Ferguson, Alienation, and City Budgets: Fleece the Poor, or Democratize Finance?

The elephant in the room is almost always an economic elephant.

The unrest in Ferguson, Missouri following both the shooting of Michael Brown and the failure of a grand jury to indict the police officer who shot him was, in a large part, contextualized by Ferguson's model of city financing. Now it seems city officials are unwilling to learn from history. While the city's policy of generating a substantial portion of its revenue from petty fines contributed to alienation and unrest in the city even before the shooting of Brown, Ferguson is doubling down on using tickets and fines to generate municipal revenue.

Bloomberg News's Kate Smith reports that

Ferguson, Missouri, which is recovering from riots following the August shooting death of an unarmed black teenager by a white policeman, plans to close a budget gap by boosting revenue from public-safety fines and tapping reserves.The strategy by the St. Louis suburb, which suffered a second round of violent protests last month after a grand jury refused to indict the police officer, may risk worsening community relations with increased citations and weakening its credit standing by reducing a rainy-day fund.To close a projected deficit for fiscal 2014, which ended June 30, the municipality will deplete a $10 million capital-projects reserve, Jeffrey Blume, Ferguson’s finance director, said in a telephone interview. For the current year, the city is budgeting for higher receipts from police-issued tickets. . .Revenue from violations, which already represents the city’s second-largest source of cash after sales taxes, will rise to 15.7 percent of receipts in fiscal 2015, from a projected 11.8 percent this year, he said. In 2013, fines brought in $2.2 million, or 11.8 percent of the city’s $18.62 million in annual revenue, according to budget documents.

Importantly, the Bloomberg piece draws attention not only to the social implications of this form of financing (terrible, as you might imagine)...

Howard Cure, head of municipal research at New York-based Evercore Wealth Management LLC, which oversees $5.2 billion, said Ferguson’s reliance on revenue from police citations may have contributed to public anger after officer Darren Wilson shot and killed 18-year-old Michael Brown.“It leads to animosity and distrust that might have even spawned some of the unrest that we’re seeing,” Cure said.

...but also points out how untenable this financing model is for municipal government.

Reliance on a revenue stream like police fines was problematic from a purely credit perspective as well, said Joe Rosenblum, director of municipal credit research at New York-based AllianceBernstein LP.
“Any community that faces budget issuers with a whole series of financial and social challenges you have to approach with a skeptical mind,” he said. “I’d be fairly negative on the outlook from a credit perspective.”
Trading in Ferguson debt indicates that investors in the $3.7 trillion municipal market have started to take note of financial issues. Yields on the city’s 2013 certificates of participation maturing in 2032 exceded 4 percent last week from 3.5 percent as prices fell below 90 cents on the dollar for the first time since issuance, according to data compiled by Bloomberg.

The practice of funding city budgets through petty fines is particularly pervasive in Missouri, where, as Radley Balko wrote in an explosive and widely read piece in September:

Some of the towns in St. Louis County can derive 40 percent or more of their annual revenue from the petty fines and fees collected by their municipal courts . . . If you were tasked with designing a regional system of government guaranteed to produce racial conflict, anger, and resentment, you’d be hard pressed to do better than St. Louis County.

Funding cities is increasingly difficult during this time of enforced scarcity and disingenuous austerity. Property and sales taxes are unpopular, and now municipal bonds are in big trouble.  The Federal Reserve recently changed the liquidity requirements for the big banks that typically finance government budgets through municipal bonds. Those bonds, or "munis," have been considered safe liquid investments for a long time. But the new regulations eliminated munis from the "high-quality liquid collateral assets" category. This means that the biggest banks are now unlikely to carry their holdings in munis, which, according to Wall Street on Parade, "could raise the cost or limit the ability for states, counties, cities and school districts to issue muni bonds to build schools, roads, bridges and other infrastructure needs. This is a particularly strange position for a Fed that is worried about subpar economic growth." As Ellen Brown argues,

In the US, there is already a trend to force state and municipal governments into austerity measures, if not outright bankruptcy, in order to eliminate labor unions, pension obligations and social services. Bankruptcies can be involuntary, forced by the creditors who caused them. Detroit is the US model. Michigan’s Constitution protects pensions, so the emergency manager appointed by the governor could not unilaterally cut those funds. But in a municipal bankruptcy, a judge would decide the fate of city workers’ pensions, making it an attractive option for banking interests. The oligarchs have long had their eyes on the massive sums represented by the pension funds.

But city- and county-owned banks could easily finance city services, the construction of schools and the repair of roads, even the locally-controlled and monitored operation of police and firefighter budgets. As Public Banking Institute Executive Director Gwen Hallsmith concludes, public banking at the local level means that "lending for infrastructure, housing, education, and job creation is a lot less expensive, and the profits from the lending go back into public coffers as a revenue stream for other purposes."

Civil unrest, alienation from governance, and police brutality are all symptoms of a system that can't deliver the goods, that fails to make economic security and opportunity available to all people, that makes participation frightening and civic trust futile. Last week I suggested an alternative possibility: cities with democratized economies, including public banks.

Municipalities funded by public banks rather than traffic fines would generate equitable social relations, eliminating the hierarchies that make brutality an endgame for cops. Public banks can finance city services, schools and even public safety, ending cities’ reliance on ideologically-laden federal and corporate funding sources.

It seems like an easy choice: financing city services with democratized, locally-controlled banking, or taking money directly out of residents' pockets through excessive citations and fines--and using police power to do so, in the midst of a firestorm of bad relations between public and police.

The latter option just seems awful. Let's bring cities into the new economy with the kind of initiatives taking shape in Santa Fe and Seattle--the kind that already exists in North Dakota.

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