Making Cities Smarter than Bankers

As complex organisms, modern cities monitor their financial health and longevity, like Olympic athletes and hospital patients. The banking system encircles and ensnares people, buildings and environments defining cities, credit rating some higher, no matter their quality of life, disaster mitigation, infrastructure buffers or exposures. This paper explores technologies for smart cities to use the banking system to better advantage, through more coherent measures, innovation policies and incentives for livability. Municipal banking, credit ratings, sustainability bonds, crowd-sourcing and crowd-funding solutions for smart cities are also discussed. Urban Finance: Old School Cities contextualize how people own, use and finance assets there. Home prices and vacancy rates reflect (1) physical, environmental and neighborhood assets (amenities), (2) expected mortgage and tax rates and other costs of ownership (total cost of ownership, TCO) and (3) expected resale prices (future value). Commercial real estate adds (4) the uncertainty of lease rental rates for business cycles, (5) idling costs of vacant space, and (6) operating cost inflation, so as to maximize the building’s total net revenues and competitiveness. Governments own and manage a portfolio of assets (streets, schools, parks, airports, hospitals, city halls, courts, police stations) that attract city dwellers who pay the taxes that pay interest on bonds that finance the city’s operating and capital budgets. Years ago, the maze of a city’s credit rating, debt service, bond refinancing, self-insurance for its operations (think plaintiffs’ slip-and-fall jury awards), costs of extreme events (such as natural and manmade hazards), tax rates, and intergovernmental transfers from state and federal governments, was a byzantine financial alchemy few knew or cared to explore. Taxes were taxes, and how they came to be so was simplified to citing the number of city public high school graduates who finished college. How banks financed city life went unseen as urban finance. Urban Finance: Today Today, urban finance is a game, where players succeed through literacy, transparency and practice. Home prices, tax assessments and trends are online. Real estate listings Copyright © 2011, Bruce Cahan and Urban Logic, Inc. (www.urbanlogic.org). All rights reserved. show buyers and tenants the cost of owning or renting urban space. Government budgets are available online, with crime rates, public school rankings, land use/environmental impact reports and other information readily available for anticipating city quality of life risks and threats for comparison to like-sized cities. And banks compete directly and through intermediating online brokers for home mortgages, car, credit card and other customers. Reconnecting Banks with Urban Finance The 2008-10 Credit Crisis and rolling state, county and sovereign debt destabilizations prove that what banks finance or refuse to finance, to whom and on what terms, can revive or wreak havoc on regional economic, social, environmental and geopolitical stability. Herein lies the disconnect: No matter how sustainable or transparent the city, its municipal bond rates reflect no discount. No matter how sustainable the family’s lifestyle, its mortgage, taxes and other costs reflect no discount. No matter how much consensus a neighborhood reaches to save energy, combat crime or feed and house their homeless or “working poor” so as to reduce their hospital, school, crime and social services costs, the neighborhood’s tax rate earns no discount. And certainly no dynamic mechanisms automate awarding, monitoring or withdrawing the discount as local efforts ebb and flow meriting it. Can smart livable cities leverage their banking? Can 1 Nouriel Roubini [1] and other noted economists suggest that the recent uprisings in North Africa trace to rapid increases in oil and resulting food prices. Thus, urban farming and indigenous food supply offer “food security” for cities with the natural or innovation assets to harvest food. 2 Municipal bond buyers and credit rating agencies have yet to quantify municipal sustainability. While some municipal projects may be rated or sold for their attractiveness to sustainable investors, overall municipal sustainability credit ratings and methods are in their infancy. Contrast, VanScoy 2009 [2] with Leurig 2010 [3]. Government Accounting Standards Board (GASB)’s Statement No. 49 [4] addresses pollution remediation liabilities, after-the-fact. Accounting and Financial Reporting for Pollution Remediation Obligations. GASB Statement 42 [5], Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries (November 2003) creates little incentive to replace less-energy or environmentally efficient capital assets, unless the replaced assets were functionally impaired and the replacement cost is less than the impairment charge. GASB Statement 34 [6] rules for infrastructure accounting indirectly may encourage cities to report operating budget savings through capital asset replacements and technology innovations that extend the infrastructure system’s useful