US cities turn could turn to “community mini bonds” to fund infrastructure projects

A new dawn over Denver, Colorado. Image courtesy of Robert Kash on Flickr, reused under creative commons.

Earlier this month, the US Federal Reserve and the FDIC revised their liquidity standards for 100 of the country’s biggest financial institutions. The revision appeared in the form of a hefty 400 page document which, at first glance, appeared to be little more than a cure for insomnia.

But buried in the changes was a shocker for state and local governments across the country: the measure would make it much harder for them to issue bonds.

For those not familiar with how “muni” bonds work, here’s what you need to know. They are essentially payment guarantees issued by a city, asking investors for a certain amount of money in exchange for that money back over a set period of time (known as the bond’s “maturity”), plus some interest. Cities generally use bonds to pay off one-time capital costs, often in the form of large infrastructure projects.

Once issued, these bonds are frequently traded by investors. They’re not so popular with average citizens (individual bonds usually go for $10,000 or more apiece). But they’re a favourite of investment firms looking for stable assets: when compared to stocks, they generally hold their value and garner reliable returns.

Or, at least, they did. Before the financial crisis, real estate values soared, and municipalities banked on increasing tax revenue to pay back their bonds. When the bubble burst in 2008, some cities were unable to make payments. To make matters worse, many of the firms who’d insured those bonds swiftly ran into trouble, undermining the market’s confidence that these were the safest of safest bonds. So traders began frantically trying to dump their muni bonds.

If cities don’t pay, [Wall Street] can go after city-owned assets, such as pensions and utilities.

The current regulations purport to head off future credit crises by requiring big banks to keep a set amount of “high quality liquid collateral assets” on hand. And, to the dismay of municipal bean-counters across the country, state and muni bonds were eliminated from this list of assets: big banks will now be required to dump these bonds in favour of more supposedly liquid assets.

Among the first to sound the alarm about this was Ellen Brown, a financial whiz turned barnstorming populist politician (she recently ran a spirited, though unsuccessful, campaign for California state treasurer). Writing at Truthout, she explained why this was so harmful to city and state governments:

"Muni bonds fund the nation’s critical infrastructure, and they are subject to the whims of the market: as demand goes down, interest rates must be raised to attract buyers. State and local governments could find themselves in the position of cash-strapped Eurozone states, subject to crippling interest rates.”

Appropriately enough, this sentiment was shared by the man whose job Brown was trying to take. According to a Bloomberg report, a spokesman for California treasurer Bill Lockyer stated that the change in regulations “will increase their borrowing costs because it will reduce demand for municipal bonds”.

The biggest casualties of this decision appear to be new infrastructure projects. Since bonds are typically issued to pay capital costs, higher interest rates mean that cities will have to pay more for vital upgrades to their transportation, power, and water networks.

But this change threatens more than future infrastructure. As Brown points out, higher interest rates give more power to the financiers who hold the bonds: if cities don’t pay, they can go after city-owned assets, such as pensions and utilities.

There have already been a number of ugly examples of this. In bankrupt Detroit, water service has been cut to roughly 15,000 of the city’s residents (described as a human rights violation by the UN) in a bid to get users to pay up.  After Stockton, California, went bankrupt, bondholders forced the city to cut pensions to city employees. In classically tactless Wall Street fashion, one of the pensioners whose insurance they cut was a former policeman dependant on medical care due to a brain tumour.

Cities do still have a number of options for obtaining necessary the capital funds. One solution frequently advocated by Brown is the creation of city and state-owned banks: that would give them fundraising options currently only available to their private sector equivalents. In 2013, Brown reported on an initiative to create a municipal bank in San Francisco, which made significant progress when a judge struck down a prohibition on city-issued credit. Nonetheless, opponents balk at the idea of issuing taxpayer money as loans, even if it is for community investment.

Cities can also turn to the federal government for assistance; or they can try to pass local tax initiatives to fund specific projects. However, in a climate where Republicans in congress threaten necessary federal transportation funding and the tax-averse Tea Party is growing its influence in local government, these efforts might not be enough to meet cities’ needs.

Denver mayor Michael B. Hancock meets an admirer of his community bond plan. Image: Getty.

