Cross posted from Arizonans for a New Economy
At their upcoming meeting on June 19-22, the US Conference of Mayors will be considering hundreds of resolutions on everything from gun safety to tax incentives to jobs and education. Tucked into that long list of resolutions is the “Mayors Resolution on Strengthening Municipal Finances“.
This resolution addresses the millions of dollars in fees that Wall Street banks charge cities and challenges mayors to negotiate with bankers to reduce these fees or, alternatively, seek other more affordable means of financing– like establishment of a public bank.
Arizonans for a New Economy and the Public Banking Institute strongly support this resolution. Cities across the country– like Tucson– are strapped for cash and faced with tough budget choices. Paying outrageous bank service and financing fees only starves our local economy. If that cash were here in Tucson, we the people could use it to grow and improve our city– instead of wasting it on lining the pockets of the too-big-to-fail banks.
Bond Issues… booo
How do cities amass such high banking service fees? A major way that cities accrue debt (and related fees and interest) is through bond issues. For example, in recent years voters approved a city bond issue to fix the roads and a county bond issue to build a new animal shelter. On Election Day 2015, voters will be asked to approve yet another bond issue— this one covering everything but the kitchen sink. Listen up, people! Bond issues are not a panacea for all local funding needs. Yes, bond issues allow us to have the services, facilities, and infrastructure improvements we need but can’t fit into the budget– thanks to budget cuts by the Legislature– but bond issues carry a hefty long-term price tag.
Here is a summary from the Pima County website about the 2015 bond issue:
On April 21, 2015 the Board of Supervisors approved a resolution ordering and calling a special bond election to be held on November 3, 2015 for the purposes of road and highway improvements; economic development; libraries and workforce training; tourism promotion; parks and recreation; public health; welfare and safety; neighborhoods and housing; natural area conservation and historic preservation; and flood control. Please visit the Bonds2015 information page to learn more.
That’s quite a list. What’s left?
Below, a section of the resolution to strengthen municipal finances resolution quotes staggering statistics about municipal debt. One glaring example of oppressive city debt is the City of Los Angeles, which pays $204 million per year in Wall Street bank fees; this is 30% more than it spends to fix the streets. (Read a detailed report about LA here.) How much is the City of Tucson or Pima County pay in bank fees? We should be provided this information– since the politicians want us to vote for another bond issue in a few months.
How can we have the money we need to thrive as a community– without bond issues or higher taxes? Establish a public bank. A city, a county, a state, a tribe– any or all of these governmental bodies could use their public funds to create a bank, which would build infrastructure projects, create jobs, bolster the middle class, and grow our local economy. If we continuously borrow money to pay for services– instead of raising taxes, cutting services or electing better Legislators to fund the services– we will be caught in a web of debt with fees and interest payments gobbling up more and more of the local budget.
We in Southern Arizona need to stop drinking that bond issue quick-fix Kool-Aid because borrowing more money will only create more long-term problems in the future. Ironically, on Saturday, the Arizona Daily Star posted a commentary by Councilman Steve Kozachik about the city’s budget, bond ratings, the cost of borrowing, and living within our means. Although Koz doesn’t mention public banking as a solution, he does raise red flags about the cost of borrowing and the use of bonds to make ends meet.
Mayors Conference Resolution of Strengthening Municipal Finance
Only four Arizona mayors are registered to attend this most recent mayors conference– Greg Stanton of Phoenix, John Giles of Mesa, Mark W. Mitchell of Tempe, and John Weiers of Glendale. If you live in Phoenix, Mesa, Tempe, or Glendale, please send the mayor an email or make a telephone call and encourage him to support Mayors Resolution on Strengthening Finances resolution (#71 on the conference program).
Even if your mayor is not registered for the conference– like Tucson Mayor Jonathan Rothschild– it is still worthwhile to bring up your concerns related to exorbitant bank service fees, pass along the resolution and related links (PDF here), and tell your mayor that you support establishment of state and municipal public banks to grow the economy, create jobs, and help the middle class. (BTW, we have already sent this resolution and background information to Mayor Rothschild, but it would be helpful for others to do the same.)
To give you an idea of the scope of the bank fee problem, here are some of the clauses from the resolution.
WHEREAS, numerous American cities and towns rely on major financial service providers
for managing financial accounts, structuring bond deals and the like; and
WHEREAS, municipal finance services in the US comprise a $4 trillion business;(2) and
WHEREAS, in many cases said services entail excessive cost impacts on municipalities;(3) and
WHEREAS, in 2012-13, one city alone paid financial service providers more than $204 million in fees, contributing to harmful reductions in municipal services;(4) and
WHEREAS. in 2012 another city paid financial service providers $193 million in debt service, equal to 19% of total municipal expenditures, much of it for toxic debt;(5) and
WHEREAS, major service providers in 2012 were forced to pay $673 million in restitution for systematic rigging of municipal bond auctions spanning ten years or longer;(6) and
WHEREAS, financial service providers have sold complex, substantially defective municipal financings while misrepresenting inherent and actual risks;(7) and
WHEREAS, such financial products include various interest rate swaps, pension obligation bonds, auction-rate securities, credit enhancements, capital appreciation bonds and, despite a municipal default rate of only 0.012% (1970-2012),(8) unreasonably high-interest financings;(9) and
WHEREAS, many such products and services may be inherently flawed and violate Rule G-17, the “fair dealing” rule of the Municipal Securities Rulemaking Board (MSRB);(10) and
WHEREAS, in the past three decades, outstanding US municipal bond debt has soared from $400 billion to $3.7 trillion,(11) a ninefold increase; and
WHEREAS, financial fees, not interest, may now comprise 70% of income at three of the largest municipal finance service providers, up from less than 45% in 1995;(12) and
WHEREAS, financial service fees charged municipalities are often exorbitant, arbitrary and unreasonable, bearing no relation to costs of delivering the respective services;(13) and
WHEREAS, this fee-based model enables financial service providers to profit even when municipalities suffer financially from certain types of deals and, in fact, to profit especially in such cases; and
WHEREAS, this model creates perverse incentives in certain cases for financial service providers to aggressively work against the best interests of municipalities and taxpayers; and
WHEREAS, municipal officials commonly believe they have little leverage and ultimately no alternative but to pay exorbitant financing and management fees;(14) and
WHEREAS, multiple attractive alternatives exist that can ease municipalities’ dependence on predatory financial services;(15) and
WHEREAS, a pioneering city council voted to bar a major financial service provider from city business if this provider refused to release the municipality from a costly rate-swap arrangement;(16)
NOW, THEREFORE, BE IT RESOLVED, that the US Conference of Mayors does hereby condemn predatory financial service practices, products and fees; and does hereby insist that fees should bear a rational relationship to costs of providing the respective services.
BE IT FURTHER RESOLVED, that municipalities should seek to internally identify, and to voluntarily publish, their fee and interest payments for financial services and debt; examine past and present financing arrangements to detect any predatory features and their costs; and, via such means as renegotiation, seek to strengthen their finances by recovering public funds taken in unfair deals…
Remember: Austerity is a Lie. There’s plenty of money. The problem is that it’s on Wall Street– not here on Main Street. And as I mentioned above, we need transparency in what our cities and counties are paying in banking fees now. We can’t borrow our way out of our budget problems, but we can invest our way out.