How a little-understood feature of urban finance—municipal bonds—fuels racial inequality.
Read the full article here.
Municipal governments today hold around $4 trillion in outstanding debt. For many cities, the growing costs of simply servicing their debt is cannibalizing their annual budgets. When municipalities get in trouble, it’s not uncommon for around a fifth of a big city budget to go to debt service alone. This is far from a new development. Since the birth of the modern city in the nineteenth century, cities have turned to the private sector to fulfill their immediate cash needs by issuing what are known as municipal bonds.
The bond market, despite its invisibility to the public, has long been the oil in the gears of our society. If a city needs a dilapidated bridge secured, a school building updated, a transit expansion funded, or, in the case of Flint, Michigan, in 2013, a new water pipeline built, they issue a bond. The bond—a kind of loan, in essence—is bought from the municipality by a bank or a syndicate of banks and bond dealers. Together they raise the money necessary for the project through a process called underwriting, offering shares to investors and in turn making money from transaction fees and interest rate spreads—the difference between the price they paid and the premium they will charge.
In most cases, the bond itself is guaranteed by the taxation of residents, or the fees they will pay to access the service. The conveyor belt of highway toll stations to get from New York to New Jersey is one such example: residents bear the financial burdens of the municipal debt taken on in the construction of the city’s streets, parks, schools, and hospitals.
Banks and investment funds have made a small fortune off of the development of our cities.
So deep are American cities’ reliance on bonds that without access to them, most would simply be unable to provide even the most rudimentary social services. When lockdowns spread in the spring of 2020, slowing cities’ revenues from sales taxes and user fees to a trickle, the Federal Reserve stepped in almost immediately to offer $500 billion in short-term municipal debt financing. The measure, called the Municipal Liquidity Facility (MLF), backstopped the market as it “imploded in real time.”
Banks and investment funds, by financing municipal bonds, have made a small fortune off of the infrastructural development of our cities. Aside from being an almost indestructible asset class, bonds are one of the only federally tax-exempt places to store capital. And in the rare event that things should turn south, as was the case in Detroit’s 2013 bankruptcy, it is everyday people, not bondholders, who are first in the line of fire. As part of the city’s 2014 “Grand Bargain” debt reorganization plan, retired city employees’ pensions were slashed by 4.5 percent, forcing many to go back to work to make ends meet, while bondholders received privileged payouts.
But municipal bonds are doing more than ensnaring cities and residents in private debt. More and more, they have been used for distinct political ends. Bonds have increasingly been used as debt issuances used by cities to pay off police brutality settlements they could not otherwise afford. From 2010 to 2017 Chicago borrowed $483 million dollars specifically to pay off police settlements and their court-related fees. Scholars estimate that taxpayers will foot a bill of more than $1 billion to pay off the interest alone over the life of these bonds. “Cities,” Bloomberg’s Brentin Mock put it succinctly, “are effectively using their residents to mortgage police violence.”
And in May, Florida Governor Ron DeSantis banned the state from issuing municipal bonds using Environmental, Social, and Governance (ESG) ratings or criteria, deeming the system part and parcel of the “woke mind virus” he claims is taking hold of society. The ESG investment movement is a tool meant to guide investors toward perceptibly more ethical decisions in funding. An investor steered by ESG precepts might only invest in bonds for projects that meet specific environmental criteria, or decline to invest in a bond for a project that increases greenhouse gas emissions: hardly a radical tool, but one that may have been of some use in a state like Florida, whose governor has explicitly denied the existence of climate change and banned its cities from adopting 100 percent clean energy goals.
Yet despite the bond market dictating much of our collective experience, it rarely appears as an object of serious political discussion. From the outside, these markets appear as a labyrinth of financial jargon, hidden actors, and closed-door happenings. Part of this obfuscation can be attributed to the almost complete lack of writing on the subject outside of professional circles. In the words of author and former Goldman Sachs partner Barrie Wigmore, the bond market—particularly the municipal bond market—is “ignored by all but those who participate in it. Scholars ignore it; there are virtually no studies on its history or mechanics.”
