Overview: State & Local Investments

City and state governments have adopted a wide set of policy tools to spur community wealth building, including creating loan funds to start up local businesses and venture capital funds that give cities and states an equity stake in the outcome of their public investments. Another important strategy has been economically targeted investments, which employ pension assets to support local jobs and community economic development.

In the past two decades, U.S. city, county, and state governments have increasingly sought to invest directly in local business, either through economic development programs, which make loans or investments in local businesses, or through direct targeting of pension fund investments. The shift in strategy has taken place gradually over the past two decades. State and municipal loan and venture funds provide perhaps the most common form of public investment efforts. Indeed, it is rare to find a city or county government that does not seek to use policy tools such as equity and loan investments to support the creation of local business, promoting local asset development in the process. Most commonly, this is done through the use of an arms-length, non-profit, largely self-supporting “economic development corporation” in which city officials provide limited financial support and partner with business and other government officials to develop local business support services.

Another important policy change has been the increasingly active targeting of state and local pension fund monies, by which state and local pension funds direct a percentage of their equity investments to support businesses within their regions. These efforts are attractive to state pension trustees, since to the extent their local wealth-building efforts succeed, the state also enjoys greater tax revenues generated by its investment activity. Estimates of the level of economically targeted investment vary. The last comprehensive survey, conducted by the U.S. General Accounting Office in 1993, found that pension funds in 29 states had $19.8 billion in targeted investments, or roughly 2.4% of total assets. Given the growth of public pension funds since then, today, it is conservatively estimated that they total at least $43.6 billion. Basic statistics regarding these investment efforts are provided in the table below:

 

Local and State Government Investment Strategies: Basic Statistics

Percent of cities surveyed investing city money in equities, 1989 20.4%
Percent of cities surveyed investing city money in equities, 1996 56.3%
Percent of cities surveyed with venture capital funds, 1989 5.4%
Percent of cities surveyed with venture capital funds, 1996 33.2%
Public sector pension holds as percent of total pension holdings, 1998 28.4%
States that have allocated state dollars to venture and loan funds, 2000 31
States whose pension funds have investments in private equity, 2002 31
Estimated public sector pension fund holdings, 2002 $2.3 trillion
State pension funds in economically targeted investments (estimate), 2004 $43.6 billion