other benefits. However, individual real estate profits are limited by the design of the resale formula, which varies among CLTs. Outcomes also will vary with real estate cycles in particular cities and regions. A second question, then, has to do with the degree to which the limitation on real estate profits limits individual asset building. It is possible, for example, that the security of tenure and the predictability in housing costs provided by the CLT allow individuals to pursue other, non-real estate strategies for asset accumulation.

How effective are public and nonprofit sector funds when used to produce community land trust housing?

In most cases, community land trust housing requires subsidies for the purchase of land and/or house construction. Grants typically come from government sources or private foundations. One of the premises of the CLT model is that these subsidies are recycled later to reclaim the value of the subsidies and to benefit future homebuyers. Public subsidies are no longer needed when a CLT house is sold under the resale formula. However, it is not known how efficient subsidies are when used to develop CLT housing and how the subsidy capture mechanisms work.

Do community land trusts provide access to urban services and/or regional opportunities for leaseholders?

Quality of housing in the U.S. is closely related to residential location. However, location influences more than simply house quality; it also affects the existence and quality of job opportunities and urban services such as access to transportation, health care, libraries and public schools, all of which have direct and indirect effects on quality of life and life chances.

Researchers looking at regional policy solutions are particularly interested in whether and how community land trusts influence this access to urban services. Economists use the term “spatial mismatch” to refer to the imbalance between the location of many employment opportunities in the suburbs and the location of unemployed jobseekers in the city centers. Many participants at the roundtable were interested in exploring the degree to which CLTs facilitate bridging this mismatch because of their specific location within a region, their connections to other organizations in the neighborhood and region, or employment and training programs offered to support CLT residents.

Do community land trusts contribute to community building?

Community land trusts are unique among U.S. community-based organizations in that their concerns are geographically focused and include economic relationships, the governance structure of the organization, and the provision of direct services. In some communities CLTs are connected to other organizations serving the same community or the same constituency. Much of the literature on neighborhood development and revitalization focuses on the importance of “social capital” to people and their community. Do CLTs contribute to this connective tissue of neighborhoods? How and why? Some CLTs operate across a number of communities and thus have a more regional focus. This difference among CLTs will lead us to consider questions of scale and community definition.

Why have some community land trusts excelled and others failed?

There is great variation in community land trusts across the country. The largest, Burlington Community Land Trust in Vermont, has 370 single-family homes and condominiums and 270 rental apartment leases; other CLTs may have just a handful of units available for lease. Some CLTs have been able to grow significantly while others have not, and some have ceased peration altogether. There are many possible reasons for this variation in success, including staff resources and skills; differences in mission; financing arrangements; ability to receive donations of land; and the strength or weakness of the local land and housing market.

Future Activities Regarding community land trusts

The Lincoln Institute is interested in community land trusts because they provide a window that encourages a deeper understanding of the significant role that land plays in social and economic development and the mechanisms by which it occurs. The roundtable participants hope that investigation into this research agenda would accomplish a number of objectives.

First, new research would spread knowledge of community land trusts to practitioners in fields ranging from urban development to housing policy, neighborhood planning, community organizing, regional sustainability and equity. Second, among policy analysts this research will improve our understanding of the strengths and weaknesses of the CLT model and the contexts in which it is most useful and successful. For CLT members, leaseholders, staff and board members, the findings will provide an understanding of their locally based work within a national context. For funders and lenders the investigations will provide an empirical base from which to make future funding decisions.

This work will be conducted by the Lincoln Institute, the Institute for Community Economics, representatives of organizations who attended the roundtable and others who become engaged in these issues. For example, the National Housing Institute already has begun a study of shared equity home ownership. We expect that documenting, investigating and analyzing the history of CLTs and individual experiences will provide a better understanding of the role of land in housing affordability.

Sawmill Community Land Trust

Sawmill Community Land Trust (SCLT) is located near downtown Albuquerque, New Mexico, adjacent to Historic Old Town, which has become a leading tourist attraction. Gentrification has increased the housing prices in the Sawmill neighborhood, and vacant industrial land has increased from $1.05 per square foot in 1996 to its current high of $4.10 per square foot. A home that sold for $26,500 in 1981 cost $125,000 in 2000 and $175,000 in 2004. From 2000 to 2004, real increases in a single-family home (land and housing) in the neighborhood increased by 31 percent.

Founded in 1996, SCLT evolved from existing community organizations that had been working for years to protect the character of the ethnically diverse Sawmill community and address environmental and pollution problems caused by a particleboard factory on the site. SCLT’s main focus has been to create a permanent stock of affordable housing in the neighborhood.

In partnership with the City of Albuquerque, which acquired the 27-acre former industrial site, SCLT developed plans for 196 housing units of various types (live-work lofts, single-family detached houses, townhouses, duplexes, senior apartments and condos) as well as a plaza, park, community center, commercial space and open space connected with trails. All of the 26 homes built in the first phase of development have been sold, and construction of a second housing phase will begin soon. SCLT has led a cooperative effort to develop a metropolitan redevelopment plan for the surrounding 510-acre Sawmill/Wells Park area. The plan calls for expanding the SCLT model to other neighborhoods to ensure a permanent stock of affordable housing and a mixed-income community for the long term.

Rosalind Greenstein is senior fellow and co-chair of the Lincoln Institute’s Department of Planning and Development. Yesim Sungu-Eryilmaz is a research assistant in the Lincoln Institute’s Department of Planning and Development.

References

Burlington Associates in Community Development, LLC. 2003. Key features of the “classic” community land trust. Burlington, VT: Burlington Associates.

Institute for Community Economics (ICE) 1991. The community land trust legal manual. Springfield, MA: ICE.

Resources

Burlington Community Land Trust

Fannie Mae Corporation (search for the link to CLTs)

Institute for Community Economics (ICE)

Policy Link. See Equitable Development Toolkit and link to CLT case studies.

National Housing Institute (NHI)

Public policy changes often have unintended consequences—side effects, feedback effects, benefits to individuals not in the target group, unexpected costs, perverse incentives, new opportunities to game the system, and the like. Early experiences with assessment limitation measures reveal an unanticipated result: some property owners seemingly targeted to benefit from lower assessments may be harmed instead.

Universities are involved in the development of their immediate neighborhoods for a variety of reasons. For some, it is a matter of self-preservation and marketing, as neighborhood deterioration and disinvestment can negatively affect student enrollments. Other institutions are driven primarily by the need for new or updated facilities, such as laboratories, classrooms, student housing or athletic fields, which require expansion beyond existing campus boundaries, or by a long-standing commitment to neighborhood redevelopment. However, in tight urban real estate markets, where renters and low-income households already feel the threat of displacement, university expansion plans can serve to intensify residents’ apprehensions and lead to complicated land use disputes.

Universities have responded to disinvestment and dilapidation in their neighborhoods by using a variety of strategies. These include the acquisition and rehabilitation of abandoned buildings or vacant properties; support of faculty and staff home ownership in the area; improvement of local public services, including public schools and public safety programs; redevelopment of key nonresidential and commercial properties; and, at times, the encouragement of community involvement in the redevelopment process. New development often requires a fresh approach to architecture and urban design, since historically many institutions deliberately cut themselves off from their neighbors. Steve Cottingham, of Marquette University in Milwaukee, refers to this new approach as “weaving in, rather than walling out.”

Even when universities succeed in securing new development sites, they have to balance many competing demands. For example, donors favor signature buildings; the city requires regulatory compliance; neighborhood activists call for input into the school’s expansion plans, as well as benefits from that expansion; parents want a safe environment for their children; and students desire retail and entertainment options, as well as housing and security. Meeting all of these demands is difficult and none of the possible responses speaks directly to furthering the core educational mission of a university.

Roles and Responsibilities of Urban Universities

Last February, the Lincoln Institute, the Great Cities Institute of the University of Illinois at Chicago and the Urban Land Institute convened a group of executive-level university administrators involved in real estate decision making to address these issues. The seminar participants discussed specific real estate development cases as well as general concerns, such as finance and taxation, internal organizational structures, working with developers, and community involvement. Participants were interested in the technical aspects of urban development, but also in the expectations and accompanying responsibilities placed on universities in an urban context.

