Bruce Katz, Centennial Scholar at the Brookings Institution, and Jeremy Nowak, Distinguished Visiting Fellow at Drexel University’s Lindy Institute for Urban Innovation, argue in their recent book, The New Localism: How Cities Can Thrive in the Age of Populism, that the power to create social, economic and environmental change lies in the hands of a new kind of localism. Cities and communities are emerging as innovators and problem-solvers to address everything from social inclusion to environmental sustainability despite their being limited in these roles by fiscal distress. While not a replacement for the essential functions of federal governments, Katz and Nowak argue that this new localism is the ideal complement to an effective federal government. Indeed, they argue it is an urgently needed remedy for national dysfunction.

We interviewed Jeremy Nowak to learn more about how he thinks the new localism will shape 21st century urban places in an environment of municipal fiscal distress.

What role do you expect underfunded pensions and other liabilities to play in shaping what local policymakers can and can’t do in the 21st century?

A lack of fiscal flexibility - local, state, and federal – is a defining factor of early 21st century urbanism. Our nation’s public budgets are too captive to obligations to past generations. Those obligations were made for good reasons, in good faith, and should be honored; although in many instances they have to be restructured going forward. Otherwise we will all lose out. That is the lesson of Detroit and the almost impossible situation in the state of Illinois.

Pension obligations and other liabilities can crowd out investments in basic services, not to mention more future-oriented investments. This can only be sorted out by facing the facts and building a broad coalition for change. And it is generally better to do this years prior to bankruptcy.

Given the lack of fiscal flexibility, local policymakers and civic leaders have to do six things to succeed:

Recognize the fiscal hole they are in and stop digging. This takes courage and collaboration particularly around unfunded pension liabilities. Align public investment strategy with the organization of private and civic capital. We see this with happening already with early stage business investments, longer-term infrastructure investments, and targeted education support. Improve basic operations through better technology and increased accountability. The public sector has to align budgets with outcomes; it can no longer view itself as a compliance system. Increase the quality of public asset management to maximize public wealth. Cities are more wealthy than they realize but the wealth is often unrealized because asset management is so mediocre. Go to voters with targeted referenda that speak to vital investments and offer real accountability. People and firms will pay if they know what they are buying and why it is in their interest. Mayor Garcetti’s recent transportation referenda in Los Angeles is a case in point. Promote an economy that is competitive in terms of global products and services. In our book we use examples of how Pittsburgh and Indianapolis have done just that.

In this context I am really happy that Penn IUR has focused on pension fund issues through a recent book of essays published by the University of Pennsylvania Press. That collection was evidence based and systematic. And I am happy to report that we are continuing this work which will be broadcast and documented in a forthcoming website. We have to keep shining the light and articulate where and how solutions are emerging.

What should be clear from our analysis is the rising importance of organizing civic and private capital around urban revitalization. Cities are not governments but networks of public, private, and civic actors and institutions. We have to organize and act accordingly. The recent tax bill created something called an Opportunity Zone tax incentive, which provides a federal capital gains tax deferral and partial exemptions for funds that invest in certain designated low income areas. We hope that this might add to the potential for more private investment in many communities. Bruce Katz and I recently authored a policy brief on the subject which can be accessed at our website.

How does this happen? You emphasize the importance of fiscal transparency in The New Localism. But what forces will push cities to be more transparent?

You can regulate transparency and you can have citizens demand it. The two strategies reinforce each other. In general, citizen demand is the driver. With the decline of local and statewide journalism, the analysis of what is happening locally and what it means is an increasingly important civic activity. But civil society needs a partnership with the public sector to succeed.

There is no excuse for cities to be opaque systems; cities should become open source. While of course making sure to maintain citizen privacy, cities need to develop and implement systems that make it easy for citizens to navigate, understand, analyze, and participate in civil society. We have great examples of this all over the world and those cities that deny substantive participation will lose out over the long-term. Cities that open up their information benefit from crowd-sourced solutions. As we all get used to using technology our standards for competency and efficiency change. Cities that eschew these technological innovations and insist on vertical control over information will no longer be able to compete. That day has passed.

Your book focuses on underperforming local assets. What are these and how can they be transformed to performing assets?

One of our case studies focuses on Copenhagen. Today when you visit that city it is hard to imagine that only a few decades ago it was nearly bankrupt and had an 18% unemployment rate. Its port had lost out to Malmo in Sweden and it was filled with underdeveloped commercial real estate.