In the midst of these shaky options, a new type of muni bond has appeared with the potential to avoid the issues conventional bonds now face. In August, Denver announced the sale of $12 million worth of “mini-bonds”; these, unlike regular bonds, were sold at $500 apiece as opposed to the usual $10,000 or more.

According to the program’s official website, their sale was limited to Colorado residents, and though the bonds could be “transferred” to other owners, they could not be resold. These measures were to ensure that the bonds, instead of going to bankers on Wall Street, would be purchased by members of the community.

The project was a success: the mini-bonds were so popular that they sold out within an hour of being offered. This measure is more expensive than regular bond offerings normally have been (though an increase in the national interest rate might change this); but it does avoid the risk of giving Wall Street excessive influence, by keeping bonds within the community.

It’s a model with potential for other cities in the US, too. “It seems like a compelling idea. If this could be scaled, the transaction costs could be brought down,“ says Marc Joffe, founder of Public Sector Credit Solutions, and an expert in public sector securities. “Since the mainstream muni market is quite inefficient, a market for mini bonds may be a win-win for cities and small savers who are getting near zero interest from banks these days.”

Time will tell if these community-based bonds prove effective. But, in the face of unfavourable Fed regulations, they may be the best option for cities eager to take power back into their own hands.


To build its emerging “megaregions”, the USA should turn to trains

Under construction: high speed rail in California. Image: Getty.

An extract from “Designing the Megaregion: Meeting Urban Challenges at a New Scale”, out now from Island Press.

A regional transportation system does not become balanced until all its parts are operating effectively. Highways, arterial streets, and local streets are essential, and every megaregion has them, although there is often a big backlog of needed repairs, especially for bridges. Airports for long-distance travel are also recognized as essential, and there are major airports in all the evolving megaregions. Both highways and airports are overloaded at peak periods in the megaregions because of gaps in the rest of the transportation system. Predictions for 2040, when the megaregions will be far more developed than they are today, show that there will be much worse traffic congestion and more airport delays.

What is needed to create a better balance? Passenger rail service that is fast enough to be competitive with driving and with some short airplane trips, commuter rail to major employment centers to take some travelers off highways, and improved local transit systems, especially those that make use of exclusive transit rights-of-way, again to reduce the number of cars on highways and arterial roads. Bicycle paths, sidewalks, and pedestrian paths are also important for reducing car trips in neighborhoods and business centers.

Implementing “fast enough” passenger rail

Long-distance Amtrak trains and commuter rail on conventional, unelectrified tracks are powered by diesel locomotives that can attain a maximum permitted speed of 79 miles per hour, which works out to average operating speeds of 30 to 50 miles per hour. At these speeds, trains are not competitive with driving or even short airline flights.

Trains that can attain 110 miles per hour and can operate at average speeds of 70 miles per hour are fast enough to help balance transportation in megaregions. A trip that takes two to three hours by rail can be competitive with a one-hour flight because of the need to allow an hour and a half or more to get to the boarding area through security, plus the time needed to pick up checked baggage. A two-to-three-hour train trip can be competitive with driving when the distance between destinations is more than two hundred miles – particularly for business travelers who want to sit and work on the train. Of course, the trains also have to be frequent enough, and the traveler’s destination needs to be easily reachable from a train station.

An important factor in reaching higher railway speeds is the recent federal law requiring all trains to have a positive train control safety system, where automated devices manage train separation to avoid collisions, as well as to prevent excessive speeds and deal with track repairs and other temporary situations. What are called high-speed trains in the United States, averaging 70 miles per hour, need gate controls at grade crossings, upgraded tracks, and trains with tilt technology – as on the Acela trains – to permit faster speeds around curves. The Virgin Trains in Florida have diesel-electric locomotives with an electrical generator on board that drives the train but is powered by a diesel engine. 

The faster the train needs to operate, the larger, and heavier, these diesel-electric locomotives have to be, setting an effective speed limit on this technology. The faster speeds possible on the portion of Amtrak’s Acela service north of New Haven, Connecticut, came after the entire line was electrified, as engines that get their power from lines along the track can be smaller and much lighter, and thus go faster. Catenary or third-rail electric trains, like Amtrak’s Acela, can attain speeds of 150 miles per hour, but only a few portions of the tracks now permit this, and average operating speeds are much lower.