Universities remain one of the few examples of long-established, place-based institutions in urban areas, and they typically have a significant physical presence in their communities. While their faculty, staff and students place many demands on local public and private services, from increased traffic and police protection to escalating housing costs, universities also provide considerable cultural, social, intellectual and economic benefits. The well-known identity of most universities contrasts with that of private-sector corporations that frequently merge and relocate to suit their changing needs and to respond to the highly competitive, globalized economy. Universities typically do not have this option, so they depend on (and contribute to) the health and vitality of their local communities to protect their vested interests. The quality of the surrounding environment directly affects the competitive advantage of a university, which is crucial to attracting and retaining the best students and faculty. In turn, communities increasingly look to universities to fill the gaps left by departed corporate leadership.

Broad Street Development in Columbus, Ohio, exemplifies this kind of university-community interdependence. Campus Partners, a nonprofit redevelopment corporation started by Ohio State University, has secured the purchase option for this 1,400-unit, scattered-site public housing project. Broad Street’s Section 8 contracts from the U.S. Department of Housing and Urban Development (HUD) have expired or are about to expire. Typically, when the federal government restructures or extends these contracts there is a significant reduction in the rent subsidy available to low-income households and little or no money available for rehabilitation of the properties. Campus Partners is working with local organizations to implement a better level of management and structural rehabilitation than is typical for Section 8 projects. Although this housing redevelopment is unrelated to Ohio State’s mission, and the university was initially reluctant to take on the responsibility, when faced with the likelihood of continued physical decline near the campus, the university decided there was no other option than to pursue the project.

As universities expend resources on local revitalization projects, they often set other forces in motion that may alter or threaten the cultural and demographic identity of the neighborhood. Real estate development can contribute to increases in the value of the land and community amenities, but it can also displace existing residents and businesses that cannot compete in tighter and more expensive land and housing markets. Seminar participants debated the responsibility of universities to address neighborhood gentrification and housing shortages due to rising land markets in the same way they previously responded to neighborhood decline. The University of Chicago, for example, has long invested in making its neighborhood an attractive residential community. Now, that strategy is being challenged because many long-term residents, both university employees and other urban dwellers, can no longer afford to live there.

Universities also face challenges from falling land markets. For example, some universities are surrounded by privately owned housing that caters to students, and those landlords often engage in short-term management practices to maximize their profits. Substandard property maintenance, coupled with high turnover of rental units, can lead to rapid deterioration in the housing stock. This behavior can either start or reinforce the process of declining property values and neighborhood deterioration-a process that fails to benefit either the university community or the neighborhood. Such a situation recently motivated the University of Pennsylvania to enter into a partnership with the Fannie Mae Corporation, First Union Bank and Trammell Crow Company to preserve and develop moderate-cost rental housing options for the broader community, and to provide high-quality management of the units.

Employer-assisted housing (EAH) strategies have also been used by the University of Pennsylvania and other universities to promote home ownership for their faculty and staff. Jim Gimpel, of the University of Illinois at Chicago, underscored the value of developing housing for staff, including the custodial, clerical and food service workers who are crucial to a university’s operation yet are among the lowest paid employees. With EAH, a university provides financial incentives, such as down-payment assistance, forgivable loans or a mortgage guarantee, to help employees purchase existing local homes. In some cases, a university may even develop the housing, but will rarely manage it. Sandra Lier, now at the University of Washington, drew on her experiences at the University of California at Irvine, which developed a faculty housing complex. After it was completed, an intermediary took over the management of the housing so that applications and complaints would be handled by the management firm rather than the university itself.

Town-Gown Tensions

Increasingly, communities are holding universities accountable for their development actions that affect the surrounding neighborhood. Historical town-gown antagonisms, coupled with the high expectations that communities hold for universities, mean that good will is more easily eroded than earned. For example, in the mid-1990s, without public input or consultation, Marquette University decided to close a major thoroughfare to traffic and create new green space for the campus. Although the plan was never carried out, the university lost much of the good will it had gained through earlier, highly successful development projects.

Openly discussing university plans with the community can help keep a project on track and avoid compromising situations when unforeseen obstacles arise, according to Terry Foegler of Campus Partners in Ohio. For example, the University of Minnesota, Twin Cities recently implemented a mandatory Neighborhood Impact Assessment that makes the university’s planning vision accessible to the public and requires the university to consider alternatives to its master plan, including the option to stop building in certain locations.. However, while community groups want universities to make their plans known, university real estate developers are generally averse to publicizing their acquisition plans, and they commonly establish a 501(c)(3) nonprofit corporation when purchasing land or properties. By buying “blind” (i.e., blind to the seller), the university is protected from the likely premium that sellers would demand were the buyer (and its presumed deep pockets) known. This is an example of how universities are often held to higher standards of development, and it is one area where the university and the community will likely continue to disagree, according to seminar participants.

The contentious issue of tax-exempt status for nonprofit educational institutions was addressed at the seminar by Joan Youngman, senior fellow and director of the Lincoln Institute’s taxation program, and Bill Stafford, finance director for the City of Evanston, Illinois, the home of Northwestern University. After churches, universities are in the strongest legal position with respect to their tax-exempt status. Still, the issue is confusing because vested interests are clear, yet are clearly in opposition. In practice, the property tax is a hybrid consisting of a user charge for services and a wealth charge based on the property’s value. Many municipalities favor user charges or fees-for-services, as opposed to property taxes, to obtain revenue from a university, and the race for revenue can lead municipalities to creative ideas. For example, one California city wanted to charge a university for its scenic view. Universities, on the other hand, feel there is some ambiguity with respect to what benefits they actually receive from municipalities, since universities provide many of their own services, such as street plowing and campus police protection.

Despite the controversial negotiations between universities and municipalities around property taxes and payments in lieu of taxes (PILOT), the actual payments may be relatively small, according to Youngman. Depending on the size of the city and the diversity of its local economy, the university payment may not be a meaningful share of local revenues, and several seminar participants confirmed this observation. Smaller cities tend to look to their universities as a more important source of revenue than do large cities, and controversy over tax-exempt status tends to escalate when universities expand their activities beyond their traditional and clearly academic roles. For example, when a university owns property that contains not only research offices and laboratories but also a bookstore, a Starbucks and a Kinko’s, should it be tax-exempt? Frank Mares, of DePaul University in Chicago, described a mixed-use project in which specific university uses are tax-exempt while the parking garage and retail spaces are taxed, essentially creating separate taxing districts.

Stafford of Evanston pointed out that there are legitimate public policy questions regarding the uses and abuses of nonprofit organizations. The nonprofit status of universities stems from the long-held belief that they contribute to the public good. However, this privileged status was based on an implicit understanding that the university did not make a profit on its activities. There are currently numerous examples of ways universities challenge this assumption. For example, when professors market themselves as consultants, working from their university-provided offices and capitalizing on the university’s “brand name,” are they acting in the public interest? Furthermore, the endowments of many universities exceed the operating budgets of the cities and towns in which they reside. Stafford concludes, “the university, at best, is a subsidized citizen.”

Yet, from the perspective of the university, increasing competition has forced universities to walk a fine line between remaining faithful to their missions and vying with other institutions to recruit and retain students and faculty, and to meet ever-growing demands for newer athletic and academic facilities, bigger and better dorm rooms, or more sophisticated telecommunications resources. The role played by universities in their communities has altered considerably over the past few decades and, at a minimum, further clarification of public policy intent and tax law regarding tax-exempt status needs to be revisited.

While the university must address the concerns of its local community, it also faces pressures to respond to broader regional goals. Local governments increasingly view universities as engines of economic development-both programmatically and physically-and as “economic anchors” in the city. Norma Grace, of the University of New Orleans, remarked on a common expectation that universities will create jobs and help local entrepreneurs, yet due to increasing budget demands universities have few resources to support this community goal. As one participant put it, the university cannot be only a real estate developer, because there are consequences to its actions; it needs to be a community developer as well. Hank Webber, of the University of Chicago, stated, “We’re not malevolent, we’re just wrong a lot of the time.”

Best Practices for the Future

Because most universities will remain in their current locations indefinitely, their futures will continue to be intertwined with their surrounding neighborhoods. However, the inevitability of future change and persistent development pressure highlights the differences between universities and the private real estate sector. Profit and speed motivate private developers-two qualities not usually associated with universities, particularly public institutions. Furthermore, given the broader mission of a university, short-term, market-oriented thinking is not always suitable. It is clear that future prospects for university expansion remain a complex challenge, especially in urban areas where land available for development is limited and expensive.

This seminar was intended to begin a dialogue among university officials responsible for campus development, and it will reconvene next year in an effort to add to our knowledge of the ways urban universities’ real estate development activities contribute to the revitalization of their cities. Many seminar participants expressed an interest in institutionalizing community and real estate development practices, and they stated a preference for examining cases in depth, with input from city officials, community leaders and university administrators, to uncover the complexities of an individual project. Seminar cochairs David Perry and Wim Wiewel, of the University of Illinois at Chicago, have begun collecting such cases to use in future seminars and to broaden the ongoing debate on this topic.

