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
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
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
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
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
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
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.
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