The Stadium Scam and Cities as Instruments of Democracy

I’m working on the edits for an article I’ve been working on in some way, shape, or form since 2010. Yes. 2010. Such is academic publishing. The article (no spoilers) deals in chief with the ways that cities as legal corporations might potentially serve as instruments of public democracy by expressing and acting in the public interest. I counterpose this kind of democracy with a prevailing privatized view of political participation defined by the contribution to a candidate or a single-issue nonprofit advocacy group.

Spoiler alert (OK, a little one): I contend that public democracy is better. However, a big problem for cities, where people have routinely demonstrated a desire to practice public democracy, has been the renewed opposition of state legislatures, substantially influenced by the American Legislative Exchange Council (ALEC), to urban government action in response to democratic pressure.

What has made working on these edits tolerable and not a crushing reminder of the absurdities inherent in the academic publishing model is that current events keep reinforcing the argument. Today’s example comes from Deadspin, which, while nominally a sports blog, is routinely at the front of the line identifying the ways that sports (among other spectacles) have been leveraged by capitalists to transform cities and secure extensive public subsidies for billionaires (see also here and here).

The stuff that Bill Bradley describes could be happening anywhere, but it has particular poignance since it’s happening in Detroit, where local democracy has taken a considerable beating at the hands of capitalists and rural-suburban politicians). There, the city council has advocated requiring developers receiving public funds for major development projects to sign Community Benefits Agreements, legally binding contracts that would set terms by which the developer would be required to abide. These might address hiring, the number of construction and non-construction jobs to be established, the wages and benefits to be paid, and the proportion of local residents to be hired.

The precipitating events behind the proposed local law were many, but one stands out:

“We are allowing these large corporations—companies that could build a hockey arena without our money—to get in the corporate welfare line and take resources away from us,” Rashida Tlaib, a Michigan state representative who serves Detroit, told me. “In exchange for what?”

The hockey arena Tlaib mentioned is for the city’s beloved Red Wings, owned by pizza baron Mike Ilitch. The Ilitch family, whose net worth is estimated at $3.2 billion thanks in part to their Little Caesars pizza empire, received $284.5 million in public money to build a new, $450 million arena in the city’s Cass Corridor neighborhood. (They are desperately and vapidly rebranding it as the “arena and entertainment district.”)

While the Ilitch family was finishing up its honeypot stadium welfare deal last year—not to mention a wildly below-market rate $1 land transfer for 39 vacant parcels—they refused to sign a CBA that would ensure a certain percentage of permanent, non-construction jobs at the arena went to Detroiters. A group of locals formed the Corridors Alliance in an attempt to engage with the Ilitches, but their efforts were futile. The Ilitches did, however, agree to a mayoral executive order that demanded 51 percent of construction jobs go to residents and 30 percent of construction contracts go to local businesses. (The mayoral order, like Marathon’s hollow promise, is not legally binding.)

Take public money, the CBA reasonably insists, and deliver public benefits. Sounds about right? Not so fast:

The opposition made it all the way to the state capitol in Lansing during December’s lame duck session, where Republican State Representative Earl Poleski introduced House Bill 5977, which would “prohibit local units of government from creating a ‘community benefits ordinance.'” The bill, which died in December and was reintroduced in January, would ban Detroit’s proposed ordinance outright.

“House Bill 5977 sets up the state as a dictatorship telling local units of government that they cannot do what is best for their community, workers and residents when it comes to wages and benefits tied to economic development in that community,” Tlaib said in a statement.

I should also mention that the Detroit Regional Chamber Political Action Committee donated money to Poleski’s reelection campaign last summer, according to Secretary of State disclosures. And while it was a paltry and deeply stupid check for only $250, it’s worth asking why the Detroit Regional Chamber is propping up a state representative from Jackson, a county 80 miles west.