Allegra Calder is a research assistant and Rosalind Greenstein is a senior fellow and cochairman of the Planning and Development Department at the Lincoln Institute.

A las grandes instituciones, como universidades, hospitales y organizaciones sin fines de lucro, se les suele llamar “anclas”, debido a su permanencia y a los lazos estabilizadores que generan, tanto en lo físico como en lo social, con las comunidades circundantes. Más allá de cumplir con sus respectivas misiones de educar, sanar, cultivar las artes o brindar otros servicios, estas instituciones educativas y médicas han demostrado ser verdaderos motores económicos: emplean una gran cantidad de mano de obra, ocupan y administran inmuebles de grandes proporciones, compran grandes cantidades de bienes y servicios, atraen inversiones a través de proyectos de capital y actividades de investigación, y brindan a los residentes acceso a la comida, a los bienes minoristas y a otros servicios. En muchos casos, las instituciones “ancla” son los empleadores de mayor envergadura, fuera del ámbito público, en sus ciudades. De hecho, según estimaciones del Departamento de Vivienda y Desarrollo Urbano (HUD), las instituciones educativas y médicas dieron empleo a más de 7 millones de personas y generaron un billón de dólares en actividades económicas durante el año 2009 (Brophy y Godsil 2009).

En algunos casos, se genera una dinámica de beneficios mutuos entre la institución “ancla” y la comunidad en donde se encuentra, lo que da como resultado la creación de corredores comerciales económicamente sostenibles, calles llenas de vida y barrios con una población densa y diversa. Muchas de las grandes ciudades universitarias en los Estados Unidos muestran esta productiva interacción. Sin embargo, en muchos otros casos, especialmente en las áreas urbanas que carecen de servicios suficientes, el liderazgo institucional y civil debe ser más emprendedor, mediante el impulso activo de proyectos, programas y políticas con el fin de lograr estos objetivos. Dicho proceso, conocido como estrategia “ancla”, proporciona un marco guía para que las comunidades trabajen junto con las instituciones a fin de capitalizar y maximizar el impacto de su impronta.

En teoría, el valor de involucrar a las instituciones “ancla” para lograr resultados positivos en el barrio o la comunidad es evidente: todas las partes se benefician y, a la vez, es una forma inteligente de hacer negocios. No obstante, en la práctica, la comunidad y sus instituciones deben trabajar juntas para redefinir cómo alinear y apalancar sus objetivos, intereses económicos y actividades a fin de lograr un resultado que beneficie a todas las partes. En este artículo se analiza por qué resulta difícil llevar a cabo estrategias “ancla” significativas para lograr un cambio fundamental en la forma en que las instituciones “ancla” y sus comunidades se relacionan entre sí. También aprovechamos algunas de las lecciones aprendidas de medidas exitosas que se tomaron en lugares como Filadelfia, Detroit y Cleveland, en donde la participación civil integral se ha convertido en la norma a seguir de algunas de las instituciones médicas y educativas más importantes de la nación.

Parámetros para el éxito

Debe destacarse que las tácticas individuales son necesarias pero insuficientes para constituir una estrategia. Una estrategia implica una participación a largo plazo, que se implementa a través de tácticas que evolucionan a lo largo del tiempo. Además, las estrategias “ancla” implican asociarse con muchas organizaciones y personas en la comunidad circundante, y estas relaciones también deben evolucionar con el tiempo a fin de responder a las necesidades y objetivos de la comunidad diseñados para lograr que la zona sea más habitable.

Las estrategias “ancla” efectivas y transformadoras poseen tres características fundamentales: están basadas en el lugar, están incorporadas a las instituciones y son integrales.

La ventaja de los mediadores

Muchas estrategias “ancla” se ven beneficiadas con la posibilidad de tener socios en la comunidad que guíen su trabajo. Estos mediadores por lo general refuerzan la capacidad del personal de las instituciones “ancla” a fin de lograr una mayor participación de la comunidad y mayores beneficios para la misma. Algunos ejemplos de mediadores eficaces son las sociedades de desarrollo comunitario (CDC, por sus siglas en inglés) o las instituciones financieras de desarrollo comunitario (CDFI), que deben estar dirigidas por un representante de la comunidad.

Los mediadores son más ágiles que las grandes instituciones “ancla”, por lo que son capaces de negociar con diferentes socios y tomar medidas sin el peso de la burocracia. Los mediadores más exitosos son las organizaciones de la comunidad que poseen un extenso historial en la región, una credibilidad dentro de la comunidad (para que no sean consideradas como una herramienta manejada por la institución “ancla” o por las fuentes de financiación) y la capacidad de brindar un terreno neutral para debatir y llevar a cabo el trabajo “ancla”. Si la comunidad es escéptica ante un proyecto completamente impulsado por una institución “ancla”, trabajar en conjunto con un mediador de confianza puede proporcionar legitimidad a la tarea.

En Detroit podemos observar un buen ejemplo de la capacidad de una CDC de la comunidad para apalancar la iniciativa patrocinada por una institución “ancla”. Midtown Detroit Inc., o MDI, (midtowndetroitinc.org) administra Live Midtown (livemidtown.org), un programa de obtención de vivienda con apoyo de empleadores, que tiene el respaldo de la Universidad Estatal de Wayne, el Sistema de Salud Henry Ford y el Centro Médico de Detroit. Tal como señala Susan Mosey, presidente de MDI: “Es importante que haya gente de la comunidad que guíe este trabajo día a día. Esto genera familiaridad con las iniciativas, a la vez que produce credibilidad y aceptación para que las estrategias “ancla” tengan éxito”. De hecho, con la ayuda de MDI, el compromiso financiero de las instituciones “ancla”, que ascendió a 5 millones de dólares en cinco años, se vio igualado por fondos de contrapartida de fuentes de financiamiento de la comunidad, así como de la agencia estatal de financiamiento de la vivienda. Este éxito estimuló a los grandes empleadores del centro de la ciudad (Quicken Loans, DTE, Compuware y Blue Cross Blue Shield entre otros) a crear su propio programa Live Downtown de 5 millones de dólares. Entre ambos programas, más de 1.600 empleados se han mudado al centro y aledaños de la ciudad de Detroit, lo que ha reducido el índice de puestos vacantes en este corredor a menos del 3 por ciento (Welch 2014).

Basadas en el lugar

Las estrategias basadas en el lugar poseen una geografía específica y fácilmente identificable a la que la institución “ancla” afecta en forma directa, tales como edificios, espacios abiertos, entradas y redes viales que conectan una institución con la comunidad. Más allá de la orientación física de una institución, encontramos los lugares que las personas que forman parte de dicha institución (sean empleados, estudiantes, pacientes, clientes o visitantes) habitan y frecuentan. Los barrios que rodean a las instituciones y que presentan un alto nivel de usos múltiples son un apoyo al estilo de vida que define a todo distrito dinámico, promueven la actividad peatonal y generan la densidad residencial que, a su vez, crea comunidad.

Las actividades de placemaking de cualquier institución “ancla” (que dan forma a los espacios públicos de manera comunitaria a fin de intensificar su valor compartido) deben comprometer, desde el punto de vista táctico, a otras partes interesadas para poder ser consideradas como estratégicas. Estas tácticas pueden incluir: la reinversión en el barrio a través de la construcción y la rehabilitación de viviendas; el fomento del desarrollo comercial y minorista específicos; la mejora de los espacios públicos y la seguridad pública; y el fortalecimiento de los servicios locales, tales como escuelas, organizaciones sin fines de lucro y recursos comunitarios. Estas actividades benefician a la institución “ancla” de varias maneras y promueven un barrio más fortalecido, lo que aumenta el atractivo de la institución a posibles clientes (estudiantes, pacientes y personal) y genera un sentimiento de buena voluntad entre los residentes y los funcionarios municipales.

Incorporadas en las instituciones

La estrategia “ancla” debe formar parte del ADN de una institución. Dicha integración comienza cuando los líderes se comprometen con el papel que desempeña la organización a la que pertenecen como institución “ancla” y lo comunican a toda la organización. Luego, el liderazgo continúa cumpliendo esta tarea, dedicando importantes cantidades de tiempo y recursos en todas las funciones institucionales.

