(co-authored with Julie Wagner and Colin Higgins)

If you have been following the news lately, you may have noticed the attention being paid to the complexity of Congressional deliberations. While important to modernizing America and meeting the moment, these deliberations are but an early step in achieving the Biden Administration’s ambitious agenda. We believe that history will show that appropriating federal resources was actually the easy part of the process; spending federal resources in efficient, effective and equitable ways — “smart spending” in a nutshell — is what should keep us all up at night.

Depending on what Senator Manchin and Rep. Jayapal can agree on, we may see an additional $3 trillion in federal funding approved in the coming months. But, if the past is prelude, an abundance of capital — public or private — doesn’t necessarily result in smart spending, just more spending. Building Back Better, as we’ve said before, requires doing things differently.

The process of actually doing so is complicated by several factors. The shift from austerity and scarcity to abundance and public largesse has been a rapid one, leaving little time for strategic design or local planning. The degrading of the public sector over many decades and the weakness of many nonprofit intermediaries and community networks means that the capacity to design and plan is minimal in the preponderance of communities. We have a delivery crisis in the making in other words.

With federal rescue and recovery funds now beginning to flow at scale across the country, it is time to forestall this crisis-in-the-making. We believe a good starting point is by examining the way local networks can make smart spending more rather than less likely, and in-turn drive investments that are transformative and catalytic. Below we lay out five principles local practitioners can follow for smart spending, and five corresponding actions that the federal government can take.

Our thinking has been guided by two policy papers — Jeremy Nowak’s 2013 work on “Smart Subsidy” and our own 2008 essay around Transformative Investments. If America is to Build Back Better, as the Biden Administration intends, practitioners and policymakers alike would be wise to apply some of these lessons from the past 15 years.

Smart Spending: when public money draws in private & civic commitments

Jeremy’s piece, written for the Living Cities network, constituted a practitioner’s reflection on the role of subsidies in place-based real estate development and finance in markets beset with low property values and high building and renovation costs. As Jeremy summarized later in The New Localism,

“Smart subsidy fills a gap the market [cannot] (emphasis added). Public subsidy is not useful if it crowds out a market mechanism that could do a comparable job, hides operating efficiencies, or has no trajectory for longer-term sustainability (when that is feasible).”

Jeremy drew his thinking from a remarkable effort in Pennsylvania to create high quality grocery stores in disadvantaged communities. The Fresh Food initiative represented a unique partnership: the state put up $30 million in grants over three years and The Reinvestment Fund (a community development financial institution) matched the grants with more than $100 million in private debt and other financing, including new markets tax credit allocations.

Jeremy described the division of responsibilities between different entities and different forms of capital:

“The Reinvestment Fund managed both the grant and debt financing, the state monitored the program, the nonprofit Food Trust ensured that the stores met the standards of high quality and comparable pricing, and the Urban Affairs Coalition worked to ensure minority contractor participation.

The grant money was used to subsidize costs that were a barrier to entry, including workforce training, environmental remediation, and higher infrastructure costs. […] The debt financing was used as with any grocery store development for commercial real estate and business operations.”

Transformative Investments: when a project starts a chain-reaction

Smart spending, structured well and executed with discipline, has the potential to support catalytic projects and initiatives that can drive inclusive and sustainable outcomes. Our 2008 piece on Transformative Investments, initially written for Ethos and then re-published by the Brookings Institution, aimed to define and codify such extraordinary “transformative investments” as:

“… discrete public or private development projects that trigger a profound, ripple effect of positive, multi-dimensional change in ways that fundamentally remake the value and/or function of one or more of a city’s physical building blocks”.

By “building blocks” we meant the following:

“… the remaking of downtowns as living, mixed-use communities; the creation of neighborhoods of choice that are attractive to households with a range of incomes; the conversion of transportation corridors into destinations in their own right; the reclaiming of parks and green spaces as valued places; and the revitalization of waterfronts as regional destinations, new residential quarters and recreational hubs.”

By “multi-dimensional change” we included economic, fiscal, cognitive, environmental and social outcomes. On the social front, for example, we envisioned that:

“… transformative investments have the potential, while not always realized, to alter the opportunity structure for low-income residents. When carefully designed, staged and leveraged, they can expand the housing, employment and educational opportunities available to low-income residents and overcome the racial, ethnic and economic disparities that have inhibited city performance for decades.”