The reason of course, is that the concept of pre-emption, which plagued cities in the nineteenth century when urban special interests could leverage the anti-urbanism of rural legislators to stop cities from doing anything they didn’t like, has come back in with a vengeance. Whether it’s an idiosyncratic case like Detroit’s CBA initiative or the kinds of cookie-cutter pre-emption bills ALEC has distributed through the State Houses to try to kill off living wage bills or environmental protections, urban special interests of the stadium-building class have discovered that the states are a potent weapon against local democracy.

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In Case You Heard Differently, Property Taxes Have Often Helped White People in Atlanta Stay Richer

In my research for an upcoming talk on the 1990s tax revolt in north Fulton County, I’ve had a revelation of sorts about one way in which white privilege is institutionalized and perpetuated (to be clear, this is a personal revelation, not a thought unprecedented in the annals of urban political economy). Ironically, this mechanism, the ad valorem tax on real estate, has been a principal boogeyman in the reactionary politics of privatism, public retrenchment and racial resentments of what George Lipsitz and Barbara Tomlinson describe as

a small cadre of affluent individuals—who comprise what surely must be the most sullen, surly, self-pitying, and sadistic group of “haves” in the history of the world.[1]

How can this be? Aren’t taxes the instrument by which the poor, minorities, liberals, and other members of the 47%  steal from upstanding taxpayers? Let’s do some quick history, drawing first on a Research Atlanta report by David Sjoquist and Drew Warwick [2], whose analysis is the basis for my summary of events below, to frame the conditions of the tax revolt.

In 1989 Fulton County’s tax digest (its list of every assessed property and its assessed taxes) was rejected by the Georgia Revenue Commissioner, who found that the county was

1. Violating state law because its overall tax digest fell nearly 10 percentage points short of the statutory requirement for property to be assessed at 40 percent of fair market value.

2. Assessing property at wildly uneven rates; a few properties were assessed above 40 percent of fair market value, most were assessed less, and some, mostly high-value residences, were assessed at much less than 40 percent.

These determinations were made through a sales ratio study conducted by the state Department of Audits on the order of the Revenue Commissioner. A sales ratio study compares the ratio of tax assessments to the sale price of properties sold in the jurisdiction that year to determine if assessments were in line with market value.

Atlanta and Fulton County’s flunking of this audit precipitated a fateful series of events. Atlanta and Fulton County, and their Joint Board of Tax Assessors, hired the firm of Cole, Layer and Trumble to perform a mass reappraisal of all Fulton County properties (more than 230,000!) based on a comprehensive sales ratio study. Fulton County was forced to acknowledge that it had been breaking state law by underassessing property. New legislation passed in 1988 also forced the two governments and their joint tax board to take swift and decisive action, or face stiff fines from the state. Atlanta and Fulton elected to bite the bullet and impose the assessment hikes all at once, rather than ratcheting up assessments gradually. The results were dramatic; virtually no property owners were spared an upward reassessment, but the most dramatic assessment hikes affected the owners of more valuable properties. It wasn’t unusual for residents of affluent neighborhoods to see their assessments double.

One might think that, since a sales ratio study makes the “free market” the yardstick by which tax assessments are evaluated, political opposition would be minimized, and the right-leaning homeowners who are prone to protest their tax bills would be placated. After all, it wasn’t some county bureaucrat arbitrarily making assessments, but the aggregated wisdom of the “free market”–the same force that was helping them to grow equity.  As Sjoquist and Warwick put it,

Despite the shock that residents face in dealing with the new assessments, the new state procedures should result in more equitable assessments.[2]