Para lograr la efectividad, el trabajo de una institución “ancla” requiere, por lo general, realizar ciertos cambios en la cultura de la organización, tales como modificar la estructura de recompensas, adoptar nuevas declaraciones de misión y mediciones del éxito, y examinar en forma crítica las comunicaciones, tanto internas como externas. Una vez que los programas internos, las unidades administrativas, el personal de gestión de las instalaciones y las juntas directivas logran trabajar juntos para alcanzar los objetivos colectivos, entonces la estrategia “ancla” puede comenzar a transformar la comunidad que rodea a la institución.

Integrales

Las instituciones educativas y médicas afectan a las comunidades que las rodean de muchas maneras: contratan a residentes del lugar, tienen una gran presencia física, educan o sanan a los miembros de la comunidad y producen desechos, entre otros impactos. Además de estar basada en el lugar, una estrategia “ancla” integral debe tratar los siguientes puntos de intersección:

Personal

En vista de que las instituciones “ancla” son, por lo general, el mayor empleador en una ciudad, las decisiones relativas a la contratación de personal y los beneficios de los empleados pueden tener un profundo impacto en la estructura social y económica de la comunidad. Al aumentar el porcentaje de trabajadores que provienen del lugar mismo donde la institución tiene presencia, esta puede, simultáneamente, elevar la economía de la comunidad, proporcionar empleos a aquellas personas desempleadas o subempleadas y generar un sentimiento de buena voluntad entre los vecinos. La posibilidad de conseguir viviendas con ayuda del empleador es otra inversión crucial tanto en el personal como en la comunidad circundante (Webber y Karlstrom 2009). Cuando los empleados pueden vivir cerca de la institución “ancla”, esta situación beneficia a todas las partes, ya que se reducen los costos de vivienda y transporte para los trabajadores y, a la vez, disminuye el nivel de absentismo laboral y de rotación de personal para los empleadores.

Adquisiciones

El poder de compra de las grandes instituciones “ancla” puede llegar a ser muy importante: por año, el gasto en concepto de bienes y servicios puede llegar a los cientos de millones de dólares. La captación por parte de las empresas locales de aunque sea una pequeña parte del flujo de compras puede tener un impacto significativo en la economía de la comunidad. Por ejemplo, la Universidad de Pensilvania inyectó 57 millones de dólares en la economía de la zona oeste de Filadelfia con sólo el 9 por ciento de sus compras anuales (ICIC y CEOs for Cities 2002).

Los beneficios derivados de las compras en la misma comunidad son evidentes; sin embargo, redirigir este proceso y reconocer dichos beneficios no es una tarea fácil. Por ejemplo, la institución “ancla” tal vez tenga que incurrir en costos indirectos significativos en concepto de sensibilización de la comunidad y capacitación para garantizar una continua disponibilidad de bienes y servicios producidos en el lugar. Por añadidura, nunca debe darse por sentada la existencia de proveedores confiables y competitivos en costos en la comunidad. Más aún, es posible que las instituciones de mayor envergadura tengan procesos de compra altamente descentralizados, por lo que lograr que cada departamento de la institución se adhiera a las nuevas políticas puede llevar tiempo y esfuerzo (ICIC y CEOs for Cities 2002). Es aquí cuando los mediadores de confianza de la comunidad pueden ayudar a facilitar la tendencia hacia los proveedores del lugar.

Políticas

La relación entre las instituciones “ancla” y los organismos gubernamentales municipales o regionales es, con frecuencia, complicada. En su calidad de organizaciones privadas, las instituciones “ancla” pueden creer que no necesitan responder ante el gobierno municipal. Aun más, es posible que consideren al gobierno municipal como un organismo ineficiente, ineficaz y generador de obstáculos a la hora de llevar a cabo sus óptimas estrategias de negocios. Por su parte, los gobiernos municipales y regionales pueden considerar a las instituciones “ancla” como oportunistas que consumen servicios públicos y otros beneficios públicos al tiempo que gozan de exenciones al impuesto sobre la propiedad (la mayor fuente de recaudación de los gobiernos municipales). A fin de aliviar estas tensiones, algunas instituciones han contribuido voluntariamente con “pagos en lugar de impuestos” (PILOT, por sus siglas en inglés) para compensar a los municipios por dicha pérdida de ingresos (Kenyon y Langley 2010). No obstante, una exitosa estrategia “ancla” puede establecer otras maneras de promover un trabajo mutuamente beneficioso que mejore el futuro de la institución y, a la vez, aborde problemas relacionados con las políticas municipales o regionales. Wim Wiewel, presidente de la Universidad Estatal de Portland, ha hecho especial hincapié en este sentido, al citar la adopción, por parte de la institución, de su lema “Que el conocimiento sirva a la ciudad” a principios de la década de los 90. Según sus palabras, “Servimos al área metropolitana y estamos orgullosos de ello”.

Planificación

Alguien debe coordinar estos elementos en una iniciativa coherente. Las grandes instituciones “ancla” poseen una gran capacidad de planificación interna y, con regularidad, se involucran en la planificación a largo plazo de sus emprendimientos. Cuando deciden llevar a cabo una estrategia, las instituciones “ancla” pueden utilizar esta capacidad para determinar cuál es la mejor forma de involucrarse en la comunidad y relacionarse con las partes interesadas, tanto del lugar como regionales. Además, trabajar en los procesos de planificación estratégica de las instituciones “ancla” es una forma de institucionalizar la estrategia “ancla” de manera que permanezca en el tiempo, aun después de que el presidente o director ejecutivo de la institución haya finalizado su gestión, y se convierta en la forma normal de hacer negocios.

Cómo funcionan las instituciones “ancla”

Una estrategia “ancla” exitosa ni se crea ni se implementa en un vacío. Para que cualquiera de las actividades mencionadas anteriormente sea parte de una genuina estrategia “ancla”, las instituciones “ancla” deben llevarlas a cabo de manera estratégica en sincronía con otras partes interesadas en el área. Por ejemplo, iniciar un programa de vivienda para trabajadores con ayuda del empleador o establecer objetivos de compra en el lugar puede beneficiar a los empleados o a los residentes de la comunidad, pero dichas medidas no se consideran parte de la estrategia “ancla” integral, a menos que estén conectadas a un enfoque general que abarca a toda la institución en cuanto a la participación e interacción comunitaria. Para lograr este tipo de interacción, es importante comprender cómo funcionan las instituciones “ancla”.

Las grandes instituciones sin fines de lucro, tales como las organizaciones educativas y médicas, son básicamente renuentes a correr riesgos y se toman su tiempo para realizar cambios o asumir nuevos roles. Por lo tanto, emprender una estrategia “ancla” implica un cambio fundamental en la forma en que los líderes de las instituciones “ancla” piensan y cómo funcionan sus organizaciones; esto puede llevar tiempo, implicar una serie de debates o negociaciones importantes y difíciles, y requerir un liderazgo sólido e incentivos, tanto internos como externos a la organización.

Las universidades y hospitales son instituciones “ancla” no sólo porque están enraizadas en el lugar y tienen un impacto crucial en la economía de la comunidad sino también porque son de gran envergadura. La cuestión del tamaño lleva implícita una serie de capas burocráticas, una gran cantidad de participantes que deben involucrarse en el trabajo derivado de las estrategias “ancla” y la incapacidad de moverse en forma ágil y rápida.

La figura 1 muestra la estructura típica de una universidad. En la parte superior se encuentra la junta directiva, formada por líderes del sector civil, industrial y científico, además de contar, en general, con exalumnos u otros afiliados académicos. Los miembros de esta junta interactúan con el campus de manera intermitente y se concentran en la gestión del riesgo financiero y de reputación de la universidad.

El presidente es, normalmente, un académico que puede o no tener formación en temas de administración. Los presidentes se centran en la recaudación de fondos y en la gestión de la reputación de la universidad. Los académicos, por lo general, consideran a las universidades como lugares donde reina el libre pensamiento, aislados de las fuerzas del mercado y de capital. Con frecuencia, su visión del sector administrativo es recelosa o escéptica. Por su lado, los administradores tienen, generalmente, formación en contabilidad o gestión y priorizan la seguridad del empleo. Todas estas prioridades y actitudes se combinan de manera tal que crean una cultura en la que el riesgo no se recompensa y los fracasos se castigan.

Los hospitales presentan, de manera similar, grandes estructuras burocráticas. Los organismos principales que toman decisiones son, por lo general, la junta directiva y el director ejecutivo, que se concentran en minimizar el riesgo institucional y gestionar las finanzas de manera responsable y rentable. Los administradores priorizan el hecho de cumplir con los requisitos de sus puestos y garantizar la seguridad del empleo a través de la protección institucional, mientras que es más probable que los profesionales de la salud, como médicos y enfermeros, se centren en atender a los pacientes o llevar a cabo investigaciones, sin mirar más allá de los límites de las instalaciones del hospital.