Municipal bonds represent a key point of capital transfer between the market, the state, and the people.
And the field of urban history is all the worse for this gap. While groundbreaking work has been published on the role of the government in enacting and enforcing racial segregation, these narratives have, over time, etched themselves as deep grooves in the field’s terrain. Being confined to what Michael Katz calls the “master narratives” of urban history as public failure can, at times, foreclose a deeper engagement with other, less immediately visible concepts. Big-ticket ideas—the racist state, deindustrialization, white flight—are seen as the major drivers of inequality, with other objects of study, like the municipal bond market, being forced to take on a supporting role, if given one at all.
Thankfully, Destin Jenkins’s book The Bonds of Inequality: Debt and the Making of the American City (2021) offers an essential, overlooked story. Municipal bonds, the book reveals, represent a key point of capital transfer between the market, the state, and the people. When put under the microscope by Jenkins, we can see the myriad of daily mechanisms that give shape to such transfers. An interest rate on a given city’s bond may appear as the colorblind manifestation of a free market function: banks bid it up or down, and at some point, this process results in the sale of the bonds at a certain rate. In reality, the interest rate outcome was fabricated from an aggregation of racialized data points. Inputs like a neighborhood’s property tax levy, unemployment rate, and median income come together to inform the market in a sleight of hand sociologist Davon Norris recently dubbed “embedding racism.”
The Bonds of Inequality gives us a long, local, textured account of this process of embedding—and in doing so, rewrites our shopworn, largely outdated narratives of urban political history.
The book centers the municipal bond market of a postwar San Francisco and follows it until into the late 1980s. Its genius lies in its narrative detail. Jenkins tells the story of San Francisco’s development machine from the inside out, following particular banks and particular bankers, particular borrowers and particular bonds. In the growing body of literature on racial capitalism—the study, broadly, of the relationship between racial inequalities and the market economy—Jenkins’s book is among the most successful in infiltrating and translating capital’s own discourse: the language spoken in the meeting rooms, credit ratings reports, and bond issuances that make up the system.
Public officials were dependent on the blessings of rating agencies and the financial commitments of lenders.
The Bonds of Inequality chronicles the rise of technocratic rule and the “science of municipal administration” that served to legitimize it. We get the sense that such science was mostly one in name only. As Jenkins writes, “the citation practices and revolving door of personnel make it hard to figure out where ‘the public’ ended and where ‘the private’ started.” Public financial officers sought the counsel and wisdom of the very financiers who would underwrite their bonds. Conferences brought together technocrats from both sides of the bond, but as Jenkins notes, informational and power asymmetries defined those relationships, with public officials dependent on financiers.
Lenders and credit rating agencies like Moody’s essentially taught public financial officers how to appeal to them: What characteristics would make their city more appealing to faraway markets? What budget guidelines were lenders looking for, and for what demographics were they not? Public officials, from the onset, were dependent on the blessings of rating agencies and the financial commitments of lenders. Together, they formed “fraternal” relationships as partners in the municipal bond market defined by whiteness, maleness, and status.
Another pillar of bond economics was racism. In 1966 Thomas Morris, the vice president of United California Bank of Los Angeles, argued, in an award-winning essay, for a bond rating system that used a city’s “percentage non-white population” as an integral aspect of the “intangibles” category that would determine its credit rating. “The facts,” Morris wrote, “are irrefutable—the Negro community in metropolitan areas has a lower income, higher crime rate, higher birth rate, higher percentage of welfare cases, higher unemployment rate, and a lower educational level.” All these factors, Morris lamented, were “unfortunate,” but ultimately “lead to increased debt while not contributing significantly to a community’s ability to pay.” Jenkins calls this the “cold calculus” of the municipal bond business: a business that did not simply “reflect racial inequality,” but “actively constructed it.”