One of its revitalization jewels was a brand new metro system, which the city paid for without any new taxes. It did this by aggregating all of the public land holdings into a publicly owned but privately-managed corporation that rebuilt the old port and is now doing work near the airport. The corporation sold, leased, and developed parcels and used profits to pay the debt service on the new metro. The city functioned like a private real estate developer without any interference from public pressure. The city thus increased public wealth through private means.

Understanding what cities own, not just what they owe, is critical. Most cities cannot generate a useful balance sheet. City ownership is often spread over multiple agencies and myriad authorities – airports, convention centers, parking, port – with distinct roles and legislative mandates. Understanding a city’s holdings and assets is a critical aspect of transparency.

Few places can give you an accurate assessment of the assets let alone the return on those public assets. But imagine if the return was adjusted upward by 25 or 50 basis points; the impact on budgets would be incredible. Is it really possible that the New York and New Jersey Port Authority, for example, cannot generate more public wealth than they do today? It’s hard to imagine that being the case.

The problem is that cities and localities are caught both practically and ideologically between those that believe many government functions ought to be privatized and those that defend existing government management practices as sacrosanct. The former position is generally associated with conservatives and the latter with progressives. These are not the only two choices. We can also build public wealth through management models that are private (and profit motivated), while allowing the underlying asset to remain public.

It is true that some functions ought to be privatized, but in most cases that is not the answer. In many cases our present way of managing public wealth leaves far too much value on the table, thus shortchanging citizens and taxpayers. A substantial new literature on this issue has emerged through the work of Dag Detter and Stefan Folster, which is best captured in their recent book, The Public Wealth of Cities. The main point is that we need to focus on the management of the assets more than simply the ownership.

In the Copenhagen example a fiscal crisis forced a city to find new management answers rather than simply reference the old playbook. We think that this will increasingly be the case in America. There will be no choice.

Recent research has shown a divergence between big, productive cities, offering higher wages and wellbeing, and smaller cities with a less-skilled workforce. Do you expect this inequality to continue growing? What implications does this have?

The great divergence we see is between rural and small town economies and more urbanized counties. That has already shown its meaning in political terms, particularly in the American rustbelt. And it is also a global problem. But the distinction between rural and urban isn’t as cut and dry as it might seem. For example, it turns out that 50% of rural Americans live within some metropolitan labor market, so the potential for building out transit linkages or creating satellite job hubs exists. Moreover, technology has eliminated the meaning of proximity for some jobs thereby creating opportunities in rural areas. The right work force qualities and civic strategies can re-position the value of rural workers. Think of the back office business functions that are often carried out in rural states.

The advantages of economic agglomeration are obvious but we think that there are also remarkable examples in America of mid-sized cities thriving. America’s urban competitive advantage over the long term is as a nation of middleweight cities with high quality growth assets. Our book spends more time looking at Louisville, St. Louis, Kansas City, Chattanooga, and similar cities than it does looking at the usual suspects like Boston or San Francisco. It is easy to drive an advanced economy when Harvard and MIT are at the doorstep, but look at what Indianapolis is doing with biotech or Pittsburgh’s reinvention into a robotics hub. This is where you find real optimism and new possibilities for America.

It is true that the geography of job clustering increasingly favors the co-location of certain assets: universities and medical research centers, cultural districts, enterprise ecosystems, the quality of the startup community, and so forth. But one of the remarkable things that you observe from traveling around the nation and world is the power of urban adoption and adaptation. Ambitious cities – from Tulsa to Kansas City - are hungry for new ideas and strategies. And they are not waiting for Godot or worrying about New York or Los Angeles. They are investing in their own centers of excellence, reinvesting their own downtowns and innovation districts, and identifying ways to collaborate across sectors. They are reenergizing and redefining urban development.

The New Localism is not about local government. It is about a shift in power downward from federal systems to local, as well as outward across public, private, and civic boundaries. It is fundamentally about the new models of co-governance that are emerging in a world that can no longer be explained in twentieth century industrial terms.

What can researchers or research institutes like Penn IUR do to help in the context of The New Localism?

We hope that our work opens up new research and civic action that recognizes the enormous shift in how problems are being solved today. This is the most exciting time I can imagine to explore interdisciplinary ways to solve problems. I believe that this has always been the spirit of Penn IUR from its inception. The mid-twentieth century framework of vertical compartmentalized solution building has been transformed by globalization, technology, and the changing role of the nation-state. We need more examples and understanding of how cities are doing this. This is where the action is and how Penn IUR can continue to serve as a global leader.

Jeremy Nowak is a Penn IUR Fellow and Advisory Board Member. He, with Bruce Katz, Centennial Scholar at the Brookings Institution, is the author of The New Localism: How Cities Thrive in the Age of Populism (Brookings Institution Press, 2017).