Estas culturas generan decisiones que pueden parecer lógicas para las instituciones en sí, pero que, con frecuencia, no se encuentran alineadas con los objetivos de la comunidad. Por ejemplo, la universidad puede construir zonas de estacionamiento alrededor de sus instalaciones, generalmente en los límites del campus, a fin de facilitar el acceso a la institución del cuerpo docente, el personal y los estudiantes. Sin embargo, con esta medida se incentiva a los empleados y a los estudiantes a ir a la universidad en automóvil, lo que reduce la probabilidad de que estas personas vivan en barrios desde los que se pueda llegar a pie y que visiten los comercios cercanos. Las zonas de estacionamiento generan, también, una barrera de asfalto que aísla al campus de la comunidad. De manera similar, las políticas de compra de la institución pueden fundamentarse en obtener el precio más bajo para obtener los resultados más predecibles, lo que significa que, para obtener los bienes y servicios que necesitan, recurren a los proveedores más grandes (que, por lo general, son de alcance nacional), en lugar de contratar a los proveedores del lugar. Finalmente, una universidad generalmente ubica el espacio abierto, las instalaciones destinadas a la recreación y otros servicios dentro de sus límites, lo que permite sólo una interacción limitada con los miembros de la comunidad. Para cambiar la forma en que se toman estas decisiones, resulta esencial modificar la visión que el liderazgo de las instituciones “ancla” tiene acerca de dichas instituciones en relación con su comunidad, así como también comprender la manera en que pueden cambiarse los hábitos y actitudes arraigadas.

Promover la participación de la comunidad

Existen varias maneras en las que los líderes de la comunidad, filántropos, grupos comunitarios y otras partes interesadas pueden movilizar a la institución “ancla” a asumir un nuevo rol en el barrio.

Identificar a los líderes

El liderazgo es, por lo general, un aspecto clave para una estrategia “ancla” exitosa. La filosofía y el enfoque que tenga el rector, el presidente o el director ejecutivo pueden determinar si una institución se ve a sí misma como un “ancla” y cómo actúa una vez que se define como tal, y si dichas acciones perdurarán en el tiempo. Tal como lo aconseja Benjamin Kennedy, de la Fundación Kresge: “¡Aprovechen la oportunidad! No es necesario que cada una de las personas que forma parte de la institución esté de acuerdo; sólo las personas clave. Los líderes son los que transformarán la institución y transmitirán la idea de las estrategias “ancla” a los demás”.

Un líder sólido comprometido con una estrategia “ancla” puede poner el fundamento para una participación comunitaria y un impacto más significativos. El abordaje debe estar arraigado en los niveles altos de la administración, para luego filtrarse en toda la institución, a fin de que el personal directamente responsable de llevar a cabo partes específicas de la estrategia, como el personal de recursos humanos, funcionarios encargados de las compras y profesores involucrados en los proyectos de investigación en la comunidad, comprenda sus nuevas prioridades. Dicha transición puede lograrse, en parte, cambiando la estructura de recompensas y llevando a cabo una comunicación estratégica, modificando la declaración de visión y describiendo regularmente el trabajo y los logros de la estrategia “ancla” mediante mensajes de circulación interna.

Una estrategia “ancla” tiene mayores probabilidades de obtener el éxito si muchas partes interesadas expresan su apoyo a la misma. Dentro de la institución “ancla”, puede resultar muy útil identificar al personal que apoya la idea de participación comunitaria y trabaja con los grupos del lugar para definir estrategias que beneficien a todos. Fuera de la institución “ancla”, es útil contratar líderes de la comunidad que empujen a la institución a asumir un nuevo rol. Por ejemplo, la filantropía de la comunidad, tanto en Cleveland como en Detroit, desempeñó un papel significativo a la hora de persuadir a las instituciones a unirse para formular estrategias “ancla” destinadas a las comunidades que las rodean.

Analizar las oportunidades de participación de varias instituciones “ancla”

Si en un barrio existe más de una institución “ancla”, muchas organizaciones pueden participar en los proyectos. Este abordaje ha tenido mucho éxito en Cleveland, donde diferentes hospitales, universidades y organizaciones culturales, junto con organizaciones filantrópicas del lugar, instituciones financieras y el municipio de Cleveland, han aunado esfuerzos con el fin de implementar la Iniciativa del Gran Círculo Universitario.

Aunque una estrategia en la que participan muchas instituciones “ancla” implica cierto nivel de complejidad, en vista de que aumenta la cantidad de personas y organizaciones que deben estar de acuerdo con el trabajo, igualmente puede incrementar el impacto de la iniciativa, ya que se suman muchos otros recursos y se aumenta la cantidad de líderes. Asimismo, los líderes de cada institución “ancla” pueden animarse mutuamente y reforzar el trabajo de unos y otros, a la vez que distribuyen el peso de cualquier riesgo percibido.

Identificar el interés propio

En un nivel básico, un hospital o una universidad puede emprender una estrategia “ancla” porque sus líderes creen que las mejoras que se producirán en la comunidad circundante beneficiarían a la institución. Por ejemplo, el Dr. Wallace D. Loh, presidente de la Universidad de Maryland, en College Park, se ha centrado en mejorar la calidad de vida en el barrio porque estaba preocupado de que las condiciones del lugar restaban valor a la capacidad de la universidad de atraer y retener a docentes y personal.

Las estrategias “ancla” tienen otros beneficios más indirectos. Aunque una universidad u hospital puede tomar decisiones unilaterales sobre lo que ocurre en su propio terreno, también puede enfrentar problemas que requieren el apoyo de fuerzas externas a la institución, tales como el gobierno municipal y los residentes de la comunidad. Crear relaciones sólidas y perdurables con los líderes del lugar a través del trabajo en estrategias “ancla” puede ayudar a la organización a obtener apoyo para futuros planes. Al pensar en forma holística acerca de sus relaciones con la comunidad circundante, los líderes de las instituciones “ancla” por lo general tienen el incentivo de reconceptualizar sus objetivos básicos de educación y salud. La Dra. Lucy Kerman, vicerrectora de University and Community Partnerships, en la Universidad de Drexel, lo resume de la siguiente manera: “El trabajo en estrategias “ancla” debe estar alineado con los intereses propios de la universidad y estar cimentado en el rol apropiado que desempeña la institución. Tal vez no estemos generando viviendas económicas o dirigiendo una escuela en forma directa, pero somos socios en un sistema que crea oportunidades de ingresos mixtos y ofrece la posibilidad de una educación sólida”.

Aportar recursos

Por supuesto que todo puede resumirse en la disponibilidad de recursos. Los incentivos financieros animan a las instituciones y a sus socios a llevar a cabo trabajos “ancla”, desarrollar estrategias acerca del papel que desempeñan en la comunidad, reunirse con las partes interesadas regularmente e invertir en actividades “ancla”. Por su parte, las partes interesadas de la comunidad pueden ver la oportunidad de involucrar a la institución “ancla” pero carecen de la capacidad o las herramientas para participar si no tienen nuevos fondos.

En Detroit, por ejemplo, las instituciones “ancla” se sentaron a la mesa de negociaciones por muchas razones, pero uno de los factores principales fueron los recursos financieros que ofrecieron los dos socios convocantes, las fundaciones Hudson-Webber y Kresge. Este incentivo de capital permitió el inicio de las conversaciones y, al día de hoy, continúa apoyando el trabajo. Al ofrecer fondos de contrapartida destinados a tácticas específicas, las fundaciones incentivaron a las instituciones “ancla” a comprometer sus propios fondos. Hoy en día, las instituciones “ancla” no sólo apoyan iniciativas específicas sino que también proporcionan recursos operativos a Midtown Detroit Inc., la organización de planificación y desarrollo de la comunidad que apoya y brinda personal destinado a la mayor parte del trabajo “ancla”. De esta manera, los recursos provenientes de fuentes filantrópicas plantaron la semilla de la iniciativa, a la vez que ayudaron a crear la infraestructura necesaria para una implementación y una sostenibilidad exitosas.

Cómo conectar la estrategia con la comunidad

A primera vista, las necesidades y los objetivos de la comunidad, tales como buenas escuelas, calles seguras, servicios y comodidades, oportunidades de empleo, espacios públicos y vivienda, no guardan una correlación directa con los resultados de una institución “ancla”. De hecho, si una institución genera graduados exitosos, una atención médica de gran calidad y un alto nivel de investigaciones, concluirá que ha cumplido con su tarea como ciudadana, tanto de la comunidad como del mundo.

