This article originally appeared in Dissent Magazine.
The
European debt crisis, and the ensuing austerity-fueled chaos, can seem
to Americans like a distant battle that portends a dark future. Yet a
closer look reveals that the future is already here. American austerity
has largely taken the form of municipal budget crises precipitated by
predatory Wall Street lending practices. The debt financing of U.S.
cities and towns, a neoliberal economic model that long precedes the
current recession, has inflicted deep and growing suffering on
communities across the country.
In July 2012, Mayor Christopher
Doherty of Scranton, Pennsylvania, reduced all city employees’ salaries
to the minimum wage. With a stroke of his pen, wages for teachers,
firefighters, police, and other municipal workers, many of whom had been
on the job for decades, dropped to $7.25 per hour. The city, the mayor
explained, simply could not pay them more. Ron Allen, who reported the
story for NBC Nightly News, repeated this assessment. Cities like
Scranton,
he said,
“just don’t have the money” to pay city employees more than the minimum
wage. Officials blamed the crisis on a declining tax base, on reduced
revenue from the state, and on public sector labor contracts that the
city could no longer afford.
What does it mean to say that a
former steel town in decline “just doesn’t have the money” to pay its
bills? It means that it no longer has access to credit markets
controlled by the big banks. For years, Scranton officials, like
officials across the United States, have been selling municipal bonds to
finance everything from basic services to development projects.
Scranton’s problems careened out of control when they city’s parking
authority threatened to default on its bonds. Wall Street responded
aggressively by cutting off its credit line, and city workers paid a
steep price. American-style austerity arrived in Scranton under the
guise of budget cuts blamed on public employees, whose salaries and
pensions had nothing to do with the economic crisis.
Scranton’s
problems are hardly unique. Municipalities across the country are
grappling with declining local tax revenue and reduced federal funding
in an era when growth and development are equated with prosperity. This
toxic mix has produced a $3.7 trillion municipal debt market, a revenue
juggernaut for Wall Street. Municipal bonds are issued by virtually
every city, county, and development agency in the United States. The
number of taxpayer-backed bonds in circulation is five times higher than
only ten years ago. This means that the world’s largest financial firms
now hold the purse strings for everything from essential services like
sewage treatment plants to large-scale developments such as sports
arenas. Municipal bonds are extremely profitable for investors because
they are tax-exempt and, like mortgages, can be packaged into
securities.
How Did We Get Here?
Part of
the municipal debt story can be traced to New York City’s 1975 fiscal
crisis, when the city almost defaulted on its debt. New York was able to
avoid bankruptcy at the last moment by issuing guaranteed bonds backed
by public pension funds. As a result, the Emergency Financial Control
Board, the municipal body that controlled the city’s bank accounts, was
in the position of rewriting the social contract, exerting control over
labor at every level. Union leadership agreed to the deal because they
feared a bankruptcy filing would void labor contracts. Only after the
city had disciplined the unions did the federal government move in with
rescue loans.
New York City had been debt-financed since the
1960s. But the fiscal crisis of 1975 inaugurated a new funding paradigm
for distressed municipalities: taxpayer-backed debt is issued to service
the debt already on the books. American municipalities are now
increasingly financed not with public money, but with private loans, and
the pace of this shift has accelerated since 2008. The Center on Budget
Policy and Priorities recently reported that thirty-one states will
face unsustainable budget gaps in 2013.
Few public assets are safe
from Wall Street’s profit imperative. Public transportation has long
been a cash cow for investors. Since 2008, the New York Metropolitan
Transportation Authority (MTA) has lost over $600 million as a result of
interest rate swaps with JP Morgan Chase, Citigroup, and other big
banks. As a result, thousands of transit workers have lost their jobs
and hundreds of bus and subway lines have been cut. That is not enough
to satisfy the bond market. In March 2013 New York transit riders can
expect a new round of fare hikes. Most subway and bus riders are
working-class New Yorkers, immigrants, and people of color. They will
soon pay even more for the privilege of lining Jamie Dimon’s pockets.
The
MTA is not the only municipal organization in the country that runs on
debt. The Refund Transit Coalition, a public transportation advocacy
group, has uncovered at least 1,100 of these swaps at more than 100
government agencies costing taxpayers $2.5 billion a year. None is more
indebted than Boston’s Massachusetts Bay Transportation Authority
(MBTA). The story is a familiar one: in 2000 state legislators ended
most public subsidies for the MBTA, which was additionally saddled with
almost $2 billion in debt, much of it left over from the infamous Big
Dig. Wall Street was happy to provide loans so the MBTA could maintain
the system’s aging infrastructure and finance expansions.
