Monday, July 25, 2016

Jerusalem – Toward a fiscal balance

Glenn Yago, Senior Director, Milken Innovation Center
Jacob Udell, Research Analyst, Milken Innovation Center
http://milkeninnovationcenter.org

In a word, Jerusalem is unique.  It is at once a world-class brand, a paradox of every type, and the obsession of about one-quarter of the people on the planet.  It is also a city – a municipality to almost 900 thousand people. Jerusalem is also structurally insolvent.  
With a 2016 operating budget of NIS 5.15 billion, Jerusalem received NIS 320 million to cover its operating deficit in 2015 and NIS 516 million in 2016.  In the simplest terms, this is 10% percent operating deficit. On its face, such a deficit is a big budget problem.  There is not enough money to pay the current bills – and to take care of long term needs and obligations such as infrastructure spending, pension obligations, and other legacy costs. With about one-third of the city’s population at or below the national poverty level (compared to one-fifth nationally, and just over one-tenth in Tel Aviv) and the high concentration of land use in government and non-profit activities, total property tax exemptions more than double that of Tel Aviv and Haifa – in 2015, such exemptions totalled over NIS 587 million, or 23% percent of all taxable real estate in the City.  Though Jerusalem businesses and residents who do pay property tax are burdened with rates at almost twice the amount per square meter than in other cities, total property tax collection per capita is still significantly lower than that of other major cities in the country (see chart).  All in all, per capita municipal expenditures in Jerusalem are about half the per capita expenditures in other major cities in Israel.   Jerusalem is like an employee who has to work sixteen hour shifts day after day and get only half the salary.
Each year, the public is treated to the spectacle of the City reaching out to the Government to help it settle its budget woes.  To his enormous credit, the Mayor has taken the position of promoting, leveraging, strengthening, and building the city out of this persistent deficit. 
The 2020 Plan, so called for both its perfect vision and unrealistic deadline, is a robust effort to leverage the region’s strengths, attract private investment, and increase the tax base sufficiently to overcome the budget deficit.  The joint investment of private capital, government, and philanthropy of NIS 1.2 billion over the next decade, along with the corresponding improvements in transportation and access within the city and with other cities on the coast, and the rehabilitation of neighborhoods, will spur economic growth in Jerusalem valued at NIS 4.15 billion. The influx of municipal revenue from new housing, new commercial activities, and new offices, and, yes, even new residents, even while adjusted for escalated costs of municipal operations over this period, is expected to eventually yield a viable operating margin to support the city’s growth and strengthen its financial condition. 
But how to achieve this fiscal balance when the new cash flow will be gradual over a long period of time and the amount needed to get there is so large?  Borrow against this incremental annual cash flow to pay for the needed investments in the city that will make these new sources of revenue possible.  This is a familiar fiscal strategy for cities around the world – New York (1975-1980), London, Chicago (1985-1995), Boston (1990-2010), Paris (1988-1995), Cleveland (1985-1995).  The Government can enable this new fiscal vision for Jerusalem by creating financial tools that create opportunities to investors that understand the long term benefits of a city in fiscal balance.


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