Fiscal and financial issues for 21st century cities

The Project on 21st Century City Governance
will explore solutions for successful urban
governance in today’s complex world. Many cities
face rapid urban growth, growing environmental
concerns, a clamor from citizens for better local
services, and other pressures, often in the face of
tight resource constraints. This adds urgency to the
imperatives of effectiveness and efficiency in local
spending, and of growth-friendly, sustainable and
equitable generation of local revenues. Successful
solutions that tackle these imperatives tend to be
multi-level, multi-channel, and multi-sectoral.

More and more, solutions to urban challenges involve
creative approaches that circumvent the constraints
of traditional governmental bureaucracies
through greater collaboration with the private sector
and civil society. Yet no amount of innovation
can escape the need to tackle fiscal constraints and
set up mechanisms that allow for a predictable
flow of funding from national and regional governments
to cities. Mapping these arrangements
presents a daunting challenge for city leaders. The
underlying decision-making structures and the
merits of governance arrangements also need to
be assessed from a national perspective if the cities
of the future are to be better and more effectively

This first in a series of papers seeks to analyze the
experiences of some relatively successful cities, initially
in the United States and Europe, to identify
how their governance and financing models contribute
to their success, and to draw lessons applicable
elsewhere. It briefly summarizes the relevant
literature on intergovernmental fiscal relations, and outlines some of the issues to be addressed in
the case studies of the selected cities.

Although models of intergovernmental fiscal relations
vary widely across countries and over time,
reflecting a range of historical, institutional, and
socio-political, as well as economic, factors, the literature
has identified a number of principles that
are important for the effective functioning of city

These include, among others, governance arrangements
that promote transparency and accountability
of local officials to the electorate; effective
mechanisms of cooperation with neighboring municipalities,
and with higher levels of government; clarity in the definition of local spending functions
and an adequate degree of autonomy in carrying
them out; the assignment of significant and appropriate
own-revenue sources; the avoidance of unfunded
mandates; predictability of transfers from
other levels of government; and limits on borrowing
that reflect the debt management and servicing
capacity of each municipality. The background paper
explores in some detail these principles, as well
as challenges in applying them in practice.

Listen to this interview with Ter-Minassian about public-private partnerships:

In light of the lessons from the literature, it is proposed
that the case studies of the selected European
cities focus on the following broad issues: 

  • The nature and effectiveness of the arrangements
    for multi-level governance and coordination; 
  • The breadth and composition of spending
    responsibilities of the city government, and
    its degree of autonomy in carrying them
  • The indicators of quality and efficiency of
    its main spending programs, and the insights
    they provide into the institutional
    characteristics and managerial techniques
    that contribute to their performance; 
  • The extent of revenue autonomy of the city,
    and the advantages and disadvantages of
    the main own-revenue sources, in particular
    the challenges in effectively administering
    local property taxes; 
  • The factors influencing the level and mix
    of intergovernmental transfers received by
    the city; and whether their characteristics
    and performance conform to the theoretical
  • The systems of control of the city’s indebtedness,
    and an analysis of their effectiveness
    in preventing debt crises; and
  • The city’s experience to date with public-
    private partnerships (PPPs).