The New Urban Fiscal Crisis

• DOI: 10.1177/0032329215617464
• Author: L. Owen Kirkpatrick
• Published date: 01 March 2016
• Date: 01 March 2016
• Subject Matter: Special Section Articles

Politics & Society

2016, Vol. 44(1) 45 –80

© 2015 SAGE Publications

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DOI: 10.1177/0032329215617464

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Special Section Article

The New Urban Fiscal Crisis:

Finance, Democracy,

and Municipal Debt*

L. Owen Kirkpatrick

Southern Methodist University

Abstract

Numerous U.S. cities suffered immense fiscal strain following the subprime mortgage

crisis and financial crash of 2007–8. Diminished revenues, tightened credit, and

speculative financing that went bad in the aftermath fueled widespread fiscal distress

on the local scale. Although the current moment resembles fiscal crises that crested

in cities in the 1970s–90s, two factors distinguish the current period. First, municipal

affairs have become thoroughly financialized—dominated by speculative securities

and volatile debt arrangements—such that local crisis can no longer be understood

apart from financial market instability. Second, local fiscal politics have become

increasingly removed from democratic oversight and control. This de-democratization

hinders the capacity of political communities to reregulate markets and rebuild urban

communities. An analytic model derived from the work of Hyman Minsky and Karl

Polanyi emphasizes how cities become ensnared in a “financial instability” cycle and

how communities seek to protect themselves by way of the “double movement.”

Keywords

urban fiscal crisis, municipal finance, municipal bonds, Hyman Minsky, Karl Polanyi,

financialization, de-democratization, Chicago, Detroit

Corresponding Author:

L. Owen Kirkpatrick, Department of Sociology, Southern Methodist University, PO Box 750192, Dallas,

TX 75275-0192, USA.

Email: Kirkpatrick@smu.edu

*This is one of four special section articles in the March 2016 issue of Politics & Society on the topic of

“The Contradictory Logics of Financialization.” The papers were originally presented at a workshop held

at the Marconi Center in Marshall, California, in May 2013 that was supported by the journal and a grant

from the Ford Foundation.

617464PASXXX10.1177/0032329215617464Politics & SocietyKirkpatrick

research-article2015

46 Politics & Society 44(1)

Many local communities in the United States have come under immense fiscal strain

in the wake of the subprime mortgage crisis and Great Recession. Diminished reve-

nues, tightened credit markets, and a rash of speculative municipal debt that “went

bad” in the aftermath of the financial meltdown fueled widespread fiscal crisis on the

local scale, ultimately pushing numerous cities and counties into bankruptcy. When

Detroit filed for bankruptcy in the spring of 2013 it became the twenty-eighth urban

municipality to do so since the onset of the financial crisis.1 Numerous public and

quasi-public municipal agencies (local and regional authorities, public corporations,

and special districts) have followed suit, and many more cities, towns, counties, and

agencies—while managing to avoid formal bankruptcy—struggle with deep budget-

ary imbalances. In some respects the current wave of fiscal distress appears quite simi-

lar to earlier waves that crested in U.S. cities in the 1970s, 1980s, and 1990s. Yet

conventional explanations of urban fiscal crisis only go so far in explaining contempo-

rary cases, a limitation traced to the changing role of financial markets in urban affairs.

Conventional explanations tend to attribute urban fiscal crisis to some underlying

economic or political factor (or combination of factors) that prevents local officials

from effectively balancing expenditures and revenues. Some emphasize the wider eco-

nomic and demographic context, particularly broader patterns of socioeconomic

decline and contraction that erode the local tax base. For instance, scholars of earlier

periods of local fiscal crisis pointed to the decentralization of manufacturing activities

(“globalization”) and the out-migration of white, middle-class households (“white

flight”) as key causal factors. Other researchers focus on political variables, such as

poor fiscal management, weakened political parties incapable of refusing interest

group demands (e.g., public unions and antitax organizations), intergovernmental aid

(or lack thereof), and “variation in jurisdictional responsibilities” as being key deter-

minants of local fiscal crisis.2 In all of these cases, however, the world of finance is

seen merely as a passive instrument, innocently reflecting the fiscal turmoil unfolding

“on the ground.” Financial markets signal to observers when a city is in a state of fiscal

distress (via credit rating downgrades) and when a city is in a state of fiscal crisis (via

failed bond auctions), but only rarely are they accorded a causal capacity of their own.

