Problem Identification:
Stagnant growth in General Fund revenues has limited the City’s ability to undertake major improvement initiatives with significant start-up costs.

Recommended Action:
Create a renewable intergovernmental venture fund as an independent source of funding for qualified public sector initiatives that cannot normally be funded through departments’ annual budgets.

Cost Savings, Organizational, Revenue Enhancement, Service Improvement

Functional/Operational Area:

Estimated Annual Impact:
$670,000 – $2,000,000

Estimated Implementation Costs:

Barriers to Implementation:
The City would need to devise a method for capitalizing the renewable intergovernmental venture fund.

Projected Implementation:
180 days

Next Steps:
Develop a strategy for capitalizing the fund and establish guidelines for projects to qualify for investment support. Appoint an investment board made up of key City leaders and private sector representatives with banking or venture capital experience and recruit a manager to oversee the fund’s portfolio of project investments.

In recent years, the City has been afforded very limited budgeting flexibility to support improvement initiatives with high start-up costs where the realization of financial benefits is not immediate. This is particularly true in areas such as information technology, where the City’s ability to undertake potentially beneficial improvement initiatives is often inhibited by prohibitive start-up costs. Through a renewable intergovernmental venture fund, the City could make strategic investments in qualified projects that yield a specified return on investment. The fund would make investments in public sector projects that could not otherwise be funded through the City’s operating or capital budget. Cost reductions achieved and revenue enhancements gained would be reflected in adjusted budgets and used to replenish the capital base of the venture fund. For example, consider the following simplistic scenario:

1. The City was able to capitalize a $10-million renewable intergovernmental venture fund.
2. Strict guidelines for project investment were applied requiring a minimum 20 percent quantifiable return on investment.
3. The City was able to make $3.33 million in venture fund investments in each of the first three years of fund operations.

Renewable Intergovernmental Venture Fund Model
(All dollars in millions)

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Total
Yearly Investment $3.33 $3.33 $3.33
ROI f/Year 1 Investment $0.67 $0.67 $0.67 $0.67 $0.67 $3.33
ROI f/Year 2 Investment $0.67 $0.67 $0.67 $0.67 $0.67 $3.33
ROI f/Year 3 Investment $0.67 $0.67 $0.67 $0.67 $0.67 $3.33
Total ROI $0.67 $1.33 $2.00 $2.00 $2.00 $1.33 $0.67 $10.0

*ROI assumes a 20 percent annual return on investment in the form of quantifiable cost savings or revenue enhancements that are in addition to the quantifiable cost savings and revenue enhancements used to replenish the capital base of the fund.

Under this simplistic model, the interest earnings produced by the unused portion of the fund’s capital base could cover the annual cost of operating the fund. Ideally, the fund would be able to increase its investment activity, and the accompanying cost savings and revenue enhancement benefits, beyond the modest levels described in the chart above as financed projects begin to come on-line and produce financial benefits that can be used to renew the fund.

The capitalization of a renewable intergovernmental venture fund, given the City’s already-referenced financial constraints that prompt this recommendation, would be challenging. Possible capitalization options include using proceeds from non-recurring cost savings or one-time revenues from the sale of City assets or a general obligation bond issue.

This recommendation is modeled after the Productivity Bank initiative undertaken by the City of Philadelphia. During the FY94-FY2000 period, Philadelphia’s Productivity Bank made approximately $22.7 million in loans to City departments and agencies that are projected to result in almost $71 million of expenditure savings and revenue enhancements through FY2003.