Opportunity Zones and Institutional Reform

Bruce Katz & Jeremy Nowak · June 19, 2018


The two of us have been spending the bulk of our time in hyper-invention mode. To maximize the potential economic and social impact of recently enacted federal tax incentives, Mayor Garcetti’s Accelerator for America has engaged us to create a new tool — an Investment Prospectus — to enable cities, counties and states to identify concrete investable projects and propositions in designated Opportunity Zones. We are using Louisville, Oklahoma City and South Bend as our test cases and we are grateful to Mayors Greg Fischer, David Holt and Pete Buttigieg and their teams for being co-creators.

While the Investment Prospectus will be written for individual cities, it is being developed with a more universal perspective. Investors look for repeated patterns across places — similar spatial geographies, common product types — so that markets can be routinized and friction reduced. We are, therefore, creating a typology of census tracts across the country to unveil the special economies and investment possibilities of distinct urban geographies (e.g., central business districts, anchor districts, industrial districts, airport districts and residential areas). We will be unveiling this typology soon and look forward to your thoughts on how such a categorization could not only help cities attract tax-advantaged capital but also get smarter about their economic narratives and strategies in general.

Yet the broad objective of the new tax incentive — expanding economic opportunities for places and people left behind — will not be achieved by market investors and market typologies alone. Cities in the broadest sense — municipal governments, urban institutions, cross-sector networks — will need to act with agency and purpose.

To that end, we have been thinking a lot about the health of the current suite of institutions that define our cities today and the kinds of capacities and competencies that will be needed to design, finance and deliver inclusive growth. We have, therefore, started to design an Institutional Audit that cities could use to: (a) assess the professional/managerial competence and fiscal capacities of the current suite of institutions that affect the economic development and social outcomes within disparate urban neighborhoods; and (b) determine whether existing institutions need to be reformed or new institutions need to be created.

Our focus on urban institutions should come as no surprise. The New Localism presented our general view: cities have, for the most part, inherited 20th century institutions that rarely have the means or perspective to succeed in the 21st. Opportunity Zones are forcing us to dig a bit deeper. Here are some initial observations:

The shape and structure of urban institutions has followed the formation of distinct urban districts to a remarkable degree. Each of the sub-geographies of a city has a distinct institutional and governance reality that reflects its unique economic function, land use and ownership pattern and socio-economic composition.

Central business districts or downtowns are by far the most complex as befits places that are a city’s mixed-used employment centers and tourist destinationsCBDs harbor multiple and intensely fragmented layers of governance. The public sector is often represented by municipal government, county government and independent authorities (e.g., stadia authorities, convention center authorities, tourism authorities, and redevelopment authorities). A group of private/public and private/civic institutions also have governance roles (e.g., business improvement districts, non-profit river conservancies, and nonprofit development entities like Cincinnati’s 3CDC and Chattanooga’s River City Company).

Anchor districts (often located in midtown areas) have a very different governance structure than CBDs. Since large institutions (e.g., universities, hospitals, research facilities) dominate land use, they also dominate district governance, creating “cities within a city”. Sometimes governance literally happens within institutions via internal offices of real estate or facility management; when multiple institutions co-locate, intermediaries have emerged to manage place either through a BID structure (Philadelphia’s University District) or specialized entities (e.g., Buffalo Niagara Medical Center, Houston’s Texas Medical Center). Increasingly cities (e.g., OKC, Pittsburgh) are creating new organizations to manage, market and sometimes develop “innovation districts.” The Cortex Innovation Community in St. Louis is by far the most advanced of these organizations since it has been delegated special authority by the city government to carry out real estate and infrastructure activities.

Industrial districts tend to be highly idiosyncratic given their legacy industrial uses. In some cases, industrial uses persist, with private owners (e.g., railroad companies, manufacturing companies) determining what is best for their own parcel. In other cases, public or private entities have assumed ownership of large swaths of land and buildings, often requiring environmental remediation that cannot be supported by market finance alone.

Low-income Residential areas are mostly governed by an eclectic mix of nonprofit organizations and social service providers: mostly small (community development corporations), occasionally large (e.g., Baker Ripley in Houston). In some cities, redevelopment authorities – remnants of urban renewal – continue to have a large ownership position. In recent years, land banks have also begun to populate many urban areas given the decline in industrial uses and the rise in mortgage foreclosures during the housing crisis. In many cities, minority elected officials (e.g., city council members, state legislative representatives) play an outsized role in the governance of these districts.

Governance in many cities has evolved through a process of accretion rather than subtraction. Entities emerged at a different time in the evolution of a city (or part of a city) and were often created to solve a particular problem (e.g., clean and safe) or carry out a particular initiative (e.g., build a stadia or convention center). In some cases, entities were merged and consolidated to achieve efficiency gains. In many cities, however, new entities were just added on top of old ones, to lessen political conflict.
Cities thus represent an amalgam of institutional choices taken by prior generations of leaders. The outcome of institutional evolution is that cities are often less than the sum of their parts. In many communities, local governments do not have the capacity or professional expertise to design, finance and deliver sophisticated market and social initiatives. The public sector is also highly fragmented, divided across multiple layers of government, specialized agencies and independent public authorities. On the private and civic side, most communities collaborate through loosely organized informal networks that do not have sufficient capital. In addition, many nonprofit organizations are either too small to affect systemic change or too circumscribed in focus to drive systemic change and impact.

You see the method to our madness. A new federal tax incentive focused on attracting market capital to low income communities requires cities to understand and communicate the assets of these places and build institutions that can maximize market and social outcomes. For the most part, cities do not have the tools necessary for making these market and institutional assessments. We (collectively) have much work to do!

Bruce Katz & Jeremy Nowak · May 29
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Bruce Katz & Jeremy Nowak · June 26
How States Can Maximize Opportunity Zones