Municipal Bonds and the Crisis of the Cities

Abayomi Azikiwe, editor of the Pan-African News Wire, sitting at the Labor Monument in Hart Plaza in downtown Detroit on September 27, 2008. (Photo: Alan Pollock).
Originally uploaded by Pan-African News Wire File Photos

Municipal Bonds and the Crisis of the Cities

Developments in Detroit illustrate the role of finance capital in the destruction of America’s urban areas

By Abayomi Azikiwe
Editor, Pan-African News Wire
Commentary

Two significant events have occurred in the city of Detroit over the last several weeks which warrant the attention of people concerned about the current plight and future of urban centers in the United States. Inside the city of Detroit the appointment of an emergency financial manager by the Democratic Governor Jennifer Granholm to oversee the affairs of the public school system represented a direct attack on the right of self-determination of the people of Detroit, a majority African-American city.

The rationale behind the appointment of an emergency financial manager purportedly stemmed from the rising budget deficit of the Detroit Public Schools and repeated claims of corruption and mismanagement of funds by the educational system that is governed by an elected board that stands for office every four years. The Detroit schools has a deficit of approximately $300 million along with a decreasing student enrollment that results in less funding every year from the state of Michigan.

Another significant event was the re-election of Mayor Dave Bing, who came to power in a special election in Detroit in May. Bing ran on a theme of reducing the budget deficit through cutting jobs, salaries and city services. He proposed to drastically reduce the city’s ailing transportation system and imposed a mandatory 10 percent wage cut for all non-union employees.

Bing directed intimidation attacks against the city unions and demanded that they accept a 10 percent wage cut. The city is reported to have a budget deficit between $250-300 million and its population will probably show a significant decline in the 2010 census.

Despite these dire economic circumstances over the last few weeks, brand new bond proposals have been introduced for approval by Detroit taxpayers and their representatives in the City Council. The newly-appointed emergency financial manager Robert Bobb initiated a bond scheme that was put before the voters in the recent November 2009 elections.

Voters in Detroit were told that federal stimulus money would be available if they voted in favor of issuing $500 million in bonds to build new schools and refurbish existing ones. Proposal S was trumpeted by most of the corporate media, with the exception of the Detroit Free Press, as a means of rebuilding the school district. Robert Bobb pushed the scheme through the corporate media and a series of community meetings where he emphasized the need for people to vote for the school improvement program.
Although there was opposition to Proposal S from Detroit residents, however as a result of the overwhelming media campaign that was financed by the supporters of Bobb and the relatively low turnout in the municipal elections, the initiative was passed by a substantial margin.

Historically people in Detroit have voted to tax themselves in order to maintain city services and public employment. Since the tenure of Detroit’s first African-American Mayor Coleman A. Young, residents have repeatedly approved mileages and bond proposals under the notion that the declining economic status of the city would require some sacrifice by the residents.

In regard to the city government, which is financed separately from the public school system, after the re-election of Bing, it was announced that the Mayor would seek approval from the City Council to issue $250 million in new municipal bonds in order to meet the current financial crisis gripping the area.

“A deficit elimination plan will be submitted to council that is inclusive of a $250 million deficit-elimination bond,” said communications director for the Mayor’s office Karen Dumas. According to the Detroit Free Press “Municipal bonds are typically issued to allow local governments to borrow money for large capital improvements to bridges, roads, power plants or sewer systems. (Detroit Free Press, November 19)

“In Detroit’s case, the money would be used to chip away at the city’s debt, which is forecast to grow to $480 million by the end of the next fiscal year and to $750 million in fiscal year 2011-12,” the Free Press article continues.

The bond rating for the city has been reduced to junk status and as a result of this factor, many people inside the city see these new bond schemes as another mechanism to further weaken its financial well-being. In addition, the issuance of both the bonds for the public school system and the city government, appear to be an endorsement by the ruling class interests in Detroit of the policies carried out by Robert Bobb and Dave Bing. Both the emergency financial manager and the mayor have been hailed by the corporate interests in the region.

