Keeping the Water Running: Public Banking as an Alternative to Privatization

Last week, Occupy published my essay on the disastrous effects--and fiscal causes--of water privatization. The cause of water shut-offs in Detroit and elsewhere, water contamination, and other hurdles to universal access to H2O, I argued, were not found in some "natural" level of resource scarcity. Rather, water crises result "from local governments going broke – in debt to big banks, regulated by unfunded mandates from an aloof and cronyist federal government, unable to finance their own control over water, or raise the capital to design and implement their own sustainable water systems. Space only allowed me to make a cursory mention of public banking as a means to avoid the privatization debacle. The argument is simple, but important to lay out explicitly: Governments turn to privatization when they perceive their budgets as irredeemable.

water-faucet.jpgMunicipal finance is a multi-trillion dollar business in the United States, and the costs, more often than not, overwhelm local governments. Banks peddle toxic debts and risky financing schemes to desperate local governments, including interest rate swaps, capital appreciation bonds, and absurdly high-interest financing. Municipal bond debt has increased nine-fold in the last three decades. Banks' drive for profits means they are working against the interest of local governments even as they are their sole providers of credit.

The federal government isn't a big help here. Compliance with, and payments for violations of, the Clean Water Act are mostly unfunded mandates. Faced with budgetary shortfalls and an expectation to comply with unfunded requirements, local governments turn to privatization--they essentially accept buy-outs of water.  The companies that do the buyouts are then only too happy to shut off the water of "delinquent" account holders. In Detroit, 40% of the city was targeted, with 300,000 directly denied access to water to drink, bathe in, or cook in. This was directly related to the costs of Detroit's remedying CWA violations at its wastewater plant--estimated at around $200 million. Upgrades to the system that would have avoided future problems were estimated at several billion dollars. None of that was affordable for a city that had been lured into relying on shady banking deals to finance its services, pensions, and basic city functions.

As I mentioned in my article, New Jersey is following other states in privatizing water--often without any democratic consensus to do so. New Jersey Governor Chris Christie manipulated cities into doing this by cutting $85 million from the state Department of Environmental Protection in 2014, specifically "limiting the amount the agency can spend on water infrastructure improvement projects." The effect has been to force municipalities into privatization.

Privatization may seem like a quick solution to a city's financial woes, but it robs Peter to pay Paul, passing those cost increases onto consumers. A few years ago, Food and Water Watch "found that private companies charge up to 80 percent more for water and 100 percent more for sewer services." More recent data holds that privatization increases"the long-term costs borne by the public" and is "shortsighted, irresponsible and costly."

Numerous examples of water privatization abuses or failures have been documented in California, Georgia, Illinois, Indiana, New Jersey, Texas, Massachusetts, Rhode Island -- just about anywhere it's been tried. Meanwhile, corporations have been making outrageous profits on a commodity that should be almost free. Nestle buys water for about 1/100 of a penny per gallon, and sells it back for ten dollars. Their bottled water is not much different from tap water.

David Brodwin of the American Sustainable Business Council explains that the foundational argument for privatization--that private ownership increases responsible stewardship--is flawed, because such "ownership" typically involves property being held by distant, wealthy entities who have no personal stake in the quality or intrinsic value of what they hold.

Absentee owners rarely have the same sense of stewardship and restraint as local owners. A group of local owner-operators (say, fishermen) have a strong incentive to stick it out through a difficult negotiation to agree on self-imposed restrictions that preserve their fishery. After all, they have most of their life savings tied up in their trade, they don’t have skills that they can readily apply to other businesses, and they may want their children to be able to follow in their footsteps. They’re in it for the long term. From an economists’ standpoint, the investment horizon for local owner-operators is measured in decades or more. But a corporate owner that seeks only a financial return will have a much shorter time horizon when making decisions. It may simply not be worth it to preserve the future productivity of a natural resources if that means forgoing a much greater profit today. All of this says that privatizing the commons may not work in a lot of cases. The incentive to chase a quick buck may outweigh the financial and social rewards of long-term stewardship. Ownership is not necessarily stewardship.

But public ownership, which can be achieved through public financing (at no cost to taxpayers and resulting in dividends being paid back to local governments instead of paid to Wall Street), actually does facilitate stewardship. Public banks would stem the tide of privatization at several points in the process, from keeping municipal budgets full to begin with, to financing water infrastructure upkeep, to supporting public water works rather than profit-driven private corporations.

Two conclusions in a recent document on the benefits of public banking are particularly applicable to the goal of funding municipal government. First:

A public bank makes a sizeable profit through its partnership lending for economic development. Because public banks partner with community banks in making loans that extend credit into their communities and do not compete as retail banks, public banks need no branches, tellers, ATMs or broad and expensive marketing. Public banks are chartered to serve the public not exploit it. Hence, there are no mega salaries, bonuses or commissions to provide incentives for imprudent risk taking. The business model of public banks, so very different from Wall Street “banking,” means that its profits are returned annually to the municipal general fund and reinvested in growing the partnership loan portfolio. This helps balance the operating budget without raising taxes, cutting vital programs, taking on more debt, asking for givebacks from employees or raiding pension funds.

And second:

A public bank finances capital projects and bond issues at lower interest rates than the traditional bond market. It can also refinance current public debt, lowering debt service costs without the use of swaps and deceptive public/private partnership agreements that give away public assets to private companies with no accountability. It is also a stable buyer of municipal bonds as investments. Paying non-escalating, fee-free payments without the need to provide additional profits for commercial bank shareholders can mean cost savings of 35% to 50% for municipal projects. And whatever interest the public bank collects is retained and returned, in part, in profits deposited in the municipal general fund, rather than extracted and exported from the community.

Privatization, in a particularly sinister "you can't vote on it" form, exists in at least five states now. Other states and municipalities, responding to the perception that there is no alternative to the privatization of public goods, are cooking up similar schemes. It's time for supporters of public banking to take the water case directly to policymakers, the media, and citizens. Tell them that the privatization of every sphere of the planet is unacceptable and, more importantly, that there is a better way. 

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