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A Conversation With…

The Government Finance Research Center works with researchers from a variety of backgrounds to analyze the role that public finance plays in our lives. In the interviews below, we talk with experts to dig deeper into pertinent topics and get their perspective on the past, present, and future of government finance.

Bruce Katz, Director of the Nowak Metro Finance Lab at Drexel University Heading link

photo of Bruce Katz

Q: As we sit here at the beginning of 2024, where do you see the fiscal status of cities heading?

Katz: I think there are some good signs and some disturbing ones.

 

Q: Let’s start with the good news, please.

Katz: What I see happening in the United States post pandemic is a reindustrialization as well as a decarbonization of the economy. There’s an enormous amount of manufacturing related investment in the country catalyzed by federal government grants, low-cost loans and tax incentives. The expansion of manufacturing facilities will obviously effect tax revenues for cities and municipalities.

 

Q: What is fueling this restoration of manufacturing? How is this impacting cities?

Katz: There are multiple factors. One over-arching factor is the rise of geopolitical tensions and the need to re-shore production in critical industries that affect national security. A part of this involves the rise of defense spending to fund the production of advanced weapons systems. So, if you’re a military metropolitan area and you have a large base or a large R&D or production facility, you’re probably already seeing the effects in terms of contracts and employees.

The defense authorization bill, signed by President Biden in December, authorizes $883 billion for the Pentagon and other defense related activities at the Department of Energy and other agencies. This is substantial. And there are certain cities and metropolitan areas in the United States that will benefit. San Diego; St. Louis; Groton, Connecticut; New London, Connecticut; Norfolk, Virginia, all have a substantial military presence. They are likely to have what we’ve been calling a defense dividend, which will ultimately lead to a boost in municipal tax revenues.

Tensions have been growing in the world for some time, but the situation worsened in 2022 and 2023 with Russia’s invasion of Ukraine and conflicts in the Middle East. We now understand we’re living in a different kind of world. It’s more dangerous. It’s more contested, both with regard to the civilian economy, but also the necessity of reinvigorating our national security.

 

Q: There’s sort of an irony here that this good news for cities isn’t really good news for the nation as a whole.

Katz: Well, it’s the real news. One must take an uber-realistic look at defense spending and at the broader national security imperatives. The pandemic revealed the US dependence on other countries for the supply of critical goods and services, irrespective of the military. We’re now beginning to bring a segment of that production home, as we should, and this will have an effect, not an even effect, and not an immediate effect, but it will have an effect on state and local tax revenues going forward.

 

Q: Now let’s talk a bit about environmental issues and how they are directly impacting cities.

Katz: This is another major factor. What we’re seeing is the rise of a climate economy as we electrify vast parts of our economy starting with the auto sector. To prepare for that, we’re going to shift the sources of energy towards renewables. And we’re going to upgrade and improve the generation, transmission, and distribution of energy. This is an industrial project. It’s not like the Clean Water Act or Clean Air Act where the federal government promulgated regulations. In this case, there are large amounts of federal incentives flowing to major corporations to accelerate this transition. This is going to mean an enormous amount of building in the US, particularly in the utility sector, as well as in the real estate and transportation sectors. Also, an enormous uptick in what I would call clean tech.

 

Q: Do any specific examples come to mind?

Katz: You already see it in the production of electric vehicles and batteries. If you travel from Michigan down to Georgia, which is the battery belt in the United States, you’re seeing a scramble to get as much of this new electric vehicle supply chain as possible. It’s a fascinating period of reindustrialization, and all of this has effects on local tax revenues. This is going to have a very broad, widespread influence on cities and metropolitan areas.

 

Q: You’ve provided abundant reasons for optimism, but you also mentioned ‘disturbing’ trends. What did you have in mind?

Katz: What is happening with remote office work is creating enormous challenges for traditional downtowns and central business districts. Again, this impact is not felt evenly across the country, because the starting points are quite disparate. But there are parts of certain cities in the US that have seen a substantial increase in work-from-home and a related rise in office vacancies. This creates reverberating effects around small business, transit ridership, and ultimately tax revenues.

 

Q: Is this a temporary phenomenon?

Katz: It’s clear that remote work is a structural change not a cyclical one. There is now going to be a new normal around how many days people actually have to be in the office. Obviously, that’s not going to apply for hospital workers, police, or firefighters, but it is the case for office workers. In many cities, organizations now want employees to come in only two or three days a week.

 

Q: Clearly that’s not a healthy thing for the tax revenue coming out of downtowns. What can be done?

Katz: We are already seeing a rapid diversification of uses. Up to now, what most people have focused on is office to residential conversions. Seems logical. We’ve got a lot of office vacancies. We also have a shortage of affordable housing. People are thinking “let’s try to convert as much as possible to residential.”

But that has its own challenges given the way in which many of these office buildings were constructed post 1960. A lot of these office buildings have large amounts of internal space which is difficult and costly to configure into residences with natural light and desirable amenities.

 

Q: If office to residential conversions isn’t practical in many cases, what are other options?

Katz: We are just beginning to see what downtowns are going to need to do to diversify their uses. There’s still going to be office work, but I think there’s going to be a much broader array of activities going on in central business districts, many of which are located along river fronts and already house entertainment venues or sports venues or things of that sort. You can’t put your head in the sand and say, ‘Oh, well, maybe eventually everyone will come back to work’. I don’t think so. Even if they’re in the office for two or three days a week, there’s definitely still a domino effect on small businesses in the area and on transit ridership.

My personal take on this is that we need to make some connection between what’s happening in our downtowns and this broader industrial/energy transition. We’re not going to have a semiconductor facility in the middle of your downtown, but you sure can have a center of excellence related to that semiconductor facility. The potential for new corporate or academy campuses and hubs of technological innovation is very real. And that’s the way we should be thinking about this.

 

This interview was conducted with Richard Greene, senior advisor, GFRC, and principal of Barrett and Greene, Inc.

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