The Role of Bond Rating Agencies and Their Impact on Detroit

With Detroit’s bond rating being evaluated at junk status, it increases the cost of borrowing by the city government. Yet the determination of the value of municipal bonds lies with three major bond rating agencies: Standard & Poor, Fitch and Moody’s. Even though the issuing of these bonds come at a critical time financially for the city, it is important to note that the residents of Detroit will ultimately be responsible for securing the returns on these investments.

Municipal bonds are rated to supposedly indicate to potential investors the probability that these bonds will default. Such an evaluation can drastically alter the cost of the maintenance and use of the public infrastructure. Consequently, the results of the evaluations issued by these agencies can determine whether a city can keep its existing work force or whether it has to lay-off thousands of public employees and reduce services to the residents.

Also what is often overlooked in the corporate media accounts of the rise and fall of bond values, is the discrimination inherent in the entire rating process. Cities which are predominantly African-American and working class tend to have a lower bond rating than areas where whites and a more affluent population reside.

A study of the racial discrimination inherent within the bond rating process was conducted by John Yinger of the public administration and economic departments at Syracuse University. Yinger drew an analogy between redlining utilized by banks and insurance companies in charging African-Americans more interests on loans, if loans are granted at all, and larger insurance premium rates, and the use of the same discriminatory methodology in rating the value of municipal bonds.

Yinger also points out that the bond ratings agencies are largely unregulated. They are not required to provide objective evaluations of the cities’ real status and the reasons why these areas are suffering economically.

According to Yinger, “Thanks to municipal bonds ratings, citizens must pay more for infrastructure in some jurisdictions than in others. The question is whether this variation is entirely ‘legitimate,’ in the sense that it is based solely on factors that society deems acceptable, or is to some degree ‘unfair’, in the sense that it is based on factors such as the racial and ethnic composition of a jurisdiction, that businesses should not consider.” (Yinger, Municipal Bond Ratings and Citizen’s Rights, December 2006)

The Need to Raise These Issues in a Fightback Program

It is important that workers and community organizations focus on the role of municipal bonds and bond rating agencies in the current period of economic crisis. The payment of interests on the debt to the banks is major factor in the decline of the cities.

With the decline in city revenue due to rising unemployment, a decrease in real wages, epidemic rates of home foreclosure, declining property and sales taxes, the ruling elites will demand even larger cutbacks in the standard of living of the most oppressed segments of the working class. If demands were made to impose a moratorium on payments of debts to the banks because the interest charged on these borrowed funds are based on discriminatory practices that unfairly punish urban areas where people of color reside, it would expose the inherent racist character of the bond rating agencies and the financial sector of the ruling class.

Yet the credit burden imposed on the people in Detroit has not made the surrounding predominantly white and middle-class suburbs immune from the current economic crisis affecting the public sector of the economy. Overall the tax revenue for the state of Michigan has dropped drastically. Earlier in the year it was reported that the state government was losing $500 million per month as a result of the declines in sales and income tax revenue due to the highest unemployment rate in the country that exceeds 15 percent.

Just recently in West Bloomfield, which is one of the more affluent suburbs outside Detroit, 2,000 people rallied to protest the drastic cutbacks in education funding which was slashed by the legislature to the tune of over $200 million. Suburban school districts are laying off teachers and eliminating academic and sports programs. Other suburban cities are forced to lay off public employees including police officers and firemen.

The cuts in Detroit that are mandated through the machinations of the banks and bond rating agencies are not enough to satisfy the profit making requirements of the banks who have already been bailed out through the federal government and the federal reserve bank by providing $11-17 trillion in giveaways and lines of credit. Workers and the oppressed must stand up and demand that their city governments refuse to pay the interests on banks loans as well as the excessive costs of issuing municipal bonds.

These demands can be raised in conjunction with the need for a moratorium on foreclosures, evictions and utility shutoffs. Until there is an effective jobs programs in the United States that can guarantee full employment, there will be no solution to the perennial crisis of debt plaguing the urban areas and states across the country.

Likewise the use of bond ratings to further squeeze the residents of urban areas in forcing them to pay higher rates on borrowing must be halted in order to provide relief to the working class and the oppressed.