Twelve
years later, Boston’s transit authority spends 33 cents of every dollar
it takes in to service its debt. Lawmakers, who have learned the lessons
of Scranton all too well, are unwilling to challenge Wall Street.
Instead, they have proposed cutting services and raising fares by as
much as 43 percent. No one believes this represents a long-term
solution. As
one Occupy Boston activist noted,
“the MBTA has never even asked the banks and bondholders who continue
to profit from the [transit system’s] enormous debt to take a similar
cut, effectively giving the banks a ‘free ride,’ while forcing T
riders—working people, the unemployed, students, seniors, and the
disabled—to bear more of the burden.”
Increasing debt loads, along
with other neoliberal policies demanding that municipalities do more
with less, put cities under enormous pressure to promote private
economic growth in lieu of spending public funds on public goods. This
imperative is one reason that city officials have pursued controversial
development strategies such as declaring a parcel of land “blighted” to
allow it to be seized by eminent domain and auctioned to the highest
bidder. For example, the Barclays Center, the new arena for the Brooklyn
Nets, was built partially on land that was condemned before being
transferred to a developer. Cities also generate revenue by leasing
public assets to the private sector. In Chicago, for example, the Skyway
toll road has been leased to a private company for ninety-nine years.
Atlanta even privatized the city water supply, only to cancel the
contract years later when residents complained about tainted water.
As
the privatization of everything from land to transportation makes
clear, taxpayers rarely have a direct say in which bonds are issued and
which public assets are sold out from under them. But with
municipalities guaranteeing loans by promising that bondholders will be
repaid with tax dollars or revenue generated by the debt-funded project,
taxpayers are often left footing the bill.
Meanwhile, it remains
nearly impossible for municipalities to cancel bond deals. By law, most
states cannot declare bankruptcy. And, in many cases, federal bankruptcy
codes guarantee that creditors will be repaid. In 1994, Orange County,
California declared bankruptcy to repair the damage done when its
treasurer took out loans on behalf of the city and then lost $1.6
billion in the securities market. Following what was then the largest
bankruptcy filing in U.S. history, the county still paid its bondholders
to avoid a tarnished credit rating. Another California city, Stockton,
has been implementing severe austerity measures ever since the housing
market tanked in 2008 in order to make payments to bondholders. The city
cut 25 percent of its police officers, 30 percent of its firefighters,
and over 40 percent of all other city employees. The crime rate in
Stockton has skyrocketed and unemployment surged, and the city is now
considering cutting pension benefits for retirees to pay its debts. The
capital of the Golden State, Sacramento, has also cut its police force,
by 30 percent, to fill a budget gap, and has seen a similar rise in
crime—gun violence, rapes, and robberies have increased dramatically.
Communities long ago abandoned by the state are also suffering from
austerity. Camden, New Jersey, one of the poorest cities in the United
States, recently privatized its police force, laying off officers and
canceling union contracts. Today, the Camden police force often does not
have the numbers to respond to crimes that don’t involve murder or
serious injury.
As cities like Scranton seek to eliminate
unsustainable debts, investors grow more demanding. Bond insurers
involved in bankruptcy negotiations in Stockton and San Bernardino have
even suggested that bondholders have a claim to CalPERS, the retirement
fund for California’s public workers. Though the retirement system is
constitutionally protected, this is a troubling development because
bondholders’ demands are almost always given priority. A
recent CBO report noted
that “of the 18,400 municipal bond issuers rated by Moody’s Investors
Service from 1970 to 2009, only 54 defaulted during that period.” Bonds
are bets that banks don’t lose.
Though the debt financing of U.S.
cities is not illegal, that doesn’t mean deals are made fairly and
transparently. We recently learned that interest rates around the world
have been manipulated for years for the benefit of a few firms. Yet the
LIBOR scandal is not surprising when one considers that municipal
interest rate fraud has been going on for years with no public outcry.
In his report on municipal bond rigging in Rolling Stone,
Matt Taibbi explainedhow
Wall Street has “skimmed untold billions” from hundreds of
municipalities—and how they continued to invest in bonds even after they
were caught. “Get busted for welfare fraud even once in America, and
good luck getting so much as a food stamp ever again,” Taibbi wrote.
“Get caught rigging interest rates in 50 states, and the government goes
right on handing you billions of dollars in public contracts.” The debt
financing of municipal government is an activity promoted and protected
by the regulatory arm of the federal government.
What Can Be Done?