The result of all this for Black San Franciscans was “spider webs without spiders”: elaborate networks of exclusivity and accumulation dressed up as the normal functioning of the market, devoid of a clear culprit.
One crucial, hidden factor was the will of the public. Bonds of Inequality makes a convincing argument that masses of whites, far more than merely being the beneficiaries of segregationist policy, played an active role in its enforcement—primarily through the ballot. In San Francisco a class of issuances called general obligation (GO) bonds must by law be put on the ballot to be approved by the residents. The measure is meant to protect the public’s influence over how their tax dollars are being spent—and a two-thirds vote is needed to approve.
White voters vetoed bonds which could be considered, even adjacently, to be aiding the development of Black neighborhoods.
Yet instead of working to democratize the city’s finances, the measure was used to enact segregation via the bond market from yet another angle. Jenkins traces a history of white voters vetoing bonds which could be considered, even adjacently, to be aiding the development of Black neighborhoods. Proposals to borrow money for the construction of housing, schools, hospitals, and parks were all soundly rejected by the city’s white majority in an era of tax revolt. In 1968, a municipal bond was put on the ballot that would fund the construction of parks, walkways, and a swimming pool in the city’s blighted Hunters Point district. In the lead-up to the election, in an attempt to win over the white liberal voter base, the bond’s proponents hung posters around the city showing Black children playing in run-down elementary schools and sitting on cracked concrete steps. But their appeals fell on deaf ears. The proposition failed, as did subsequent, similar ones. Yet in the very same year, a $61 million bond for the Port of San Francisco—an amount ten times that requested for the Hunters Point project—won enough public support to pass.
Perhaps no issue Jenkins covers better exemplifies the racial politics of the municipal market than public school investment bonds. Funding the city’s public schools, despite its cross-racial, collective benefits, was pigeonholed as a “Black issue.” With that, two consecutive public-school bonds in 1969 and 1970 failed even as simultaneous, more expensive bonds passed through the voting threshold.
To Jenkins, this “selective failure” represented both a “disinterest in investing in black futures” and, more broadly, the beginning of a retreat from Great Society frameworks of collective uplift. To put it plainly, the white masses of residents were often the only entity in San Francisco which stood between present problems and the possibility of a more racially just future. So “while municipal officials played critical roles in carrying out retrenchment,” Jenkins writes, “the retreat from an investment in social welfare was also realized through the actions of voters”—and, in the first place, through a system that allowed their racially charged anti-government sentiments to hijack the city’s development.
The Bonds of Inequality finds its place amidst an ongoing debate on the role the federal government plays in the politics of racial inequity and segregation. In each narrative telling, the bond market and the politics of public debt do not show up in full. What’s missing, Jenkins argues, is the omnipresent tension between elected officials and financiers: a tension which has long dictated a great deal of what urban historians have typically filed under terms like white flight, deindustrialization, and the neoliberal turn.
Jenkins is explicit about his investment in this discourse. The book is a necessary counterweight to a previous narrative overcorrection by Richard Rothstein is his fifty-two-week-long New York Times bestseller, The Color of Law: A Forgotten History of How Our Government Segregated America (2017). Rothstein shifted public discourse through a wholesale denouncement of de facto segregation, calling it a “national myth.” In other words, racial inequalities played out in the built environment, according to Rothstein, are due to the coordinated actions of federal, state, and local governments, rather than, say, voters or the private sector.
Rothstein is, of course, right on some counts. The Color of Law amassed a tremendous wealth of evidence that governments, through actions like racial zoning, segregated public housing, subsidized whites-only suburbs, predatory municipal annexation, and urban renewal, played a massive role in our current landscape. The problem here is that Rothstein believes that the other side of the coin—de facto practices like the racism of citizens and the actions of non-government corporations—constitute only “a small part of the truth” as to why we are segregated. Government policy, he argues, was the primary culprit, and accordingly, judicial action to rein in the government should be the sole solution.
Cities used the municipal bond market as a way to evade civil rights policy.