No obstante, al alinear los objetivos de la comunidad con los aportes de una institución (docentes, personal, pacientes, estudiantes, visitantes, inmuebles, bienes y servicios), las estrategias “ancla” pueden conectar la misión de la institución con las aspiraciones de la comunidad. La contratación de residentes de la comunidad para los empleos institucionales mejora el impacto económico de una institución “ancla” dentro de la comunidad y ayuda no sólo a las familias del lugar sino también al área en general. Cuando el personal de la institución hace las compras, vive y come en el barrio, estimula la economía de la comunidad. Utilizando el marco guía de las 5 Pes, el compromiso entre la comunidad y la institución “ancla” puede lograr que las aspiraciones de la comunidad pasen de ser objetivos a convertirse en resultados.

• Placemaking. Tanto la comunidad como la institución pueden beneficiarse de la implementación cuidadosa de un programa de bienes raíces de la institución, mediante el cual puede promover un campus abierto con límites activos y limitar ciertos usos, como el estacionamiento o almacenamiento. Mejorar el estado de las manzanas que rodean la universidad o el hospital, abrir el acceso a los espacios públicos y enfocarse en cuestiones como el alumbrado público o las mejoras en las fachadas de los comercios hace que el entorno sea más seguro y saludable para los residentes, los posibles estudiantes y los pacientes. Los participantes que podrían desempeñar un papel en este proceso con sus aportes son los docentes, el personal, los estudiantes, los pacientes, los visitantes y el sector inmobiliario. Los objetivos comunitarios que pueden lograrse son, por ejemplo, calles seguras, servicios y comodidades, oportunidades de empleo, espacios públicos y variedad de viviendas.
• Personal. Al contratar personal de la comunidad, la estrategia “ancla” brinda oportunidades de empleo para los residentes del área. A medida que aumenta la tasa de empleo, la comunidad se vuelve más segura, lo que beneficia tanto a los residentes como a la institución “ancla”. En este caso, el aporte principal es el personal.
• Proveedores. La institución “ancla” puede fortalecer la economía de la comunidad contratando proveedores del lugar, lo que genera oportunidades de empleo, calles más seguras y más servicios y comodidades. La institución “ancla” también puede generar relaciones públicas positivas en cuanto a su alcance en la comunidad. En este caso, el aporte principal también es el personal.
• Políticas. Al dirigir su destreza en el campo de la investigación y la educación hacia las cuestiones de la comunidad, la institución “ancla” puede ayudar a cumplir las aspiraciones de la comunidad de tener buenas escuelas, una mayor seguridad pública, oportunidades de empleo y atención médica, lo que, a su vez, fortalece su propia reputación en la región. Para lograr este objetivo, la institución “ancla” puede reclutar a docentes, personal, estudiantes y visitantes para llevar a cabo actividades tales como el aprendizaje-servicio, la promoción de la atención médica y la enseñanza vivencial.
• Planificación. Unir todos estos esfuerzos en una misión coherente requiere que los líderes de las instituciones “ancla” conecten cada aporte con las aspiraciones de la comunidad. Una institución “ancla” puede también aportar personas con talento para la planificación a fin de lograr una correlación entre sus propios planes y los del barrio o municipio. El principal aporte en este caso es el de personal: los empleados de la institución “ancla” trabajan en conjunto para identificar de qué manera las diferentes estrategias pueden alinearse con los objetivos de la comunidad a fin de crear propuestas que beneficien a todos.

Conclusión

Una estrategia “ancla” integral, basada en el lugar e incorporada en la institución puede tener un impacto significativo en la economía, tanto municipal como regional. Sin embargo, desarrollar e implementar este tipo de estrategia focalizada requiere grandes dosis de tiempo y paciencia. Para poder unir todos los elementos necesarios (lograr la participación de los socios, convencerlos de que existe un interés propio al llevar a cabo el trabajo “ancla”, identificar a los líderes sólidos y utilizarlos para modificar los valores de sus instituciones, identificar a los mediadores y garantizar que estos poseen la capacidad para desempeñar su papel, y establecer incentivos financieros) debe existir el compromiso y la coordinación de muchas piezas móviles.

En muchos casos, el trabajo “ancla” se fundamenta en la confianza entre grupos que, con frecuencia, nunca han trabajado juntos anteriormente. Desarrollar estas relaciones implica el contacto personal y la construcción de alianzas sólidas. Además, estos esfuerzos deben darse dentro del contexto de un trabajo en conjunto con grandes instituciones “ancla”. Aquellos que desean trabajar con instituciones “ancla” para cambiar la forma en que hacen negocios deberán comprender de qué manera y por qué razón las instituciones actúan de la forma en que lo hacen, y cuál es el modo en que toman decisiones. Cuando se unen todos estos componentes, las estrategias “ancla” pueden transformar a la comunidad, a la región y a la misma institución “ancla”.

Sobre los autores

Beth Dever es una consultora independiente que trabaja para la Fundación Ford. Omar Blaik es director ejecutivo y George Smith es vicepresidente de U3 Advisors. George W. McCarthy es presidente y director ejecutivo del Instituto Lincoln de Políticas de Suelo.

Referencias

Brophy, P. y R. Godsil. 2009. “Retooling HUD for a Catalytic Government: A Report to Secretary Shaun Donovan.” Filadelfia: Penn Institute for Urban Research.

Initiative for a Competitive Inner City (ICIC) y CEOs for Cities. 2002. “Leveraging Colleges and Universities for Urban Economic Revitalization: An Action Agenda.” Boston: ICIC y CEOs for Cities.

Kenyon, Daphne A. y Adam H. Langley. 2010. Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests. Cambridge: Instituto Lincoln de Políticas de Suelo.

Webber, H. y Mikael Karlström. 2009. “Why Community Investment is Good for Nonprofit Anchor Institutions: Understanding Costs, Benefits, and the Range of Strategic Options.” Chicago: Chapin Hall en la Universidad de Chicago.

Welch, Sherri. 2014. “Midtown Detroit Expands Boundaries for Housing Incentives.” Crain’s Detroit Business. 28 de abril.

Large institutions—universities, hospitals, and nonprofit organizations—are referred to as anchors because of their permanence and their stabilizing physical and social ties to surrounding communities. Beyond fulfilling their respective missions to educate, heal, cultivate the arts, or provide other services, these “eds and meds” are proven economic engines. They employ large workforces, occupy and manage big pieces of real estate, purchase vast quantities of goods and services, attract investment through capital projects and research activities, and provide local constituents access to food, retail, and other amenities. In many instances, anchor institutions are the largest nonpublic employers in their cities. Indeed, HUD estimated that eds and meds employed more than 7 million people and generated $1 trillion in economic activity in 2009 (Brophy and Godsil 2009).

In some instances, a mutually beneficial dynamic evolves between an anchor institution and its community, creating economically sustainable commercial corridors, vibrant streets, and dense, diverse neighborhoods. Plenty of great college towns across America showcase this productive interplay. But in many other cases, especially in underserved urban areas, institutional and civic leadership must be more entrepreneurial, actively championing projects, programs, and policies to achieve these outcomes. This process, known as an anchor strategy, provides the framework that guides local efforts to work with institutions to capitalize on and maximize the impact of their presence.

In theory, the value of engaging anchor institutions to achieve positive neighborhood or community outcomes is self-evident: all parties benefit, and it’s a smart way to do business. But in practice, the community and its institutions must work together to redefine how to align and leverage their goals, economic interests, and activities to achieve a win-win outcome. This article explores why it is difficult to undertake meaningful anchor strategies that fundamentally change how the anchor and its community relate to one other. We also draw on some of the lessons learned from successful efforts in areas such as Philadelphia, Detroit, and Cleveland, where comprehensive civic engagement has become the norm at some of the country’s leading medical and educational institutions.

Parameters for Success

The important thing to stress is that individual tactics are necessary but insufficient to constitute a strategy. A strategy is a long-term engagement, implemented through tactics that evolve over time. In addition, anchor strategies involve partnerships with multiple organizations and people in the surrounding community—relationships that must also evolve over time to respond to community needs and goals designed to make the area more livable.

Effective and transformative anchor strategies have three fundamental features: they are place-based, institutionally embedded, and comprehensive.

The Advantage of Intermediaries

Many anchor strategies benefit from having strong local partners to shepherd the work. These intermediaries often buttress anchor staff capacity to pursue broader local engagement and benefits. A properly funded community development corporation (CDC) or community development financial institution (CDFI) with a local representative at its helm can be an effective intermediary.

