Cities Want to Use Federal Rescue Funds to Pay Off Bank Debt - Action Center on Race and the Economy

Activists and local progressive officials don’t want to let them.

Read the full story here.

When Joe Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) in March, he framed it as an effort to “giv[e] people in this nation—working people and middle-class folks, the people who built the country—a fighting chance.” That presumably does not include enriching Wall Street banks, though several cities have proposed doing just that.

Among other things, ARPA provided $350 billion in state and local fiscal recovery funds, enabling communities to reverse some of the economic hardships of the pandemic as well as rebuild for the future. But according to Bloomberg, “at least two dozen local governments and lobbying groups” have urged the executive branch to give them the authority to use those recovery funds to pay down debt built up in previous years. This would have the effect of directing ARPA dollars to financiers, in most cases big banks, rather than to meeting the immediate needs of community residents.

The poster child of this effort is Chicago, where Mayor Lori Lightfoot’s office proposed in April to use more than half of its funding allocation of $1.89 billion to pay down city debt. This would specifically pay off certain so-called “scoop and toss” borrowing deals that use new issuance of long-term debt to pay off debt coming due.

More from David Dayen

Part of this repayment would go toward satisfying a $465 million debt obligation to JPMorgan Chase, one of the nation’s biggest and most profitable banks. In its most recent earnings report, JPMorgan posted an $11.9 billion profit, up 155 percent from a year earlier. The bank also made billions last year on overdraft fees, largely from the same vulnerable communities that would benefit from ARPA relief.

Bahar Tolou, a campaign director at the Action Center on Race and the Economy (ACRE), explained that the JPMorgan debt, with an interest rate of 1.95 percent, only costs Chicago $9 million per year. “The reason to use all this money to pay this now is to save $9 million in interest?” Tolou questioned. “It’s not like there’s an urgent payment schedule.”

Part of this repayment would go toward satisfying a $465 million debt obligation to JPMorgan Chase, one of the nation’s biggest and most profitable banks.

It’s also not what Congress and the Biden administration appeared to envision for how ARPA funds would be used. The ARPA text was unusually specific: Money was intended to respond to COVID-19’s public-health and economic impacts, benefit essential workers through hazard or premium pay, provide government services that fell away with the loss of revenue during 2020, or make infrastructure investments in water and sewer systems or high-speed internet.

While Congress included an important provision restricting the money from being used to finance tax cuts at the state level, there was nothing in the legislation explicitly barring the use of funds to cover debt service. However, the Treasury Department issued an interim rule that did restrict states and cities from funneling recovery funds into “payment of interest or principal on outstanding debt instruments.”

That hasn’t stopped cities from stretching the relatively narrow definitions in the ARPA text, and lobbying to make debt repayment eligible in the final rule. “Replenishing reserves” intended for future emergencies has been a favorite justification, for example, as has giving tax breaks to industries that suffered during the pandemic.

“The problem is that Treasury didn’t put parameters around the money,” said Kendra Brooks, a Philadelphia city councilwoman who fought a separate effort to use ARPA recovery funds on corporate tax breaks at the local level, which isn’t expressly prohibited in the legislative language. “They allowed municipalities to make decisions kind of ad hoc, to make elected officials kind of fight for it. If regulations were in place at the federal level, we would have a better chance of ensuring the money would go to the folks hardest hit.”

A Treasury official indicated that the agency was still reviewing public comments on the rule. Observers expect a final rule sometime in the fall.

In addition to losing revenue last year, cities also experienced acute additional crises that flowed from the pandemic, which many say should be the target for ARPA funds.

Matt Martin, an alderman from the North Side of Chicago, told me that he’s seen a four- or fivefold increase over the past year of people reaching out to his office about domestic violence. “Aldermanic offices are not typically the first office that comes to mind,” Martin said. “We learned that texts to the state’s domestic violence hotline have gone up 2,000 percent in the Chicagoland area.” People forced by the pandemic to stay home with their abusers, he said, has been a major cause of the increase, and added that permanent supportive housing and funding to issue and enforce protection orders should be primary needs that ARPA funds could address.

Other local officials cited homelessness and threats of evictions resulting from the uneven, K-shaped pandemic recovery. Support for mental health, education, nutritional assistance, at-risk youth programs, and basic income pilots were also identified as urgent needs. And with the delta variant raising case counts and hospitalizations, cities could also use the money for immediate public-health threats, like resuming increased testing or building out emergency hospital capacity.