And yet, financial markets have played a pivotal role in the current crisis, and those

interested in the fiscal predicament of U.S. cities must analytically confront the finan-

cialization of municipal budgets over the last several decades. In the mid-twentieth

century, the municipal securities market was a rather staid and sedate place, made up

of low-risk, long-term debt instruments. In the 1970s and 1980s, the world of munici-

pal finance began changing as derivatives and other high-risk products and practices

began to gain popularity. The proliferation of highly speculative municipal debt instru-

ments accelerated through the turn of the century, reaching a crescendo in the years

leading up to the Great Recession. In a complementary turn of political events, neolib-

eral retrenchment and fiscal austerity pushed more cities into the arms of bankers and

financiers–a relationship forged in an era of financial deregulation and technocratic

control. Drawing on the work of Hyman Minsky (1919–96) and Karl Polanyi (1886–

1964), this paper explores the causes of the new urban fiscal crisis, with special

emphasis on the institutional points of contact between finance and politics.

Kirkpatrick 47

Both Minsky and Polanyi developed models of socioeconomic change that go a

long way toward explaining historical patterns of municipal finance. To begin,

Minsky’s “financial instability hypothesis” proposes a cyclical model consisting of

three successive “financing regimes”—hedge, speculative, and Ponzi—each more

“dependent on financial market conditions,” and hence less stable, than the last.3 We

can construct a similar typology designating three forms of municipal finance that are

successively more volatile. The first type (or stage) consists of no-risk and low-risk

funding streams, such as intergovernmental grants, “pay as you go” financing struc-

tures, and low-risk, long-term debt vehicles (general obligation bonds). The second

consists of moderate-risk mechanisms, such as revenue-based debt and equity financ-

ing. And the third is made up of high-risk financing strategies, such as variable-rate

debt structures, swaps, and privatization schemes. Over the last forty years municipal

capital budgets have become increasingly reliant on higher-risk derivatives and more

aggressive equity relationships, an arc that largely mirrors Minsky’s financial insta-

bility cycle.4

Minsky’s cyclical theory of financial instability dovetails with Karl Polanyi’s pen-

dular theory of sociopolitical change: the double-movement. For both scholars, the

most desirable moment occurs when there is a stable institutional relationship between

markets and the polity. Minsky approvingly discusses this relationship in terms of the

“containing or thwarting mechanisms” imposed by political entities from outside the

market.5 Polanyi provides a more fleshed-out accounting in his theory of

“embeddedness”—a reference to the position of markets within intricate webs of reg-

ulatory-legal structures and sociomoral strictures. The exact level of embeddedness in

a society (or sector) is a matter of fierce struggle. On one hand, embeddedness is con-

structed by and through (political) communities seeking protection from the vicissi-

tudes of the market. On the other, certain corporate and elite entities seek to dismantle

structures and practices that impinge on market activities. These actors seek to “disem-

bed” markets from regulatory interventions and normative expectations that would

otherwise limit the range of acceptable economic behavior. Polanyi argues that the

level of embeddedness tends to follow a double-movement—in other words, modern

history tends to swing, in the fashion of a pendulum, between embeddedness and

disembeddedness.6

Polanyi draws our attention to the ways in which local public finance is severed

from regulatory control and public oversight. In the current crisis, however, the munic-

ipal debt market was politically disencumbered to a degree not entirely captured by the

concept of disembeddedness—a term that denotes a political alignment determined by

the democratically expressed preference for financial deregulation.7 Although munici-

pal financialization was certainly abetted by democratically endorsed rollbacks of this

sort, we need also emphasize its reliance on processes of de-democratization. As

financialization gathered steam, local political communities were removed as the

intermediary between government units and capital markets. As we will see, the

growth of quasi-public authorities, revenue bonds (issued without electoral approval),

and negotiated sales (closed-door bargaining) are signs of the de-democratization of

local public finance in the lead up to the crisis, and various methods of emergency