Taxpayers in La Crosse County sent at least $7.86 million to wealthy investors and Wall Street banks in 2019 in interest payments and fees.
The figure for the wider Coulee Region would add millions more to that total. Western Technical College, for example, expects to pay $4.6 million in interest on its debt for its 2019-20 budget year alone.
The money goes to investors who buy up the bonds issued by local governments and public schools and also includes fees charged by major Wall Street firms that underwrite many of those bonds.
In 2019, the State of Wisconsin spent $572 million on interest and fees on its debt, an enormous sum that could otherwise have been invested in local communities.
A new report by the left-leaning Action Center on Race & the Economy (ACRE) points out that the U.S. Federal Reserve could simply refinance all the existing debt held by cities, states, and public schools at zero percent interest. The Federal Reserve could then become the new source of credit for state and local governments, freeing up billions of dollars in public funding.
La Crosse Mayor Tim Kabat supports the idea, but given the current dysfunction in the federal government is not optimistic about the possibility of it being enacted.
“This is a wonderful idea, but I have serious doubts that it would ever happen,” Kabat told The La Crosse Independent. “Given the inability for the federal government to come together to address infrastructure and other challenges…I’m skeptical.”
Allowing the Federal Reserve to offer long-term, zero interest loans to states and local governments would come with virtually no risk for taxpayers.
“The ten-year default rate for municipal bonds between 1970 and 2019 was just 0.16%, compared with 10.17% for corporate bonds, meaning corporate bonds were a whopping 63 times more likely to default,” the ACRE report notes.
Nationwide, ACRE estimated that canceling interest payments would result in annual savings of $160 billion for state and local governments. To give an idea of the scale of that number, it would cost $66 billion to cover childcare costs for all families in the U.S. with children under the age of 5 who currently pay for childcare.
The estimated $7.86 million in interest and associated fees paid by local governments in La Crosse County in 2019 includes $2.2 million paid by the city of La Crosse, $1.5 million paid by La Crosse County and $852,000 paid by the La Crosse School District. The remainder of the total is made up by payments on debt held by school districts and municipal governments in Onalaska, Holmen and West Salem. All the numbers come from public financial reports.
The issue of local governments’ reliance on private borrowing to fund capital projects is not just that it results in resources being wasted on interest payments, the authors of the ACRE report note. The system also gives enormous power to credit ratings agencies over public policy at the local level. These agencies – primarily Standard and Poor’s, Moody’s Investors Service, and Fitch Ratings – give ratings to local and state governments that come with policy recommendations to maintain a good rating. Bond underwriters (Wall Street firms like JP Morgan Chase and Citigroup) use lower credit ratings to demand higher interest rates.
“The major rating agencies have a long history of using credit ratings to push an austerity agenda and demand cuts to public services, and are rife with conflicts of interest that have made them bad at actually rating borrowers’ likelihood of defaulting,” the ACRE report states.
This dynamic can be seen playing out in La Crosse County with negative consequences for local jobs and public services. For example, last month at a meeting of the Onalaska Common Council, City Administrator Eric Rindfleisch told the council that the city needed to cut $500,000 in spending, which has since resulted in five job losses. Council member Tom Smith asked why the city couldn’t use reserves to cover the $500,000 and thus prevent the cutbacks, according to the meeting minutes.
Rindfleisch responded, “I believe it was two years ago, we effectively budgeted the use of $150,000 in surplus to reduce the levy amount charged that year. We still have impacts with that when we deal with Moody’s and the rating agencies because effectively that’s an ongoing operational expense that we used reserves for, which raises red flags – are we collecting enough revenue.”
To credit ratings agencies, the use of reserves to plug budget holes is a policy mistake and one that if repeated will result in lower ratings. The system allows the agencies to act as a disciplining force that serves investors and banks and reduces the decision making power of democratically elected councils and boards.
“Quite frankly, this is where, in my opinion, La Crosse has lost their ratings over time because they have continued to use reserves on an ongoing basis instead of a one-off basis,” Rindfleisch added at the September meeting. “A good chunk of our budget is debt servicing, and if that line item becomes far more expensive because of rates or default, then you’re not any better off.”
In May of this year, Moody’s downgraded the City of La Crosse’s credit rating from Aa2 to Aa3, which is still an excellent level. According to Moody’s, the rationale for the downgrade was “the city’s recent spend down to realign fund balance levels with its updated fund balance policy that is below average compared to similarly rated peers.” This means that in Moody’s view the city’s fund balance level (reserves, or what could be called rainy day funds) had gotten too low.
Over the summer, when the city decided to slash the library’s budget, council member Jessica Olson was asked by the La Crosse Independent why the city’s reserves couldn’t be used to patch the budget, instead of making cutbacks that resulted in job losses. That option was off the table, she said, because it could upset Moody’s and result in another downgrade, which in turn could raise the city’s cost of borrowing.
Too Small to Fail
Critics of allowing the Federal Reserve to loan money to state and local governments contend that doing so would encourage profligacy. But the authors of the ACRE report disagree.
“The Federal Reserve could easily adopt regulations to ensure repayment of these loans and discourage over-borrowing. For example, as a condition of lending, the Federal Reserve could stipulate that any borrower that misses a payment must levy an automatic tax on residents above a set income threshold to make up the payment,” the ACRE report notes.
In response to the covid-19 crisis, the Federal Reserve was given permission to offer up to $500 billion in loans to municipal borrowers through the CARES Act, a relief bill passed by Congress. The move put an end to years of resistance from the Federal Reserve to offering loans to cities and states. But the Federal Reserve initially charged interest rates that were higher than most municipalities could already get on the private market. The terms of the loans were also limited to just three years As a result, the Municipal Liquidity Facility had closed only two loans in the first three months after it launched, one to the state of Illinois and the other to the Metropolitan Transportation Authority in New York. Meanwhile, the Federal Reserve has continued to offer more generous terms to corporations than it offered to states and cities through the program.
“The Federal Reserve’s actions clearly indicate where its priorities lie. But if the Federal Reserve wanted to extend this largesse to American taxpayers, it has all the authority it needs to fundamentally remake the municipal finance system into one that puts people before profit by making long-term, zero-cost loans available to all state and local government borrowers and government agencies,” the ACRE report concludes.
By Eric Timmons. Email questions to firstname.lastname@example.org. Top image credit: Jericho/CC BY 3.0.
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