Strike
Debt, a group (of which I am a member) inspired by Occupy Wall Street,
has begun to address municipal bonds as part of a larger critique of
debt as a system of wealth extraction. Strike Debt asserts that debt is a
primary mechanism through which the 1 percent profits from the 99
percent. Debt affects everyone, especially those who are too poor to
access low-interest credit. And Wall Street is the primary culprit.
Framing municipal debt as part of a global system poses significant
opportunities for organizers because it connects anti-austerity
movements abroad to debt resistance efforts at home. Once we reframe
debt as a problem that affects us all—as municipal debt obviously
does—it becomes easier to imagine that we have enormous power to
withdraw our consent.
Strike Debt’s analysis of debt as a system
of wealth extraction is also a critique of capitalism. Municipal debt is
more than just another example of Wall Street greed and local
corruption. It may be the biggest scandal yet because it is not a
scandal it all. U.S. cities, towns, and districts are now increasingly
debt financed, which means they cannot operate without access to the
credit markets controlled by the big banks. This illustrates that Wall
Street’s class war against cities cannot be mitigated with more
regulation. In fact, the SEC protects investors, not municipalities,
from the consequences of bond deals gone bad. Even renegotiating debt
often requires new loans. “When muni bond issuers unwind deals and pay
enormous exit fees to Wall Street,” the New York Times
recently reported,
“they typically issue new debt to do so. In recent years, for example,
New York State has paid $243 million to terminate such transactions;
$191 million was financed by new debt issuance.” Raiding cities for
wealth, which produces a cycle of indebtedness, is not illegal or
unusual. It is simply the way Wall Street does business.
The idea
that some debts cannot and should not be paid is gaining traction. In
2011, for example, Jefferson County, Alabama declared bankruptcy (the
largest in U.S. history) to rid itself of $4 billion in debt, much of it
issued by corrupt officials to finance a sewer project that left people
in a predominantly low-income, African-American community without a
functioning sewer. Some do not want to renegotiate the debt. Instead,
they reject it outright. As
one Occupy activist in Birmingham noted,
“[the debt] shouldn’t ever have been issued, and therefore it shouldn’t
exist. It shouldn’t have been spent. Since it shouldn’t have existed,
we’re not going to pay it.” This statement could become a slogan for
debt resistance movements across the country because it insists that
debtors are a class, a collective “we” that can decide when enough is
enough.
Some municipalities are fighting back, too. After their
pay was cut to minimum wage, Scranton’s municipal unions sued the city,
and their wages were restored. Baltimore, a city where more than 80
percent of school children qualify for free- or reduced-price lunch, is
suing more than a dozen big banks for manipulating LIBOR, the benchmark
for interest rates on many financial products. In July, a group called
Boston Fare Strike declared a Free Fare Day and held turnstiles open for
subway riders to protest fare hikes that enrich the 1 percent.
Activists in Chicago are organizing community debt audits with the goal
of identifying illegitimate debts that must be abolished. And finally,
in a case that has gained national attention, Oakland, CA is trying to
sever its relationship with Goldman Sachs for good. In the late 1990s,
Oakland issued $187 million in bonds as part of an interest-rate swap.
After the credit markets froze in 2008, Oakland could no longer make its
payments to Goldman. The city council voted to cancel the deal, though
Goldman insists the city must pay. CEO Lloyd Blankfein explained his
firm’s unwillingness to let Oakland out of its contract. “The fact of
the matter is,”
he said, “we’re a bank.”
Blankfein
is not wrong. Plundering U.S. cities is what large financial firms do.
This is a troubling reality. A bankruptcy attorney featured on the NBC
News report about Scranton offered this grim assessment: cutting worker
pay is necessary to avoid “more drastic measures.” The reporter didn’t
explain this statement, leaving viewers to imagine what terrible fate
awaits those who don’t accept the reigning neoliberal orthodoxy that
city budgets must be balanced by cutting worker pay, gutting public
services, and issuing more debt to profit the 1 percent.
In fact,
it is Wall Street that should be afraid of any disruption to business as
usual. The cycle of debt illustrates that we cannot fix the problem
through austerity. This tactic only deepens the devastation, since low
wages further erode the tax base for cities, leaving them vulnerable to
predatory lenders. It’s difficult to imagine how the debt financing of
American cities could be scaled back without completely rethinking our
economic system. Strike Debt is making the case that, in the United
States as in Europe, the solution lies not in austerity but in investing
in a genuine commons and in providing equitable access to public
resources. These are precisely the “drastic measures” alluded to on NBC
News. The question we must ask is,drastic for whom?