Since you’re reading and I’m writing this, you might correctly surmise that many taxpayers focused more on the “tax hike” aspect of the reassessment than on the “bringing assessments into compliance with the law” aspect–let alone any consideration of “paying one’s fair share.” In fact, the reassessments prompted the formation of taxpayers’ rights organizations, and launched the careers of many north Fulton Republicans who capitalized on the convergence of spiking tax bills and the prevailing sentiment that the region’s affluent were being soaked to support welfare recipients. The two most notable of these were Robert Proctor and Mitch Skandalakis, who were joint counsel in a taxpayers’ organization lawsuit against Atlanta, Fulton County, the Joint Board of Tax Assessors, and Cole-Layer-Trumble over the reassessment [3], and who used their new identities as tax warriors as a springboard to further political endeavors. In Skandalakis’s case, this involved a successful run for Chair of the Fulton County Commission and an unsuccessful 1998 run for Lieutenant Governor marred by extensive race-baiting of black Atlanta-area Democratic officials in his Ralph Reed-managed campaign. Proctor continued to sue virtually every government agency in Fulton County over taxes and, significantly, affirmative action, along with representing a Waffle House franchisee accused of discrimination against black customers in a briefly notorious lawsuit. (Ironically, after Skandalakis led a campaign to install a new county tax chief, Proctor served as legal counsel for a realty trust that specialized in buying tax liens at discount from the county and seizing the properties).

Proctor (as a civilian gadfly) and Skandalakis (in county government) were among the leaders of a movement that consolidated taxpayer resentment, white racial grudges about black political power, and a rising base of Republican party strength in Atlanta’s northern suburbs into a force that  transformed the state and has brought political conflict on the congruent axes of race, party, and geography to a head in Fulton County.

The most ironic part of this is that, far from soaking rich northsiders, the property tax system in Fulton County had been actively subsidizing them for decades. The pattern that the CLT study found in 1989 was the same one discovered by an Atlanta Urban League study of tax assessments in 1971, at the height of white flight.[4] A study by Research Atlanta, Inc. in 1975 referenced the Urban League’s study and a similar national investigation carried out by HUD [5], and rather delicately explained how race meshed with the “failure of assessment to keep pace with the rapidly changing property values in the county”:

The geographical distribution of neighborhood assessment-sales ratios mentioned above generally follows the trend of upward and downward transitional property values. Thus, houses in the city’s northern neighborhoods, where property values have been rising, had lower than average assessment-sales ratios. On the other hand, inner city neighborhoods, where property values have either declined or not risen as rapidly as the rest of the city, had higher ratios.[6]

Research Atlanta emphasized that the divergence was an effect of assessments lagging behind changes in the market–assessors devoting limited human resources to assessing newly developed property, for example–rather than deliberate attempts by assessors to favor any racial or ethnic group or any neighborhood area. I would not rule out the possibility that pro-development officials on the Fulton County Commission placed some thumbs on the scales so that rapidly booming northside and north Fulton areas would continue to grow without higher tax assessments, but this kind of malfeasance isn’t necessary to support an argument that tax assessments were racially biased against black Atlantans; the kind of property value instability happening in this era–both in terms of property that fell in value and that rose rapidly–was intrinsically tied to the racial identity of owners and neighbors. Further, if properties were reassessed at long or irregular intervals, that meshed with racial bias in the housing market to structure the tax system in whites’ favor.

In an era when (as David Freund ably argues) white suburbanites crafted a political identity around property ownership and a political agenda of racial exclusion justified by the need to protect property values, those homeowners scored a second windfall when tax assessors, whether through sloth, understaffing, or collusion with development interests, allowed tax bills to lag far behind that rising property value. So, while north Fulton tax revolt leaders like attorney Robert Proctor mounted soapboxes to lament the waste of their tax dollars after reassessment, they were utterly silent about the decades-long diversion of taxes whose collection was mandated by state law from the region’s schools and governments. They certainly didn’t thank any of the residents of low-value neighborhoods, whose relatively high assessments represented both a disproportionate share of the costs of government and public services and an effective subsidy to the underassessed rich.

Put it another way: Every dime of difference between the state-mandated assessment of 40 percent of market value and the actual assessment imposed on homeowners was a theft from the public at large.

Notes:

[1]: Tomlinson, Barbara, and George Lipsitz. “American Studies as Accompaniment.” American Quarterly 65, no. 1 (2013): 1–30. doi:10.1353/aq.2013.0009.