Intermediaries are more nimble than large anchor institutions and thus able to negotiate among numerous partners and take actions unencumbered by bureaucracy. Most successful intermediaries are local organizations with long histories in the region, credibility within the community so that they are not seen as tools of the anchor or funders, and the ability to provide neutral ground for discussing and pursuing the anchor work. If the community is skeptical of a fully anchor-driven effort, a partnership with a local, trusted intermediary can provide legitimacy.

A local CDC’s ability to leverage an anchor-sponsored initiative in Detroit provides a good example. Midtown Detroit Inc. (midtowndetroitinc.org) manages Live Midtown (livemidtown.org), an employer-assisted housing program supported by Wayne State University, Henry Ford Medical System, and Detroit Medical Center. As MDI’s President Susan Mosey notes, “It is important to have local people shepherding this work on a day-to-day basis. This builds familiarity with the initiatives and creates the credibility and buy-in that the anchor strategies need to be successful.” Indeed, with MDI’s help, the anchor institutions’ financial commitment of $5 million over five years was matched by contributions from local funders and the state housing finance agency. This success spurred major downtown employers—including Quicken Loans, DTE, Compuware, and Blue Cross Blue Shield—to create their own $5 million Live Downtown program. Between the two programs, more than 1,600 employees have moved to midtown and downtown Detroit, reducing vacancy rates in the corridor to less than 3 percent (Welch 2014).

Place-Based

Place-based strategies have a specific and easily identified geography that the anchor directly affects, including the buildings, open spaces, gateways, and street networks that connect an institution to its community. Beyond the physical orientation of an institution are the places that its constituents—its employees, students, patients, clients, or visitors—live in and patronize. Strong mixed-use neighborhoods surrounding institutions support the street life that defines a vibrant district, encourage pedestrian activity, and create the residential density that in turn creates community.

An anchor’s “placemaking” activities—communally shaping public spaces to heighten their shared value—must engage tactically with other stakeholders to be considered strategic. Such tactics may include reinvesting in the neighborhood through housing construction and rehabilitation; supporting targeted commercial and retail development; improving public spaces and public safety; and strengthening local services such as schools, nonprofits, and community resources. These activities benefit the anchor in a number of ways and create a stronger neighborhood, thus increasing the institution’s attractiveness to potential clients (students, patients, and staff) and generating goodwill among residents and local officials.

Institutionally Embedded

An anchor strategy must be part of an institution’s DNA. This integration starts when leaders commit to their organization’s role as an anchor and communicate it throughout the entire organization. Leadership then follows through by committing significant amounts of time and resources across all institutional functions.

To be effective, anchor work usually requires changes in the organizational culture, such as altering the reward structure, adopting new mission statements and success metrics, and critically examining internal and external communications. Once internal programs, administrative units, facilities management personnel, and governing boards are all working together toward collective goals, an anchor strategy can begin to transform the surrounding community.

Comprehensive

Eds and meds touch their surrounding communities in a multitude of ways—by employing local residents, occupying vast physical footprints, educating or healing community members, and producing waste, among other impacts. In addition to placemaking, a comprehensive anchor strategy must address the following intersections.

Personnel

Given that anchor institutions are often a city’s largest employer, hiring decisions and the provision of employee benefits can have a profound impact on the social and economic fabric of the community. By increasing the percentage of workers drawn from within its footprint, the institution can simultaneously lift the neighborhood economy, provide jobs to those who may be un- or under-employed, and create goodwill among its neighbors. Employer-assisted housing is another critical investment in both personnel and the surrounding neighborhood (Webber and Karlstrom 2009). When employees can live closer to the anchor institution, it’s a win-win, reducing housing and transportation costs for workers while lowering turnover and absenteeism for employers.

Procurement

The purchasing power of large anchor institutions can be vast, with annual outlays for goods and services in the hundreds of millions of dollars. Capturing even a portion of the procurement stream for local companies can have a significant impact on the local economy. For example, the University of Pennsylvania was able to inject $57 million into the West Philadelphia economy with only 9 percent of its annual purchasing (ICIC and CEOs for Cities 2002).

The benefits of local procurement are obvious, but redirecting that process and realizing the benefits is not a trivial undertaking. For example, the anchor may incur substantial indirect costs for community outreach as well as training to ensure reliable supplies of locally produced goods and services. In addition, the existence of reliable, cost-competitive local providers is not a given. Moreover, large institutions may have highly decentralized purchasing processes, and getting each department to adhere to new policies can take time and effort (ICIC and CEOs for Cities 2002). Again, trusted local intermediaries can help to facilitate the shift to local suppliers.

Policy

The relationship between anchor institutions and local or regional governing bodies is often complicated. As private institutions, anchors may feel that they do not need to answer to local government. Indeed, they may see local government as ineffective, inefficient, or obtrusive to executing their optimal business strategies. For their part, local and regional governments may view anchor institutions as free riders that consume public services and other public benefits while enjoying exemptions from property taxes—the main revenue source for local governments. To ease these tensions, some institutions have voluntarily provided “payments in lieu of taxes” (PILOTs) to compensate municipalities for this lost revenue (Kenyon and Langley 2010). But a successful anchor strategy will determine additional ways to promote mutually beneficial work that enhances the future of the institution while addressing local/regional policy issues. Wim Wiewel, president of Portland State University, has been especially clear on this point, citing his institution’s adoption of “Let Knowledge Serve the City” as its motto in the early 1990s. In his words, “We serve the metro area and we are proud of it.”

Planning

Someone has to coordinate these elements into a cohesive initiative. Large anchors have a great deal of in-house planning skill and regularly engage in long-term planning for their enterprises. When they decide to take on a strategy, anchors can utilize this skill to determine the best ways to engage with the community and local and regional stakeholders. In addition, working through the anchors’ strategic planning processes is a way to institutionalize the anchor strategy so that it outlasts the term of a president or CEO and becomes the normal way of doing business.

Understanding Anchor Institutions

A successful anchor strategy is neither created nor implemented in a vacuum. For any of the above activities to be part of a genuine anchor strategy, anchors must undertake them in strategic concert with other stakeholders in the area. For example, initiating an employer-assisted housing program or setting local purchasing goals can benefit employees or community residents, but these efforts are not part of a comprehensive anchor strategy unless they are connected to an overall, institution-wide approach to local engagement and interaction. To achieve this type of interaction, it is important to understand how anchor institutions work.

Large, nonprofit institutions such as eds and meds are fundamentally risk-averse and slow to change or take on new roles. Embarking on an anchor strategy thus entails a fundamental shift in the way anchor leaders think and how their organizations operate—something that may take time, involve important and difficult discussions or negotiations, and require strong leadership and incentives from both inside and outside the organization.

Universities and hospitals are anchor institutions not only because they are rooted in place and have a critical impact on the local economy, but also because they are big. With size come layers of bureaucracy, multiple players who need to participate in anchor work, and an inability to make quick, nimble moves.

Figure 1 depicts the typical structure of a university. At the top is the board of trustees, drawn from civic, industrial, and scientific leadership and generally composed of alumni or other school affiliates. Trustees interact with the campus intermittently and focus on managing the university’s reputational and financial risk. The president is typically an academic who may or may not have a background in management. Presidents concentrate on fundraising and managing the university’s reputation. Academics usually see universities as places for free thought, insulated from market and capital forces. They often view the administration with suspicion or skepticism. Administrators typically have accounting or management backgrounds and prioritize job security. These priorities and attitudes combine to create a culture that does not reward risk and punishes failure.

Hospitals have similarly large bureaucratic structures. The main decision-making bodies are generally the board and the CEO, both of which focus on minimizing institutional risk and handling finances responsibly and profitably. Administrators prioritize meeting the requirements of their positions and ensuring job security through institutional protection, while healthcare professionals such as doctors and nurses may focus on treating patients or conducting research while looking no farther than the borders of the hospital campus.

These cultures produce decisions that may seem logical for the institutions themselves, but they often do not align with community goals. For example, the university may build parking lots around the school, often at the edges of campus, to provide easy access for faculty, staff, and students. But doing so incentivizes employees and students to drive, curbing the chance that they will live in neighborhoods within walking distance and visit nearby shops. Parking lots also create an asphalt barrier that insulates the campus from the community. Similarly, the institution’s procurement policies may be based on getting the lowest price for the most predictable outcomes, meaning that they contract with large, often national vendors for their goods and services rather than with local providers. Finally, a university often locates open space, recreational facilities, and other amenities within its confines, allowing only limited interaction with community members. To change how these types of decisions are made, it is essential to alter the anchor leadership’s view of the institution in relation to its community and understand how to change ingrained habits and mindsets.

