Cities Reach Out to Private Sector to Solve Fiscal Challenges

Kirk Victor examines the new and risky roads many cities are taking to get immediate access to capital in order to finance their fiscal challenges.
March 20, 2012, 1pm PDT | Jonathan Nettler | @nettsj
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Local government officials, facing once-in-a-generation challenges of "persistently high unemployment, soaring pension and health-care costs, dwindling property values that have robbed cities of revenues, and cutbacks in federal and state assistance," are increasingly making deals for immediate access to capital from "investment bankers who come to the table armed with an array of exotic-and often difficult-to-understand-financing tools," writes Victor.

As the mortgage-back security and subprime lending markets that helped precipitate the Great Recession demonstrate, there is an danger in utilizing new and sophisticated financial instruments without a full understanding of their risks.

"Even when the cutting-edge deal stems from a genuine try at solving long-term fiscal issues, experts in municipal restructuring say they worry that city leaders don't have the knowledge base to analyze the deals sufficiently. The lack of sophisticated investment analytical abilities puts them and their cities at risk of making ill-informed decisions or even of being taken to the cleaners."

Not every deal is a bad deal, as residents of Chicago and Indianapolis can attest, but there are inherent dangers of turning to short-term fixes in exchange for long-term concessions.

As Victor asserts, "The lesson in all of this is that there are no magic financing techniques."

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Published on Tuesday, March 20, 2012 in Governing
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