Mrunal Shah is a partner at Best Best & Krieger LLP, specializing in public finance. She can be reached at mrunal.shah@bbklaw.com.

California is home to some of the most dynamic and diverse cities in the U.S., ranging from sprawling, global metropolises to small innovative hubs and scrappy farm towns. Regardless of their size, the economic success of these cities is intertwined with their public finance strategies and investment in public infrastructure.

Economic development efforts offer numerous benefits to cities, including job creation, business retention, and increased tax revenue through the growth of businesses and commercial activity. Smart economic development also allows cities to create cultural and social growth, meet sustainability goals, and reduce blight, poverty, and crime.

The ways that cities can spur economic development are as diverse as the cities themselves.

Economic development strategies and public financing

Boosting infrastructure and public services is a part of making cities more attractive to businesses. Each of those areas comes with its own unique set of financing options.  

For example, the city of Los Angeles has invested heavily in expanding its public transit system. The city uses both state funding and bond financing to accomplish its goals. Investment in public transportation and other public improvements not only draws in businesses but enhances worker mobility, allowing people to access a broader variety of employment opportunities. Affordable public transportation allows for increased disposable income, stimulating economic activity both in the communities where these individuals work and live. 

Simultaneously, the housing affordability crisis threatens to undermine many cities’ economic growth. Communities big and small have utilized housing bonds, tax increment financing, and public-private partnerships, such as housing trusts, to increase affordable housing. Public financing of affordable housing projects directly contributes to economic development by ensuring that people can live near where they work, maintaining a robust local economy.

Cities like San Diego and Sacramento have also implemented incentive programs — such as tax breaks, development fee reductions, and streamlined permitting processes — to spur economic growth. These incentives are often financed through a city’s general fund, with the expectation that the new businesses will generate additional revenue through taxes and job creation.

Many California cities use special financing districts, like Mello-Roos community facilities districts (CFDs), to finance the impacts of new development on roads and other infrastructure. CFDs allow local agencies to levy a special tax on yet undeveloped land and issue bonds secured by those special taxes, allowing for the financing of infrastructure at an earlier time. These districts are often used with other financing districts.

Other cities, like Coachella, try to foster sustainable development to ensure their cities remain both affordable and livable. Berkeley and Santa Monica have introduced sustainability bonds and climate action plans to finance renewable energy projects, green building initiatives, and climate resilience measures. These investments not only contribute to long-term environmental sustainability but also create new industries and job opportunities in the clean energy sector.

Challenges and constraints

While the relationship between public finance and economic development is clear, California cities face several challenges when it comes to maximizing this intersection. The higher costs of goods, labor, pension liabilities, and public services, as well as increased demand for public services and unfunded state mandates, can make it difficult for cities to invest in economic development activities.

California’s reliance on income and sales taxes — which are more volatile than property taxes — can also lead to significant fluctuations in revenue. During economic downturns, cities may face budget shortfalls that force them to cut back on development projects or essential services, hindering long-term economic growth.

Worker mobility and affordable housing near job opportunities are essential to reducing poverty in communities with limited opportunities for individuals and families to build wealth. Ensuring that public finance tools create inclusive growth through investments in affordable housing, job training, transportation, and equitable access to services is crucial to maintaining social cohesion and preventing inequality from undermining economic gains.

Opportunities for the future

Despite these challenges, the future holds significant opportunities for California cities. More communities are turning to innovative public-private financing mechanisms, such as social impact bonds. These tools allow cities to leverage capital and share risk while pursuing public goods and services, like affordable housing and sustainable infrastructure.

Social impact bonds are a mechanism in which a municipality enters into a contract with an intermediary for the delivery of certain social services to achieve measurable outcomes, which are agreed upon upfront in the contract. The intermediary raises the initial capital through private entities. If the outcomes are met by the intermediaries, the municipality repays the contract with savings that result as part of a program’s success.

With the ongoing passage of state legislation and federal programs, such as the Inflation Reduction Act (which allowed for tax credit for conversion to electric vehicles) and SB 852 by Sen. Bill Dodd (which enabled the creation of climate resiliency districts), California cities have new avenues for securing financial support through grants, tax credits, and loans.

As cities continue to grow, there is also a greater recognition of the need for equity and sustainability in economic development. Public finance strategies that prioritize climate resilience and inclusive growth can help ensure that economic development benefits all residents.

How cities navigate the intersection of public finance and economic development is critical to how they solve the complex challenges of growth, sustainability, and equity. By strategically managing their finances and leveraging innovative tools, cities can drive economic development that not only enhances their economies but also improves the quality of life for their residents.

To learn more about how to finance your community’s priorities, check out “Economic Development and Public Finance: New Best Friends Forever?” at the League of California Cities Annual Conference and Expo, Oct. 16-18. Be sure to check out the expo hall, which includes over 240 service providers.