Show me the money: Fiscal and financial fundamentals of 21st century city governance

Finding solutions to complex urban challenges, such as climate change, migration, or rising income inequality requires a grounded, fine-grained understanding of how cities are governed: how the interests and imperatives of public and private institutions work together (or don’t), and the politics that determine how much change from the status quo is possible.

While a clear mapping of these status quo governance arrangements will not by itself be enough to solve the problem, it is an essential first step. In a new paper, Teresa Ter-Minassian takes this framework and applies it to the fiscal and financial arrangements between cities and higher levels of government.

Recognizing that adequate financing and predictable flows of money are two primary concerns for all metropolises, she provides an important look at intergovernmental fiscal arrangements and finds they vary considerably within and across countries. For example, France does not strongly target equalization measures to more evenly redistribute national transfer or “own-revenue” incomes among cities and regions, on the grounds that its national taxation and benefits system is already strongly redistributive. This is quite distinct from the German fiscal federalism model, which includes a fiscal equalization mechanism that redistributes income among the state governments after they have received their shares of fiscal revenues.

Yet, well-functioning systems are found within countries of all levels of decentralization.

The structures that determine intergovernmental governance are constantly in flux and influenced by informal factors, as countries search for the optimal arrangements. One example of this process of ongoing adjustment: Positively, France has moved to significantly reduce the complexity of its famous “mille-feuille” administrative system, named after a multi-layer pastry due to its numerous complex, and overlapping, permutations of local government groupings. It hasn’t yet, however, eliminated any of its multiple governance levels, a move Italy has made with respect to its provinces.

Still, there are common elements across all good multilevel governance systems, which support smart fiscal arrangements.

The human factor—strong leaders and technically skilled public administrators—is one of the most important forces shaping successful cities. With coordination and cooperation a necessary part of any fiscal negotiation—both vertically, between central and local authorities, and horizontally across local governments—the presence of skilled and trusted leaders with the capacity to make deals and build relationships is critical.

Also critical are adaptive governance systems, which allow cities to benefit from the experiences of their peers, encouraging smarter policy reforms in micro-fiscal management, service delivery, and budgetary management.

Finally, nations with clear and specific assignment of local responsibilities are able to support devolution more effectively, maintaining fiscal efficiency and responsiveness even as power become more distributed.

By stepping back to examine the fiscal and financial foundations of cities, this report challenges us to consider the merits of different approaches to governing them and to envision new strategies to fund innovative urban growth and development. The takeaway: There is no one-size-fits-all solution to the fiscal challenges of cities, but solutions do have similar institutional building blocks.