Predatory Municipal Finance

Every once in a while, I come across a study that “connects dots”–that makes previously disparate bits of information tell a new and different story.

I had one of these “aha” moments when I came across a Roosevelt Institute report titled “Dirty Deals: How Wall Street’s Predatory Deals Hurt Taxpayers and What We Can Do About It.”

According to the report, Wall Street and several major financial corporations have “engaged in a systemic effort to suppress taxes.” My first reaction to this was disbelief–not because I harbor any illusions about the business practices of Wall Street, but because I didn’t understand why they’d bother to lobby for generalized tax cuts. What would motivate such efforts? What’s in it for them?

Here’s the missing piece: when it is difficult for cities and states to fund even basic public services–let alone ambitious but necessary projects– out of tax revenues, banks can take advantage of that situation by offering state and local governments “creative” (albeit predatory) municipal financing “deals.”

Predatory financing deals prey upon the weaknesses of borrowers, are characterized by high costs and high risks, are typically overly complex, and are often designed to fail.

Ironically, the money that flows to Wall Street and its partners in these transactions often ends up costing taxpayers more than they’d pay by way of a responsible tax rate imposed by elected officials–and elected officials are accountable to voters in ways that Wall Street wheeler-dealers are not. (The report notes that taxpayers “do trillions of dollars of business with Wall Street every year.)

We have a perfect example of the way this works right here and now: Indianapolis’ proposed Justice Center. I’m in favor of the project, but as I’ve noted previously, I’m extremely leery of the “creative” and highly privatized way in which the city proposes to finance it. The terms “high costs,” “high risks”, and “overly complex” certainly seem apt.

The predatory practices highlighted in the Roosevelt report are made possible by voters’ stubborn belief in a free lunch. We want public services, but we don’t like paying for them. ┬áSo “creative” politicians work with Wall Street to give us “creative financing” that allows us to pretend we’re getting a bargain.

It’s easy to con people who lie to themselves.

 

8 thoughts on “Predatory Municipal Finance

  1. I believe most of know there is no such thing as “Free Lunch.” We hear on one hand of a lack of funds for snow removal, street and road repair, street lights, parks, more Police and the always starved Public Transportation. We will hear from the politicians we are not taxed enough to upgrade these services. Perhaps this is so.

    What I strongly object to is the City with the collaboration of the State to fund the building and maintaining of Sport Palaces for the wealthy Mega-Billionaire Owners of Professional Sports Teams. Numerous other direct and indirect subsidies are in play for the selected others. The Cricket Field comes to mind, the ROC and The Broad Ripple Parking Garage. I will not be at all surprised if a new Soccer Stadium is built with Public Tax Dollars. Let’s call this what it is Crony Capitalism.

    So on one hand the Services needed by the Public are starved for funding and on the other hand the Crony-Capitalists are lavished with funds.

    We have a tax bucket so to speak that I pay into. The bottom line is I would not mind paying more taxes for Public Services. However, so much of this bucket is skimmed off the top by the Crony-Capitalists and their political enablers the Public Services are left wanting for funds.

  2. Thank you, Louie. We may need a new justice center at some future date but…after basic necessities are provided. We, the public, should decide what these necessities are by voting on questionable construction of a privately constructed and maintained justice center. There are grass filled cracks in some areas of streets in my neighborhood that will soon need to be mowed as we mow our lawns. Too many areas of this city are in the same condition. There should be no need to mention the needs in public education, public safety, public transportation and deplorable infrastructure county-wide. Apparently the GOP has forgotten (or was behind) the so-called creative financing of homes which resulted in repossessions. That old adage, “A chain is only as strong as it’s weakest link.” holds true regarding our Democratic representative in the Senate at this time. The strongest Democratic candidate I saw in this past election was Beth White; she stood strong behind her belief in supporting same-sex marriages. We need more Beth Whites and fewer Joe Donnellys to represent Indiana residents on local and national levels. This justice center will happen and we will still be complaining about it not being needed at this time when we are still looking for pro sports teams to use already constructed arenas and fields. Go team!

  3. A definition.

    Externality-

    “A situation in which the private costs or benefits to the producers or purchasers of a good or service differs from the total social costs or benefits entailed in its production and consumption. An externality exists whenever one individual’s actions affect the well-being of another individual — whether for the better or for the worse — in ways that need not be paid for according to the existing definition of property rights in the society. ”

    Standard accounting lore.

    Many worship capitalism , and it does have advantages, but also disadvantages. Externalities are one of them. Especially after oligarchy has replaced democracy as Marx and Engles predicted to be inevitable. Of course we thought that could be prevented by regulation but over the long term they may have been more prescient than we.

    Nevertheless, the combination of externalities and oligarchy means that what is being professionaly managed now is not our economy but rather the flow of money away from consumers towards owners of the means of production. Which, of course, is the end that M&E predicted was inevitable. The measure of this is wealth inequality which is at record levels here and now.

    Oligarchy has now powered predatory financing beyond innovation as the most lucrative source of wealth for the few. And of course that is counter to economic expansion which benefits all.

    We’ve always been taught that democracy would save us but the indicators now favor a future where the power of democracy is displaced by the power of wealth.

    Have we passed the point of no return?

    I don’t know. I just don’t know.

  4. Perhaps knowing that an experience federal prosecuter will be taking over the city gov will keep the illegal games to a minimum with the Justice Center. If they misbehave, PLEASE PLEASE put their pampered Republican butts in jail.

  5. The voters believe in a free lunch??? How could they? The Republicans have been telling us for years that there is no such thing. I think it is part of their Mantra: ThereIsNoSuchThingAsAFreeLunchAndTaxesMustBeCutEveryYear

  6. The Jefferson County Alabama case was different than creative financing. You had outright fraud and payola by the banks to elected officials and board members.

    However i have seen investment banks come in with refunding proposals where they were offering upfront cash payments for entering into agreements whereby if interest rates hit a certain threshold the issuer would have to refund the bonds and issue variable rate bonds with an interest rate swap w/said bank. Of course they pitched it that the certain threshold wasn’t likely to occur and you’d have all that cash on hand for right now. However, what that equates to is government officials gambling , and gambling against someone with much more information than the official has. Thankfully most big government agencies said thanks but no thanks to that kind of deal, but smaller communities, schools, etc… were far better pickings for those banks as upfront $ sounds great. The problem is that they don’t have the revenue over time when the conditions are met for the swap to kick in. That’s when they claim they didn’t know what they were signing.

  7. You can thank Mitch Daniels and his property tax cuts that eviscerated the finance of local governments, especially those in urban areas.

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