[2]: Sjoquist, Keith R., and Drew A. Warwick. Fulton County’s Mass Reappraisal: Why Was It Necessary? Atlanta, GA: Research Atlanta, Inc., 1993.

[3]: These suits were ultimately decided in favor of the governments. See Lomax v. Lee, 408 SE 2d 788 (GA Supreme Court, 1991).

[4]: Report of the Atlanta Urban League on the Fulton County Property Tax, 1971, cited in [6].

[5]: Arthur D. Little, Inc, and United States. A Study of Property Taxes and Urban Blight; Report to U.S. Dept. of Housing & Urban Development. Washington: U.S. Dept. of Housing and Urban Development; for sale by the Supt. of Docs., U.S. Govt. Print. Off, 1973.

[6]: Holmes, Donald E., and Robert W. Pinner. Assessment-sales Ratios in Fulton County and the City of Atlanta. Atlanta: Research Atlanta, 1975.

Wall Street vs. Woodward Avenue? (or, will Detroit’s Emergency Manager address predatory interest rate swaps?)

In a move that’s been anticipated for months and was presaged by last week’s release of a Michigan Treasury Department assessment (link to .pdf) of Detroit’s fiscal health and political willingness to pursue austerity measures, Governor Rick Snyder has used his controversial powers to appoint corporate bankruptcy attorney Kevyn D. Orr to oversee the governance of the state’s largest city.

Two closely intertwined points are in order, the first relating to the racial impacts of emergency management and the second to the kind of austerity measures that such management inevitably takes as the ability to control local affairs is stripped from local electorates. The Detroit decision means that nearly half of all African Americans in Michigan now live in cities where their elected officials have been supplanted by emergency managers appointed by a conservative Republican governor. Half of all black Michigan residents are denied the opportunity to elect the people who make decisions about their communities.

In the majority-black city of Benton Harbor in western Michigan, an emergency manager’s order effectively reduced elected officials in the city to figureheads, with the power to convene and adjourn meetings, but not to conduct any official business. In the Detroit suburb of Pontiac, Steven Yaccino and Monica Davey write in the NYT, a series of emergency managers who have controlled city government since 2009 have imposed similar constraints on elected officials, and undertaken an aggressive program of austerity (cutting the city budget from $57 to $36 million, a 37% reduction, and outsourcing city jobs to private contractors in the course of reducing the public payroll from 600 to 50 workers) and privatization (selling off the city’s fire trucks, parking meters, wastewater treatment facilities, and the Pontiac Silverdome stadium).

The symbolism of black political power in Michigan is, to say the least, conflicted.

21-joe-louis-fist-sculpture-in-the-middle-of-the-woodward-jefferson-avenue-intersection-iii

While many whites appear to accept the proposition that black self-government is doomed to failure through its own profligacy (such comments generally ignoring the history of white disinvestment from cities in racial transition), the substitution of managers appointed by a white conservative governor for officials elected by black voters is a serious provocation. As Pontiac councilman Donald Watkins argues,

“An emergency manager is like a man coming into your house…. He takes your checkbook, he takes your credit cards, he lives in your house and he sleeps in your bed with your wife.” Mr. Watkins added, “He tells you it’s still your house, but he doesn’t clean up, sells off everything and then he packs his bag and leaves.”

The appointment of Orr, an African American, to direct Detroit’s financial restructuring, is a concession that is absolutely vital to securing even minimum legitimacy for the manager’s decisions, which are likely to hurt.

The racially disproportionate impact of emergency management is also reflected in the way that the popular media addresses the roots of Detroit’s problems. The conviction of former Mayor Kwame Kilpatrick on corruption charges supports an implicit argument made in the report advocating emergency management: that corrupt and incompetent leadership (particularly by Kilpatrick, the self-styled “hip hop mayor”) took Detroit’s problems from serious to terminal. There’s no doubt that Kilpatrick had a hand in many of the decisions that exacerbated an already bad situation in Detroit. But what has been scarcely acknowledged is that Kilpatrick had some very powerful partners in crime that haven’t been, and won’t be, facing any criminal charges.

