Recognizing the full extent of liabilities is always a good thing, even if what emerges is pretty scary. But it’s better if the discovery process also includes surfacing (or at least looking for) less-obvious, newfound public assets that can be used as raw material for real solutions. This is the immediate relevance of a new book, Public Wealth of Cities, by Dag Detter and Stefan Folster. The authors’ central point is that cities — even US ones going through hard times — have a lot more assets with significant commercial value than people think. Detter & Folster then describe how the value of these assets can be maximized if they’re kept separate from the usual political and fiscal constraints in an ‘Urban Wealth Fund’. As you’d expect, I’m glad to hear the former and I agree completely with the principles of latter as applied to infrastructure recapitalization.
The prospect of putting together a single big wealth fund for a lot of public-sector assets might sound a bit daunting, especially in US state and local jurisdictional context. But I think most of Detter & Folster’s concept is scalable to managing one or a few basic infrastructure assets. That’s certainly realistic – if people are willing to look at P3s for some assets, then why not a ‘mini-urban-wealth-fund’?
For states & localities that have a budget-crushing ‘GASBzilla’ problem*, the best return on newfound assets might be as part of a solution to manage unfunded pension liabilities — in effect, ‘profit maximization’ for many places is actually ‘fiscal stability maximization’.
Whatever gets ‘maximized’, public asset management should include three principles that Detter & Folster list:
- Clear objective of value maximization [I’d add: “for all stakeholders and for the long-term“]
- Political independence
None of those are easy to achieve in the real world, but they’re crucial in the context of any newfound value of existing public infrastructure. There’ll be plenty of (completely understandable) temptation to monetize unanticipated value in a quick way to solve a current budget crisis. And there’s so much money looking for infrastructure assets — especially at fire-sale prices — that monetization will be all too easy. That short-term approach might keep GASBzilla temporarily at bay, but he’ll soon be back, more-accrued than ever. Using newfound assets for long-term solutions to unfunded pension liabilities requires a lot of discipline, innovation & grit, but I think that’s the only way to really defeat the monster.
*For an excellent summary of the technical background and impact of GASB 68 and 67 on state & local finances, see ‘State and Local Government Pensions at the Crossroads‘ in The CPA Journal, May 2017