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The Potential for Civic Crowd-Funding to Finance Small Public Projects

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Daniel Hummel
October 28, 2016

It had been argued in public economics by well-known scholars such as Eric Lindahl and James Buchanan that there is a need to make government more responsive to the voters, avoid interest group dominance, balance the budget and increase transparency and accountability. These scholars argued for an optimal provision of public goods based on a marginal cost curve that would determine the amount of revenue needed to produce the desired level of goods. The voters / taxpayers would then have to determine the level of good to produce based on the cost assuming that all public goods are funded through taxes.

This is a classical economic approach to a public finance problem that truly only matters in a democracy. There has been an emphasis over the years to make the administrative state more democratic. One solution is to get citizens more involved in government. This is more involved participation than simply voting for representatives. This requires more knowledge of how government functions and the issues that affect it. The constant complaints about government waste, inefficiency and the inability to balance the budget—while at the same time making increasing demands upon the government—indicates there is an information asymmetry there. It is also one of the reasons that deficit financing through debt is popular in most democracies.

Fiscal crisis has provided an impetus to engage the citizenry in ways that would please Lindahl and Buchanan. Increasingly, local governments have turned to various tools to engage the citizenry in public projects. The use of participatory budgeting by the City of Vallejo, California was in response to its bankruptcy. The idea is that this will not only better inform citizens about the tough choices, but also create a sense of ownership over the whole process. Central Falls, Rhode Island also used another tool in response to a financial crisis for this purpose. It used civic crowd-funding to finance the beautification of a park. Other cities are also using this to fund bike lanes, youth programs, bike sharing programs and even the development of a fiber optic network. The increasing importance of this type of funding for public projects received state sanction in the State of Hawaii. In 2014, it became the first state to pass municipal crowd-funding legislation.

group-1013594_640The use of civic crowd-funding is a direct response to dwindling municipal resources along with a piling up of needed, but unfunded public projects. In essence, it is an online alternative to traditional public financing for public projects where donations and investments are made by individuals, foundations, businesses and others to support a single project. Starting in 2009 with the first civic crowd-funding site ioby.org, this has expanded to include donations, equity financing and credit financing for local projects by interested investors. Projects that are fully funded based on a thorough online proposal will be approved by the local government while those that do not will be tabled or discarded. The idea of an optimal provision of public goods is most fulfilled in this approach as the funders only fund the project based on their utility from it. This could be from use or simply the ‘warm-glow’ feeling that donors get from being involved with it.

There are constraints to the use of this type of financing. Larger capital projects have longer timeframes for development and longer useful lives while voluntary commitments of funding are very short term. This would require a full understanding of the true costs of the project which is something that government does not do well in a centralized framework let alone a decentralized one. In addition, there are problems with ‘free-riders’ who fully benefit from the project, but contribute nothing to it.

These problems are not insurmountable. So long as the projects are small with shorter lifetimes, low maintenance costs, generate revenue and/or the community has a stable population of long-term and committed residents who support the project, these issues diminish. Most of these projects have tended to range from $5,000 to $30,000, while most proposals have failed to garner the necessary funding for approval. Only those projects that have the most value and support are funded through this method. It is these projects that tend to have the most emotional appeal and it does not seem that the price tag is necessarily important. For example, the largest civic crowd-funding effort in the United States so far cost $1.2 million and it was a lighting project for the Willie L. Brown Jr. Bridge in San Francisco which included utility and maintenance expenses until 2026.

The rise of local fiscal crisis has provided an opportunity to increase citizen engagement beyond simple focus groups and town hall meetings. It has expanded into the realm of planning, budgeting and financing real public projects. In essence, they are connecting the funding decisions with the actual funders (taxpayers) which is one of the central tenets of Lindahl’s and Buchanan’s ideas on public finance. It is not a replacement for traditional public finance, but it becomes a part of the public finance portfolio for needed public projects.

(This is a summary of a paper written by Dr. Hummel titled “Civic Crowd-Funding: A Potential Test of the Voluntary Theory of Public Finance for Public Capital Goods” and published in the Journal of Public Budgeting, Accounting & Financial Management.)

Author: Dr. Hummel is an assistant professor in the management, marketing and public administration department at Bowie State University. He teaches classes on public policy analysis, intergovernmental relations and public administration. His research interests are urban resiliency / sustainability and right-sizing cities. Email: [email protected]

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