The notion of “transformative investments” is as relevant today as when the Ethos essay was written 13 years ago. We are already starting to see catalytic projects and initiatives in city after city, projects that have been underway for years and are getting new energy during this period of federal activity: the Dayton Arcade, Erie’s Perry Square revival, the Buffalo East Side Avenues Initiative, and Greensboro’s Steelhouse project, among others. These projects, if financed smartly and fully completed, have the potential to “trigger profound ripple effects” that advance economic, sustainable and inclusive outcomes. They will leave a lasting legacy for their cities and be a visible sign of economic restructuring and inclusive growth for the nation.

How to spend smartly for transformative investments during Build Back Better

Our combined thinking on smart spending and transformative investments raises two questions for policymakers and practitioners.

1. How do cities deploy federal resources with these notions of Smart Subsidy and Transformative Investments in mind?
2. And how does the federal government make it more likely that cities act this way?

Below we take an initial stab at answering these complex questions.

What should local practitioners do? Five Principles to Guide Action

On the local level, being smart and transformative means deploying federal resources according to the following five principles:

1. 助教

2. Support whole districts, not just siloed projects. Federal resources should be deployed locally in a way that is driven by big vision and strategy, regenerating whole districts rather than individual buildings, entire corridors rather than single storefronts. This requires new tools, what we call an “Investment Playbook,” that can reveal multiple uses that serve community needs (e.g., an iconic community anchor, complete streets, a fresh food market, a community enterprise incubator), concretize their costs and potential capital stacks and match federal sources. Developing such an approach will also help transformative investments become additive to — rather than disruptive of — the urban landscape, by ensuring that a whole suite of workforce, community regenerating, and affordability investments come alongside the investment to broaden its beneficiaries.

3. Increase federal funds with other capital. Federal resources should be deployed in ways that leverage private and civic capital, allowing public sources to go further and farther. The torrent of federal funding, as large as it is, does not obviate the need to build a financing stack in many projects of public subsidy, private debt and civic capital. Taking a “public alone” approach would miss a tremendous opportunity (to say nothing of it violating Jeremy’s principle of smart subsidy). There is an abundance of private and civic capital sitting on the sidelines that stands ready to be unlocked if local practitioners can make the blending of quality capital the norm rather than the exception. In many respects, the most sustainable and catalytic projects will be those that marry local capital (oftentimes philanthropic or patient) with federal dollars. The Pennsylvania Food Trust model that inspired Jeremy’s “smart subsidy” article is emblematic of what’s possible with this approach.

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5. Find replicable models in new places. Smart spending is informed by best practices, codified global and local successes, that can be replicated and adapted with local variations. The United States is simultaneously demographically diverse and highly parochial. We can and should take a page from what is happening in the United Kingdom around High Streets or the Netherlands and Denmark around climate resilience or Chile around inclusive entrepreneurship.

What should the Federal Government Do? Five Ways to Design for Impact

Our focus in this piece so far has been on what local recipients can do to promote smart spending. But the federal government has essential roles to play. As we have previously written, the harsh fact is that multi-dimensional, catalytic projects are the modern equivalent of heroic acts given the compartmentalization of federal programs, the complexity of federal incentives and the absence of true coordination between federal agencies (often irrespective of which party controls the government).

The Biden Administration could do five things to fix this problem and enable local practitioners to truly build back better:

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3. Guide the field with affirmative examples. As federal agencies are designing programs, they should provide clear guidance on what smart spending looks like, with specific and tangible examples for localities to emulate. The federal government, for the most part, excels on telling recipients what not to do with federal money. This reflects an auditor’s mentality, which has grown exponentially over the past few decades in fear of one investment gone wrong (Solyndra anyone?). Mitigating the risk of program embarrassment is not how we will build back better. The restructuring of our economy cannot be achieved by preventing bad outcomes which are infinitesimally rare. Rather than throwing up their hands, federal rule-makers should both build in accountability measures and focus on providing clear guidance on uses they want to see funds used for.

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5. 新兴市场

Conclusion

The bottom line is that the lenses of smart subsidy and transformative investments are a way to see the possibilities of this moment through a more holistic frame. They represent a framework that moves from a philosophy of “don’t do dumb projects” to one of “do big things” as federal resources begin to flow. At the end of the day, this is about advancing American innovation and competitiveness, accelerating the transition to a green economy and expanding opportunity and prosperity more broadly. We believe that these important outcomes can be achieved, but the thorny details of delivery will be borne out on the local level — through the hard and under-appreciated work of practitioners. We hope in this newsletter to have brought into focus what must be done on the federal and local levels to unlock smart spending and transformative investments nationally.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Julie Wagner is the President and Founder of the Global Institute on Innovation Districts. Colin Higgins is a Senior Research Fellow at the Nowak Lab.