The Bonds of Inequality addresses the danger and inaccuracy of this argument early on. “When urban historians underscore the failure of the federal government,” writes Jenkins, “they chime with stories told by bond financiers and credit analysts threatened by federal power. Federal failure is also the bankers’ story.” Casting the federal government as the sole cause of urban racial inequality is a story that’s easily captured and redeployed by those pushing privatization, austerity, and state shrinkage. As Keeanga Yamahtta-Taylor has noted, this explanation also fails to explain why so much of this inequality was entrenched in the ‘60s and early ‘70s—an era when the federal government had begun to undo its explicitly segregationist policies. Was it simply the inertial force of historical government racism? Or was there something more at play?
Indeed there was. Cities used the municipal bond market, and the private sector as a whole, as a way to evade civil rights policy. In 1963 officials in Jackson, Mississippi, seeking funding for an airport, turned down a federal loan that would finance the airport yet would require it to enact desegregated hiring practices. Instead, they turned to the municipal bond market for a no-strings loan, allowing the city to continue their segregated policies in peace.
Yet for the most part, bonds were not politicized in this way—at least not explicitly. They tended to operate instead via a kind of foggy fraternal order of finance: a system where groups of elite white men, holding public and private positions, constructed a racialized science of evaluating municipal bonds that defined who was and who was not, in Jenkins’s words, “worthy of debt”—that is, which communities were deemed worthy of municipal bonds being written for projects that benefitted them. Now, a neighborhood’s infrastructure could fall into disrepair and its schools could remain hopelessly underfunded, but this time, it could all take place above board, abstracted into the black box of bond evaluation. Decades later, little has changed.
In 2013 Flint, Michigan—run at the time under state receivership law—issued a massive municipal bond to fund $85 million of a $300 million project for the construction of a new water pipeline with the nearby Karegnondi Water Authority (KWA). Yet the bond was fraudulent.
The KWA deal was inked by a group of political leaders called Emergency Managers (EMs), heads of a kind of financier’s coup d’état which had taken over the distressed Flint under a controversial Michigan state law. EM appointees, in situations of state receivership, are given near carte blanche authority to restructure a municipality’s finances; they are mandated to act in the best interest of the math and the city’s creditors, not the people.
What most don’t know is that in the case of Flint, even the math didn’t make sense. For one, the city’s water source, Lake Huron, would remain the same after the construction of the new KWA pipeline. In the meantime, the city would have to draw upon the Flint River, whose water was for decades contaminated by the city’s once-thriving automotive industry. Multiple commissioned studies at the time showed the city would lose money over time by switching its services away from their decades-long contract with the Detroit Water and Sewage Department. But the reports were trashed by then–EM appointee Ed Kurtz as the KWA pressured Flint officials for a commitment to the deal.
Flint’s bond was underwritten by JPMorgan Chase & Co., Wells Fargo, and Stifel, Nicolaus & Company.
Still, Flint was at the time governed by a strict debt ceiling due to its financial condition—the city had almost no ability to access the municipal bond market. Knowing this, Kurtz, with the support of Flint’s city council, conspired with the State Treasury and the Department of Environmental Quality (DEQ) to bypass Michigan laws governing the debt limits of financially struggling cities. In what now appears a twist of impressive irony, Kurtz gained access to an $85 million dollar extension of Flint’s debt ceiling, procuring an Administrative Consent Order, or ACO, by claiming that the city had an “environmental emergency” and needed money to clean out a lime sludge lagoon near the city’s water treatment plant.
But that money was not used on the lime sludge lagoon. Nor was the money used to update the city’s aging water treatment plant so that it could process the water from the Flint River while the construction of KWA’s pipeline occurred. Instead, Kurtz redirected the money to funding Flint’s portion of the KWA bond deal, leaving the people to drink untreated water from the Flint River. What happened next, as we now know, was one of the worst public health crises of the modern American city: nearly one hundred thousand residents of the majority-Black Flint were exposed to lead from their drinking water, including thousands of children.
