American cities are in crisis. They need to get into debt

AAs the House and Senate move toward passing a $1.9 trillion COVID-19 relief package, hard-hit states and local governments are set to receive $350 billion, in more billions more to help the safe reopening of public schools. This type of assistance from the federal government has been sorely needed during the pandemic and is absolutely essential to any meaningful and lasting economic recovery for the entire country.

But as vital as that money is, much of 2021 will see a tentative recovery at best. With a slower-than-expected vaccine rollout, it will be at least the summer before many businesses insist workers return to offices, and even optimistic projections don’t see a major recovery in tourism and travel until 2022. The result is that local governments and large cities in particular will always face large gaps between what they receive and what they have to spend, even with generous grants from Washington.

This is a challenge for any sustainable economic recovery. Cities are the economic engine of the country. The 25 largest metropolitan areas account for half of the country’s roughly $21 trillion GDP, and the other hundreds of smaller cities account for 35% more. Hundreds of billions of aid will help stem some of the damage of 2020, but the economy of these cities is in the trillions. There will be no Roaring Twenties without flourishing cities, and federal aid, however imperative, will not be enough.

There is an obvious solution to this problem: freeing up the capacity of cities to borrow. Unlike the federal government, cities are strongly constrained from borrowing by laws and state constitutions that mandate balanced budgets or set low caps on the amount of debt cities can assume.

This means that cities, unlike many other parts of government or private companies, can rarely solve their budget problems except by cutting workers, services and pensions. This can create a negative cascade of service cuts resulting in a deteriorating quality of life – uncollected garbage, increased crime – which then drives people to flee, which reduces the tax base, and which then requires new service reductions. To avoid this death spiral, we should just let cities borrow and spend and borrow and spend until the crisis is over. And to achieve that, we need to change state laws to let them.

To be fair, the borrowing restrictions stem from decades of mismanagement. It was the most dramatic case for New York City in the 1970s, even though other cities like Detroit and Chicago were hardly models of fiscal rectitude. Today, however, the problems facing cities are mainly the result of a pandemic. While some municipalities like San Francisco have been too drastic in preemptively closing everything, others have oscillated between too open and too closed, it is now clear that even consistent public policy could not have prevented massive economic damage. and budget holes. If tourism stops, there is no way for Las Vegas, Orlando or New York to avoid the loss of revenue. And if the federal government won’t allow emergency spending to float those savings, there’s a simple answer: borrow.

Cities have, of course, long borrowed to meet specific needs, especially to finance crucial infrastructure projects, such as roads, bridges and sewers. They issue general obligation bonds, which can be repaid by taxes, and revenue bonds, which are attached to specific projects that generate revenue such as bridge tolls. They were the first to put cities in the hottest water. Throughout the 20th century, many town halls abused their borrowing power, running into debt they could never hope to repay for projects that were never even built. History is littered with cities that took on general debt or project debt to build something, and that money then ended up in the pockets of mayors and aldermen, unions and cronies. Providence, Rhode Island, for example, became synonymous with corruption with its amply funded “roads to nowhere” in the 1980s and 1990s and its mayor eventually jailed for racketeering and fraud. The city of New Orleans borrowed heavily for projects with money that mysteriously disappeared; it took years to restore his credit rating.

The risks of excessive debt were nowhere more evident than in New York in the 1970s. After borrowing for years to supplement tax revenue, the city appealed to the federal government for a bailout in 1975, which the Ford administration denied, leading to the infamous Daily News title, “FORD TO CITY: DROP DEAD.” New York, then as now, was constrained by the New York State constitution as to how much debt it could issue, and those rules were further tightened after 1975, when the city’s finances been placed in receivership without official bankruptcy and that the town hall was placed on a debt and diet.

Limits on municipal borrowing are ubiquitous in the United States. Some of this is imposed by state governments who themselves have constitutional mandates to manage a balanced budget; some of these limits are written directly into city charters: San Francisco cannot borrow more than 3% of the city’s land value, which today limits debt to about $9 billion. Almost everywhere, however, cities have boundaries set not by bond markets or the willingness of investors to lend, but by laws put in place over time to maintain checks on the natural tendency of city governments to be wasteful and corrupt.

Past precedents are important and instructive, but they should not be a straitjacket. Not only are today’s municipal governments more accountable and transparent (although much more needs to be done in this area), but interest rates and the overall availability of capital have never been higher. When New York went bankrupt in the 1970s, interest rates soared well above 10%. Today, a city with a decent credit rating can borrow for about 2% over 30 years, and even a city with a poor credit rating can borrow for less than 4%. This cost of capital is significant. The challenge is almost always being able to keep up with the interest payments, and with rates so low, that becomes a whole lot less.

Instead of being at the mercy of Washington or state capitals for help, city leaders should work with state homes and raise their debt limits, even if only temporarily. . New York City mayoral candidate and longtime proponent of more direct spending to raise individual incomes, Andrew Yang, explained to me: “Cities should have the ability to borrow to smooth out the ups and downs, especially during a historic crisis that leads to budget deficits. around the country. We should give cities more capacity to react and adapt.

Precedents and current laws stand in the way. Debt regimes may have made sense when they were put in place, and may make sense at some point in the future. But in a world awash with capital, where each country is borrowing what it can to fill the holes created by the pandemic, tying the fiscal hands of cities because they did poorly decades ago when interest rates ‘interest were many multiples of what they are today, makes no sense.

If the federal government does not use its vast economic powers to support the struggling metropolises that are the heart of America’s 21st century economy, then at the very least cities should be able to solve their own problems by finding the right solution. money themselves and not being forced into a deadly spiral of service cuts that will only prolong the pain. Few solutions are so simple and so obvious. The only thing that opposes it is the will to break with the past. The future of the US economy will only be bright if cities can navigate it without being constrained by debt regimes that will starve them.

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