Possible alternatives to fast enough trains

True electric high-speed rail can attain maximum operating speeds of 150 to 220 miles per hour, with average operating speeds from 120 to 200 miles per hour. These trains need their own grade-separated track structure, which means new alignments, which are expensive to build. In some places the property-acquisition problem may make a new alignment impossible, unless tunnels are used. True high speeds may be attained by the proposed Texas Central train from Dallas to Houston, and on some portions of the California High-Speed Rail line, should it ever be completed. All of the California line is to be electrified, but some sections will be conventional tracks so that average operating speeds will be lower.

Maglev technology is sometimes mentioned as the ultimate solution to attaining high-speed rail travel. A maglev train travels just above a guideway using magnetic levitation and is propelled by electromagnetic energy. There is an operating maglev train connecting the center of Shanghai to its Pudong International Airport. It can reach a top speed of 267 miles per hour, although its average speed is much lower, as the distance is short and most of the trip is spent getting up to speed or decelerating. The Chinese government has not, so far, used this technology in any other application while building a national system of long-distance, high-speed electric trains. However, there has been a recent announcement of a proposed Chinese maglev train that can attain speeds of 375 miles per hour.

The Hyperloop is a proposed technology that would, in theory, permit passenger trains to travel through large tubes from which all air has been evacuated, and would be even faster than today’s highest-speed trains. Elon Musk has formed a company to develop this virtually frictionless mode of travel, which would have speeds to make it competitive with medium- and even long-distance airplane travel. However, the Hyperloop technology is not yet ready to be applied to real travel situations, and the infrastructure to support it, whether an elevated system or a tunnel, will have all the problems of building conventional high-speed rail on separate guideways, and will also be even more expensive, as a tube has to be constructed as well as the train.

Megaregions need fast enough trains now

Even if new technology someday creates long-distance passenger trains with travel times competitive with airplanes, passenger traffic will still benefit from upgrading rail service to fast-enough trains for many of the trips within a megaregion, now and in the future. States already have the responsibility of financing passenger trains in megaregion rail corridors. Section 209 of the federal Passenger Rail Investment and Improvement Act of 2008 requires states to pay 85 percent of operating costs for all Amtrak routes of less than 750 miles (the legislation exempts the Northeast Corridor) as well as capital maintenance costs of the Amtrak equipment they use, plus support costs for such programs as safety and marketing. 

California’s Caltrans and Capitol Corridor Joint Powers Authority, Connecticut, Indiana, Illinois, Maine’s Northern New England Passenger Rail Authority, Massachusetts, Michigan, Missouri, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Texas, Vermont, Virginia, Washington, and Wisconsin all have agreements with Amtrak to operate their state corridor services. Amtrak has agreements with the freight railroads that own the tracks, and by law, its operations have priority over freight trains.

At present it appears that upgrading these corridor services to fast-enough trains will also be primarily the responsibility of the states, although they may be able to receive federal grants and loans. The track improvements being financed by the State of Michigan are an example of the way a state can take control over rail service. These tracks will eventually be part of 110-mile-per-hour service between Chicago and Detroit, with commitments from not just Michigan but also Illinois and Indiana. Fast-enough service between Chicago and Detroit could become a major organizer in an evolving megaregion, with stops at key cities along the way, including Kalamazoo, Battle Creek, and Ann Arbor. 

Cooperation among states for faster train service requires formal agreements, in this case, the Midwest Interstate Passenger Rail Compact. The participants are Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, and Wisconsin. There is also an advocacy organization to support the objectives of the compact, the Midwest Interstate Passenger Rail Commission.

States could, in future, reach operating agreements with a private company such as Virgin Trains USA, but the private company would have to negotiate its own agreement with the freight railroads, and also negotiate its own dispatching priorities. Virgin Trains says in its prospectus that it can finance track improvements itself. If the Virgin Trains service in Florida proves to be profitable, it could lead to other private investments in fast-enough trains.

Jonathan Barnett is an emeritus Professor of Practice in City and Regional Planning, and former director of the Urban Design Program, at the University of Pennsylvania. 

This is an extract from “Designing the Megaregion: Meeting Urban Challenges at a New Scale”, published now by Island Press. You can find out more here.