Shockingly, U.S. Treats Municipalities Worse than Other Countries

In the drama The Rock, T.S. Eliot writes:

When the Stranger says: “What is the meaning of this city?
Do you huddle close together because you love each other?”
What will you answer? “We all dwell together
To make money from each other”? or “This is a community”?

Municipalities are the conduits of human community. As I wrote in 2013, "City budgets contain the life blood of communities. School districts, contracts with utility companies, waste services, and street repairs all filter locally. City social services are often the first line of response for people in need. City councils also fund soup kitchens, domestic violence shelters, and animal shelters." The list could go on. Counties too, of course, and my experience working in victims' legal and resource services taught me that there are many instances where multiple cities and city-county partnerships fund public services, when they have funds.   

We know municipalities have been in trouble in the U.S. since well before the 2008 recession, and we know Wall Street has been kicking them while they're down, charging prohibitive interest and exploitative financing and debt servicing fees. But how does this compare to other countries? An article last year by Frank Shafroth at Governing contrasts the American municipal experience with that of Canada and Germany. In "Why Cities Can't Go Bankrupt in Canada or Germany," Shafroth writes that Canadian taxes help municipalities' income streams greatly, while in Germany,  

which has 16 states, some 450 counties and 12,500 towns and cities, municipalities have responsibilities for public order, infrastructure, cultural institutions and public transport. To finance these essential services, German municipalities draw not only upon three local taxes (two property and a local business tax), but also allocated tax revenue from income taxes, federal value-added taxes and state-allocated grants. The shared tax base eliminates overdependence on a property tax and serves to balance disparities in both resources and needs at the local level.

bank-local1.jpgTaxes are fine and all, but taxes are politically unpopular, and there are a couple of things Shafroth doesn't mention in his article, but that two readers of it do. I don't normally read the comments on internet news stories, because many comments are more offensive than if Charles Manson had directed "Three Men and a Baby." But the two wonky (in a good way) comments on the story in Governing illustrate two important points about how we should --and perhaps should not-- take care of our municipalities. One reader says that heavy fiscal control of cities in Canada by a non-local government leads to bad prioritizing and a misunderstanding of local needs, providing the example of the national government prioritizing its "provincial taste for ring road highways over urban flood prevention." I get that. As long as localities are treated equally and treat their own residents with material and political equality under the law, I think local governance is nearly always better and ought to be a proactively supported norm. Wouldn't it be great if there were a way to achieve strong local control and guarantee fiscal stability and shared prosperity in those communities?

Well, the other comment concerns public banking, and makes clear the error of omitting mention of Germany's strong public banks that, in the view of the reader, create "unparalleled stability in the financial sector."

150px-Sparbuch.jpgThe German public banking system is entrusted with 40% of total banking assets in Germany. In addition to public consumer and savings banks, many German public banks act as business development and infrastructure financing institutions. The public banking sector employs well over ten thousand Germans and manages nearly 900 billion euros. German Landesbanken act as business and mortgage banks. A subset of Landesbanken are Landesbausparkassen, or real estate banks. "Because of the landesbanken," Peter Dorman wrote in 2011, "small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive."

Ellen Brown describes the Sparkassen, or municipally owned savings banks:

The Sparkassen were instituted in Germany in the late 18th century as nonprofit organizations to aid the poor. The intent was to help people with low incomes save small sums of money, and to support business start-ups. The first savings bank was set up by academics and philanthropically minded merchants in Hamburg in 1778, and the first savings bank with a local government guarantor was founded in Goettingen in 1801. The municipal savings banks were so effective and popular that they spread rapidly, increasing from 630 in 1850 to 2,834 in 1903. Today the savings banks operate a network of over 15,600 branches and offices and employ over 250,000 people, and they have a strong record of investing wisely in local businesses.

Contrast Germany and even, to an extent, Canada, with Chicago:

Mayor Rahm Emanuel's decision to borrow for costs such as debt payments, bank fees and penalty payments on old deals gone bad -- the kind of bills cities typically pay with operating funds -- will cost Chicago more than $500 million in interest over the next three decades. Data released Thursday show the city is paying rates that approach 8 percent on the $743 million in taxable debt sold Wednesday. Chicago's borrowing costs have risen dramatically relative to other borrowers as its credit rating has deteriorated.

Other countries support and sustain their cities' budgets. In America, we gamble ours. Even absent derivatives, debt swaps, and the whole Wall Street financial debauchery, the fact that American states and municipalities are coerced into playing the unstable bond market to fund basic goods (issuing close to half a trillion dollars of new bonds every year) is structurally problematic. Markets are only really fair in a world of perfect information, and the bond market barely has any information available to the local governments that play it: 

. . . centralized, standardized, userfriendly, and timely financial information on all of those bond issuers is impossible to find . . . Price transparency is particularly lacking in the market for municipal bonds. One reason is that municipal bonds, unlike stocks and options, trade primarily on over-the-counter (OTC) dealer networks rather than on centralized exchanges . . . most municipal bonds trade infrequently—in fact many never trade in a given year—and investors have little ability to assess the value and prices of their investments. As a result, issuers and individual investors trade through intermediaries with significant advantages in terms of information and sophistication, and must compete with professional and institutional investors on unequal footing. Because investors value and will pay more for securities that are more liquid, the lack of liquidity drives up financing costs for municipal borrowers.

That's a huge sacrifice made by local governments just so some people can make money by having money. It's a piteously irrational model of financing governance and administration. Municipalities could save enormous amounts of money by borrowing from their own banks instead of being forced to compete in an illiquid bond market.

"The people are the city," Shakespeare writes in Coriolanus.

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