Book Review: The Municipal Financial Crisis
The Individual Freedom Model
One way to measure the financial strength of city, county and state governments is to look at the credit ratings of their municipal bonds. A brief survey of those bond ratings tells us that 72% of them have a credit rating of AA or AAA. Digging deeper, almost 20% of them carry credit ratings of BBB or A, which means that about 90% of all municipal bonds outstanding are investment grade (BBB or higher) or institutional quality (trust department eligible.)
Some of that is because of dedicated sinking funds or municipal bond insurance, but the existence of insured bonds has declined sharply (to about 10%) since the Great Recession of 2008. Of course, inflated credit ratings on mortgage-backed securities (MBS) were a primary cause. With that in mind and since 2020:
Just consider: $130 billion in federal aid to municipalities, rising municipal fees and taxes, the deteriorating public infrastructure, and the struggle of local governments to pay for employee retirement benefits.
Accordingly, I believe it is imperative that we take The Municipal Financial Crisis - a book published in 2022 and authored by Mark Moses, seriously. Potentially, it is a seminal work of reason and justice for Main Street USA.
Mission Impossible
The subtitle of Moses’s book, A Framework for Understanding and Fixing Government Budgeting, may sound innocuous enough, but the language is loaded. First is Framework - there is no understanding without knowledge of the relevant concepts and their relationships to each other. Second is understanding – a framework that is an integrated structure of budgeting and service delivery that are responsive to each other. Third is a document that is comprehensible to all interested parties – especially the taxpayers and rate payers who are the customers.
That is what Moses does so well. By defining the participants according to their nature, their reasonable expectations, and their chosen duties, he is able to evaluate government revenue sources, scope of activity, expense budgeting, and delivery methods according to their man-made purpose and to reality:
After thirty years in municipal government finance, I realized that a traditional decision-making approach was fundamentally responsible for the municipal financial crisis. Traditional decision-making does not account for what government is, what it should be doing, or what clear principles should guide it.
The first thing Moses does is to identify the nature and purpose of government. This is essential. Without explicit definition and documentation, things can get messy real quick. And for those with grand visions of their own grand visions, a city’s Mission and Vision Statements can be evidence of trouble, as he has identified in these snippets from four municipalities:
For the City’s way of life . . . the City will be renowned . . . the best of the best . . . precision execution and innovative leadership . . . pride in civic ownership . . . maximize services . . . by enhancing development, revitalizing downtown, protecting natural resources, encouraging economic growth, and providing new community facilities.
Predictably, those platitudes are heavily weighted toward ambiguity, glorification, reckless spending, and economic intrusion. And in Chapter Three, Moses begins to describe how well he understands the various budgeting methods by asking, “how can a process predicated on exercising financial control and supported by extensive resources prove ineffective?”
“Once the annual budget is approved, there is little impetus to look for improvements.”
“There is a loss of credibility when the city does not spend the funds that it once declared to be needed.”
“To appreciate how misjudging revenues and lumping distinct kinds of expenditures together can distort financial understanding, one need only look at the process for balancing a city budget.”
The Entitled
Like any book about economics or finance that is worthy of your attention, Moses gets to a core issue - the price discovery mechanism:
When price is reflective of what people voluntarily pay for a product or service, it is a measure of value. When price is characterized as what taxpayers will tolerate, the meanings of price and value are lost.
However, we should consider the local government officials who overtly or passively accept the attitude of “what taxpayers will tolerate” as an effect. Their cause is “public service” and good intentions as a moral imperative. And if that doesn’t fly, their “community surveys” can rationalize just about anything, or as Moses explains, “no asks why it is in the interest of taxpaying residents to assume such risk. Instead, city officials characterize the financial commitments as investments.”
You know you are in trouble when they start talking about investments. And no conversation about municipal finance malfeasance is complete without glaring attention on pension fund obligations. In my book, The Moneyball Method, Chapter Seven analyzes government pension fund mismanagement in the wake of 2001-2003 market meltdown and the 2008-2010 Great Recession. Or as Moses writes about his experiences:
It did not take long to discover that this representation was based on incomplete analysis that did not allow for the possibility of pension fund investment returns that would underperform in the future.
And the pension fund liability disaster is a package deal. Government employee unions are a dominant force that touch nearly every part of local government. Hours worked and overtime are concretized by inflexible contracts. Police, fire and medical emergency personnel are sacrosanct among voters, city council members, and city managers. Their share of spending hovers around 50% of most budgets - and it is untouchable.
As a result, the ability of municipal government to increase employment, sales, and property tax revenues is how they are able to maintain their precious AA and AAA bond ratings. And in a culture that devalues money, degrades prices, denigrates markets and demonizes profit, local government officials consider themselves as “investors,” routinely expand the scope of their operations, and issue more debt for “community centers.”
Like any book about economics or finance that is worthy of your attention, Moses gets to another core issue: the essential profit motive:
Profit is the measure of the successful delivery of value to customers. It is unfair to compare the economics of private banking to a mythical structure in which abundant below-market loans are available on demand.
The Essentials
As understood and explained by Moses in The Municipal Financial Crisis, the solution to the problem lies in the decision-making standards determined by the legitimate purposes of local government. And that begins with understanding the nature of government, the nature of its constituents, and the nature of its benefactors.
In private enterprises, the customers of a business and its investors are separate entities with distinct purposes and privileges. In local government, they are the same – and for that reason, the mere existence of government employee unions is unjust, immoral, and a big reason for the municipal financial crisis. But Moses is focused on another conflict that is primary:
The individual freedom model prioritizes the autonomy of residents and business owners – preserving competition and choice . . . The group force model is vital to the ability of residents and businesses to flourish – but only when it is used for the purpose of preserving the individual freedom model.
That is the needle to thread: how to delimit the group force model. Like the American Revolution began in the minds of men in 1750, rights protecting services need to be resurrected in the minds of city managers and municipal voters. Moses tells us how.
Without that moral attitude adjustment, every other local government activity will demand the coercion of private property that could have been saved, invested or spent far more efficiently if left in the hands of its rightful owners. How? Moses explains that “market failure” is an invalid concept and bad policy.