•  HOME 
  •  BOOKS 
  •  WWP 
  •  DONATE 
  • Loading

Follow workers.org on
Twitter Facebook iGoogle

Municipal bonds and urban crisis

Finance capital’s role in the destruction of U.S. cities

Published Dec 2, 2009 2:51 PM

Two significant events have occurred in Detroit, a majority African-American city, that warrant the attention of people concerned about the plight and future of U.S. urban centers. Democratic Gov. Jennifer Granholm’s appointment of an emergency financial manager to oversee the affairs of the public school system represents a direct attack on the people of Detroit’s right to self-determination.

The other was the re-election of Mayor Dave Bing, who 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, directed intimidation attacks against the city unions and imposed a mandatory 10-percent wage cut on all nonunion employees.

The rationale behind the emergency financial manager appointment purportedly stemmed from the school system’s rising budget deficit and repeated claims of corruption and fund mismanagement. The Detroit school system has a deficit of approximately $300 million, along with a decreasing student enrollment that results in less funding every year from the state government.

The city is reported to have a budget deficit of $250-300 million and its population will probably show a significant decline in the 2010 census.

Despite these dire economic circumstances, new bond proposals have recently been introduced. The newly appointed emergency financial manager, Robert Bobb, initiated a bond scheme that was put before the voters in the November elections.

Voters 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 as a means of rebuilding the school district.

Although there was opposition to Proposal S, the initiative passed by a substantial margin as a result of the overwhelming media campaign and the relatively low turnout in the elections.

After Bing’s re-election, it was announced that the mayor would seek City Council approval to issue $250 million in new municipal bonds to meet the current financial crisis.

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 bond proposals under the notion that the city’s declining economic status would require sacrifice.

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. 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.” (Nov. 20)

The role of bond rating agencies

Detroit’s bond rating has been reduced to junk status and as a result, the cost of borrowing by the city government has increased.

The determination of the value of municipal bonds lies with three major bond rating agencies: Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Although the issuing of these bonds comes at a financially critical time, it is important to note that Detroit residents 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 public infrastructure. The evaluations can determine whether a city can keep its existing workforce or whether it has to lay off thousands of public employees and reduce services.

The discrimination inherent in the entire rating process is often overlooked in corporate media accounts of bond values. Cities that are predominantly African American and working class tend to have lower bond ratings.

John Yinger, trustee professor of Public Administration and Economics at Syracuse University, drew an analogy between the redlining used to charge African Americans higher interest and insurance premium rates, and the discriminatory methodology in bond rating: “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.” (“Municipal Bond Ratings and Citizen’s Rights,” December 2006)

The bond ratings agencies are largely unregulated. They are not required to provide objective evaluations of the cities or the reasons why they are suffering economically.

Fightback program needed

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

If demands were made to impose a moratorium on debt payments, it would expose the inherently racist character of the bond rating agencies and the financial sector of the ruling class. The interest charged on these funds is based on discriminatory practices that unfairly punish urban areas where people of color reside.

The cuts in Detroit, which are mandated through the banks and bond rating agencies, are not enough to satisfy the profit-making requirements of the banks that have already been bailed out by the Federal Reserve Bank.

The credit burden imposed on the people in Detroit has not made the surrounding predominantly white and middle-class suburbs immune from the economic crisis. Overall, the state of Michigan’s tax revenue has dropped drastically. Earlier this year it was reported that the decline in sales and income tax revenue was costing the state government $500 million per month.

Recently in West Bloomfield, an affluent suburb outside Detroit, 2,000 people protested the more than $200 million in cutbacks in education funding. Suburban school districts are laying off teachers and eliminating programs. Suburban cities are laying off public employees.

Workers and the oppressed must stand up and demand that their city governments refuse to pay the interests on bank loans as well as the excessive costs of municipal bonds.

These demands can be raised in conjunction with the need for a moratorium on foreclosures, evictions and utility shutoffs, and an effective jobs program. The use of bond ratings to further squeeze the residents of urban areas must also be halted.