Flint’s bond was underwritten by JPMorgan Chase & Co., Wells Fargo, and Stifel, Nicolaus & Company. All three, charged a 2020 lawsuit filed on behalf of 2,600 Flint youths, knew that the corrosive water from the Flint River was unsafe to be fed through the city’s pipes. Yet a year ago, a federal judge in Michigan cleared each of the banks from liability. The banks were certainly “one step in the causal chain” of harm, said the March 2022 opinion, yet were protected from liability because they “did not have the objective” of poisoning Flint residents.
The lawsuit argued that the banks had the information necessary to assess that the city was in no position to process clean water through the Flint River. This was a fact well documented by residents and politicians: so much so that the city, just sixteen months prior to approving the Flint River as an interim water source while KWA construction took place, had determined its water to be unsuitable for drinking. Still, Kurtz pushed the project through. His work was “strictly finance,” he told a congressional committee in 2016, and from this perspective, it made sense. “My job,” he told the committee, “did not include ensuring safe drinking water.”
Citizens of Flint, at the time, understood one thing: this would not have happened in the nearby Ann Arbor, where the residents are both wealthier and whiter. There, the people and their health would have been appraised by the market actors at a price higher than the potential profits of the deal. In Flint, though, racism was the collateral outcome of financial interests winning out over human-centered ones. In the eyes of the law, neither the officials at KWA, Flint’s Emergency Managers, nor the big banks who bought their debt were conspiring to poison the people of the city. They were, in reality, conspiring to push forward development projects that conjoined them through shared financial interests.
Though the class-action lawsuit filed against the three banks was unsuccessful, Flint residents did receive some measure of repair. In 2021 a settlement was awarded to finance the costs of victims’ recoveries. To cover the costs of the settlement, the state of Michigan did what all governments do when they need cash: they issued a set of municipal bonds.
Moody’s gave the bonds, which amounted to nearly $700 million, their third-highest rating, marking it “of high quality” and “subject to very low credit risk”—an attractive investment, perhaps, for the likes of Stifel, Nicolaus & Company and Wells Fargo. These bonds, including their estimated $400 million in interest, will be paid back by the state’s taxpayers, meaning that the residents of Flint will be contributing in part to their own settlement payments.
No single node of power—not the politicians, private interests, nor the public—holds the key to understanding our segregated urban landscapes. On many issues they act in concert. On others they are at odds. Our analysis must be diffuse enough to grapple with the colliding, contradictory interests of city governments, municipal bondholders, and voters. It should help us locate the spots within these interests where strategic pressure can be applied: including, perhaps counterintuitively, within the municipal bond market itself.
Strategic pressure can be applied within the municipal bond market itself.
In 2020 a small movement of scholars, in the wake of the movement for state accountability for police murders, released a report through the Action Center on Race and the Economy calling for an end to the “police brutality bonds” issued to pay the costs of settlement for lawsuits by families of victims of police violence. In this arrangement, investors were essentially collecting tax-free interest off of police brutality, they argued: and demands for justice meant, perversely, that civilians might find themselves even deeper ensnared in the networks of debt that hold up the city. To remedy this, the group called for the Federal Reserve to make available interest-free loans to cities in need of money to pay off settlements, as well as for police budgets to be made more transparent.
And in 2021 the New York Times covered the creation of “Fiscal Justice Ratings” by bond analyst Napoleon Wallace. Consider Wallace’s work at his firm Activest as the apparent opposite to that of Morris’s rating system based in racially coded “intangibles.” Wallace looks at factors such as a city’s dependence on oppressive forms of fines and fees, housing affordability factors, and, of course, money spent on police brutality settlements. All of these and more are aggregated to direct investors’ capital toward municipalities who have done the most work to reverse decades of injustice in city operations.
Does all this constitute true resistance to cities’ dependence on finance capital? Perhaps not by itself. But if DeSantis and the right succeed in quashing even the slightest considerations of social justice in public investments, we would lose some of the only weapons we have on hand in the fight against it.