Tag Archives: municipal finance

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.