As Darrell Preston and Chris Christoff report in Bloomberg, the City of Detroit currently owes at least $474 million in fees to Wall Street banks that it incurred as a result of financial deals it entered into in the early 2000s.

The city started borrowing to plug budget holes in 2005 under former Mayor Kwame Kilpatrick, who was convicted this week on corruption charges. That year, it issued $1.4 billion in securities to fund pension payments. Last year, it added $129.5 million in debt, 9.3 percent of its general-fund budget, in part to repay loans taken to service other bonds.

The loans were structured in an increasingly common form called an interest rate swap. As Andy Kroll writes in Mother Jonesthese are contracts in which

[a city and a bank] will “swap” interest rates with each other: the city will pay the bank a fixed rate—3 to 5 percent, say—to borrow money, and the bank will in return pay the city cash based on a floating, variable interest rate. (This is determined by some underlying source, like the LIBOR rate for short-term lending.) The point of a swap deal is that, when the economy was booming, cities could borrow from banks on the cheap, because their fixed payment rate was on par with or better than the bank’s floating rate.

In principle, this arrangement was intended to make borrowing cheaper for the city. What it did in practice, when interest rates fell after the crash, was create a new debt for the city when the floating interest payments it took from the banks fell far short of the fixed interest it owed back. The gap peaked at $439 million last spring, though rising interest rates have lowered it to “only” $350 million. In perspective, per Preston and Christoff, the burden of these swaps on Detroit in the form of

underwriting expenses, bond-insurance premiums and fees for wrong-way bets on swaps…. almost equals the city’s 2013 budget for police and fire protection.

But wait! one might argue. The city borrowed from banks to pay its bills, and thought that a rate swap was a good way to do it on the cheap. It didn’t work out, but them’s the breaks. Matt Taibbi’s report of similar swaps in Jefferson County, Alabama reflects not a good faith deal made between two informed parties, but

a billion-dollar predatory swap deal cooked up at the highest levels of America’s biggest banks, across a vast fruited plain of bribes and felonies — “the price of doing business,” as one JP Morgan banker says on tape — all the way down to Lisa Pack’s sewer bill and the mass layoffs in Birmingham.

Although Taibbi uses a lot of naughty words and colorful metaphors and accuses powerful bankers of fraud and other felonies, he’s still the best reporter covering this issue, and the one most willing to cut through the complex jargon of the financial sector so that the layman can grasp what’s happening in these kinds of complex transactions. Please, read the whole report, and this other one about the rigging of interest rates on municipal bond offerings. Interest rate swaps have been a disaster for cash-strapped municipalities across the United States, a way for Wall Street to pick the bones of local governments already desperate for cash that frequently creates even worse obligations that have pushed local governments to bankruptcy.

As for Detroit? As Preston and Christoff report,

The city makes periodic swap payments from money generated by casinos.

If it weren’t so horrifying it might be poetic.

Detroit’s problems aren’t wholly attributable to interest rate swaps, of course; the city’s finances have been in a conjoined decline with its industrial economy and population for decades. But the amount that Detroit owes its counterparties in these swaps purely as a result of the difference between the interest rates on money flows from the city to the banks and the banks back to the city exceeds the larges annual deficit that Detroit has run in the last 10 years. It’s a theft from a city that needs every dime it can scrape up to fund its other obligations, and the failure to discuss interest rate swaps as a part of Detroit’s problems borders on criminal. When the history of the economic crash and its effects on communities around the United States is written, interest rate swaps are going to rank with the automobile, the Federal Housing Administration, and urban renewal as forces that remade metropolitan America.

In the immediate future, will Orr’s plan of attack include seeking legal authority to extricate Detroit from its predatory swap arrangements? Or will the residents of Detroit be forced again to bear the burden of decisions made by others?