Promoting Community Engagement

There are a number of ways that local leaders, philanthropists, community groups, and other stakeholders can move an anchor institution toward a new role in the neighborhood.

Identify Champions

Leadership is often the key to a successful anchor strategy. The philosophy and approach of the chancellor, president, or CEO can determine whether an institution sees itself as an anchor, how it acts once it defines itself as such, and whether those actions are enduring. As Benjamin Kennedy of The Kresge Foundation advises, “Be opportunistic! Every single person at an institution doesn’t have to buy in—only the key people do. Your champions are the ones who will transform the institution and instill the anchor outlook.”

A strong leader committed to an anchor strategy can lay the foundation for meaningful community engagement and impact. The approach must be embedded within the senior administration and trickle down throughout the institution, so that staff members who are directly responsible for particular pieces of the strategy—such as human resources staff, procurement officers, and professors engaged in community research projects—understand their new priorities. This transition can be achieved in part through changing the reward structure and communicating strategically, by amending the vision statement, and regularly describing anchor work and accomplishments in internal messaging.

An anchor strategy has a greater chance of success if multiple parties actively echo support for it. Within the anchor institution, it can be immensely helpful to identify staff members who champion the idea of community engagement and work with local groups to devise mutually beneficial strategies. Outside the anchor, it is useful to recruit local leaders to push the institution to take on a new role. For example, local philanthropy in Cleveland and Detroit played a large part in coaxing institutions to come together to devise anchor strategies for their surrounding communities.

Explore Multi-Anchor Opportunities

If a neighborhood houses more than one anchor institution, multiple organizations can participate in the effort. This approach has proven highly successful in Cleveland, where hospitals, universities, and cultural organizations, along with local philanthropies, financial institutions, and the City of Cleveland, have joined together to implement the Greater University Circle Initiative.

Although a multi-anchor strategy adds complexity by increasing the number of people and organizations that must buy into the work, it can also magnify the initiative’s impact by bringing additional resources to the table and expanding the number of champions. Furthermore, the leaders of each anchor institution can encourage and reinforce each other’s work, while distributing perceived risk.

Identify Self-Interest

At a basic level, a hospital or university may undertake an anchor strategy because its leaders believe that improvements to the surrounding community would benefit the institution. For example, Dr. Wallace D. Loh, president of the University of Maryland, College Park, has focused on improving quality of life in the neighborhood because he was concerned that local conditions detracted from the university’s ability to attract and retain faculty and staff.

Anchor strategies have other, more indirect benefits. While a university or hospital may make unilateral decisions about what happens on its own land, it can also face issues that require support from outside forces, including local government and community residents. Creating strong and longstanding relationships with local leaders through anchor work can help the organization win support for future plans. By thinking holistically about their relationship with the surrounding community, anchor leaders are often encouraged to reconceptualize their basic goals of educating or healing. Dr. Lucy Kerman, vice provost, University and Community Partnerships at Drexel University, sums it up this way: “Anchor work must be aligned with the university’s self-interest, and be rooted in the appropriate role of the institution. We may not be directly creating affordable housing or running a school, but we are partners in a system that creates mixed-income opportunities and provides strong educational opportunity.”

Bring Resources to the Table

Of course, it may all come down to resources. Financial incentives encourage institutions and their partners to take on anchor work, strategize about their role in the community, meet regularly with stakeholders, and invest in anchor activities. For their part, local stakeholders may see the opportunity to engage the anchor institution but lack the ability or tools to get involved without new funding.

In Detroit, for example, the anchors came to the table for many reasons, but one key factor was the financial resources offered by the two partners that brought them together: the Hudson-Webber and Kresge Foundations. Their capital kick started the conversation and continues to undergird the work today. By offering matching money for specific tactics, the foundations incentivized the anchors to commit their own funds. Today, the anchors not only support specific initiatives but also provide operating resources to Midtown Detroit Inc., the neighborhood planning and development organization that supports and staffs much of the anchor work. In this way, philanthropic resources seeded the initiative while helping to create the infrastructure necessary for its successful implementation and sustainability.

Connecting Strategy to the Community

At first glance, community needs and goals—good schools, safe streets, amenities and services, job opportunities, public spaces, and housing—do not correlate directly with an anchor’s outputs. Indeed, if an institution generates successful graduates, high-quality health care, and top-notch research, it concludes that it has done its job as both a local and a global citizen.

But by aligning community goals with an institution’s inputs—faculty, staff, patients, students, visitors, real estate, goods and services—anchor strategies can connect the institution’s mission to community aspirations. Hiring local residents for institutional jobs enhances an anchor’s economic impact within the community, aiding local households as well as the overall area. When institution staff members shop, live, and dine in the neighborhood, it stimulates the local economy. Using the framework of the five Ps, anchor/community engagement can advance community aspirations from goals to outcomes.

• Placemaking. Both the community and institution can benefit from thoughtful implementation of an institution’s real estate programming, which can promote an open campus with active edges and limit uses such as parking or storage. Improving the condition of blocks surrounding the university or hospital, opening up access to public spaces, and focusing on issues such as street lighting or storefront improvements all make for a safer and healthier environment for residents, prospective students and patients. The inputs that could play a role in this process are faculty, staff, students, patients, visitors, and real estate. The community goals that can be affected include safe streets, amenities and services, job opportunities, public spaces, and housing variety.
• Personnel. By hiring locally, an anchor strategy provides job opportunities for area residents. As the employment rate rises, the community will become safer, benefiting both residents and the anchor institution. The main input in this case is staff.
• Procurement. The anchor institution can bolster the local economy by contracting with local vendors, creating job opportunities, safer streets, and more amenities and services. The anchor can also generate positive public relations regarding its local outreach. Again, staff is the main input.
• Policy. By directing its research and teaching prowess toward local issues, the anchor can help to meet community aspirations for good schools, improved public safety, job opportunities, and health care, thus bolstering its own reputation in the region. To accomplish this, the anchor can tap staff, faculty, students, and visitors for activities such as service learning, health care outreach, and experiential teaching.
• Planning. Crafting all of these efforts into a cohesive mission requires that leaders of anchor institutions link each input with community aspirations. An anchor can also provide planning talent to help build concurrence between its own plans and the plans of the neighborhood or municipality. The lead input in this case is staff, with anchor employees working together to identify how various strategies align with community goals in order to create win-win propositions.

Conclusion

A place-based, institutionally embedded, and comprehensive anchor strategy can have significant impacts on a local and regional economy. But building and implementing such a focused strategy takes a great deal of time and patience. Putting all the elements together—getting the partners involved, convincing them of their self-interest in undertaking anchor work, identifying strong leaders and using them to change the ethos of their institutions, identifying intermediaries and ensuring they have the capacity to play their roles, lining up financial incentives—requires the commitment and coordination of many moving parts.

In many cases, the anchor work is based on trust, often among groups that have not worked together in the past. Building these relationships involves in-person contact and the development of strong alliances. Furthermore, this effort must occur within the context of working with large anchor institutions. Those who wish to work with anchors to change the way they do business must understand how and why institutions act the way they do, and how they make decisions. When all these components come together, anchor strategies can transform the community, the region, and the anchor itself.

About the Authors

Beth Dever is an independent consultant working for the Ford Foundation. Omar Blaik is CEO and George Smith is vice president of U3 Advisors. George W. McCarthy is president and CEO of the Lincoln Institute of Land Policy.

References

Brophy, P., and R. Godsil. 2009. “Retooling HUD for a Catalytic Government: A Report to Secretary Shaun Donovan.” Philadelphia: Penn Institute for Urban Research.

Initiative for a Competitive Inner City (ICIC) and CEOs for Cities. 2002. “Leveraging Colleges and Universities for Urban Economic Revitalization: An Action Agenda.” Boston: ICIC and CEOs for Cities.

Kenyon, Daphne A., and Adam H. Langley. 2010. Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests. Cambridge: Lincoln Institute of Land Policy.

Webber, H., and Mikael Karlström. 2009. “Why Community Investment is Good for Nonprofit Anchor Institutions: Understanding Costs, Benefits, and the Range of Strategic Options.” Chicago: Chapin Hall at the University of Chicago.

Welch, Sherri. 2014. “Midtown Detroit Expands Boundaries for Housing Incentives.” Crain’s Detroit Business. April 28.