“When Congress enacted the American Rescue Plan, it wasn’t meant to be a bailout for bankers who have gotten very wealthy during the pandemic,” said Alderman Carlos Ramirez-Rosa, who represents Logan Square and other neighborhoods on the northwest side of Chicago. “We need to increase funding for what works.”

Ramirez-Rosa and other progressive alderman have put out a Chicago Rescue Plan, which would allocate $137 million to homelessness assistance, $118 million to reopen shuttered mental-health facilities, $100 million for crisis response systems like using social workers to interrupt community violence, and another $50 million for youth violence prevention.

“When Congress enacted the American Rescue Plan, it wasn’t meant to be a bailout for bankers who have gotten very wealthy during the pandemic.”

In addition to opposing the diversion of ARPA funds to banks, some activists have assailed the use of the money for policing. This is an area where the Biden administration disagrees. In July, the White House issued a memo directing local governments to use the money to protect public safety, including “to put more police officers on the beat.” Several cities, from Walla Walla, Washington, to Cincinnati, Ohio, have taken the opportunity to increase police hiring and budgets.

“It’s the same flawed logic we saw in the 1994 crime bill,” said Tracey Corder, a deputy campaign director with ACRE, noting that the author of that bill was then-Sen. Joe Biden. “Policing isn’t recovery. [Recovery is] making sure people can pay their rent. It’s investing so kids can return to school safely. It means shifting resources into the community to get them what they need to thrive before the police arrive.”

campaign in Milwaukee is petitioning to remove policing money from the plan to allocate ARPA funds. Progressive aldermen in Chicago have also opposed Mayor Lightfoot’s desire to boost the police budget, as she did in 2020 with federal dollars. “Chicago already has one of the largest municipal police forces in the world,” said Alderman Ramirez-Rosa. “Two-thirds of our discretionary CARES Act money went to police. We cannot continue to pursue the same failed strategy.” He added that police in Chicago have failed to prevent violence or solve the crimes that have been committed, and more money to reward that failure “would be a huge setback.”

For its part, the Biden administration has also said that ARPA funds could support “evidence-based community violence intervention programs” like youth summer jobs or education enhancements.

In Chicago, Lightfoot has held off allocating rescue funds, folding it into budget talks that will conclude later this year. Critics say this was a deliberate delay to buy time to lobby the Treasury Department to allow for debt repayment with ARPA funds. Several councilmembers have written to Treasury Secretary Janet Yellen to urge her to confirm that the final rule prohibits “budgetary sleight-of-hand” that would allow for debt repayment.

Given that money is fungible, it’s not even clear this is a problem. If ARPA funds improve economic conditions and reduce burdens on the general funds of cities and states, they could reduce debt obligations anyway with a different pot of money. But what activists and local lawmakers want to avoid is having their communities shortchanged in favor of debt service.

“We need to stabilize our economy to help the poor and working folks to come out of poverty,” said Philadelphia councilwoman Kendra Brooks. “That will add revenue to help us come out of the debt.”

Some have argued that JPMorgan Chase should waive Chicago’s trivial $9 million in interest for 2021, in recognition of the hardships of the pandemic. “I’m thinking about 2008, when we came together to bail out banks for our economic health,” said Martin. “Are they doing things commensurate with what government did for them? I haven’t seen that happening yet.”

Others have argued that having the Federal Reserve provide low- or no-cost loans, rather than relying on higher-cost financing from the private sector, would alleviate the debt burden. “Instead of taxpayers paying $160 billion a year in interest, the Fed should serve as a long-term alternative lender,” argued Saqib Bhatti, co-executive director of ACRE. “That’s the only way we’re going to stop banks from ripping us off with municipal finance deals.”

Last year, the Fed did have emergency authority to make loans to municipalities, but only used it to make two loans. Bhatti has proposed that the Fed could use a different authority to make six-month loans to municipalities and roll them over consistently to mimic a 30-year loan.

Local progressive officials argue that the issue is about equity for communities over debt service. “What we’re endeavoring to do is to look at the on-the-ground impact,” Martin added. “What are the targeted investments we can make? Can we look back in a number of years and say that we did chart a new course for our city?”