Democracy and the public purse

Russia’s invasion of Ukraine has me thinking about the elements inherent in true democracies—trust, access and accountability—and how that relates to government finances. This week’s newsletter looks at the role of those elements in the municipal market and at some of the ways the war in Ukraine could touch state and local finance.

First, a quick reminder that if you work in or with local government: ELGL, AARP and Funkhouser & Associates have partnered to provide a free training program on using the federal stimulus funding to build livable communities! Applications due by March 21.

Democracy and the public purse

Last year, the German Marshall Fund of the United States conducted a survey asking officials from 12 European and U.S. cities about their biggest challenges of running a democracy in today’s world. Though their demographics and specific challenges varied, one message was constant: When the people do not work together, democracy dies.

“Time and again, city officials observed that residents who are wary of government are gravitating toward extreme views (polarization) or dropping out of the process entirely (low participation in elections and other forms of civic activity),” the survey said.

My colleague Mark Funkhouser and the GMF’s Steven Bosacker teamed up to write about this finding for Route Fifty, pointing out that at the root of leaders’ concerns is eroding trust in our public institutions. “High-performing, competent government is essential, but a strong democracy demands more. After all, there are many authoritarian leaders who have demonstrated competency in a crisis,” they wrote. “What differentiates democratic governments is the engagement and collaboration they strive for with their constituents in shaping policy.”

So what does any of this have to do with public finance? Like democracy, it works best in systems that are also based on trust, access and accountability. Under these conditions, public money is spent more effectively, thus saving taxpayer dollars.

For example, research has shown that the decline of newspapers in this century may also have taken a toll on cities' and counties' budgets in the form of increased municipal borrowing costs. For the local governments included in that study, that translated to millions more in additional costs between 1996 and 2015.

Access to information and transparency also play a positive role in the municipal bond market. A 2015 study from the University of Oregon supports this idea. Researchers found that timelier information can reduce transaction fees on trades by up to 30%. Massachusetts became one of the first governments to test the idea that access decreases borrowing costs when it launched its MassDirect Notes program, in which the state allows individual investors to buy the state’s bonds directly rather than going through a broker.

This idea that increased transparency lowers costs is also one supported by some in the ESG investing community. So-called green bonds (municipal bonds that pay for climate-friendly projects) tend to come with a more rigorous standard for financial disclosures and there are many who believe that fact does two things: 1) increases investor demand, and 2) those investors will be willing to take a lower interest rate on the bonds because they’ll have access to more timely information about their investment.

Of course, there is an upfront cost to increasing transparency and access to information. It takes more time and almost always involves investing in new systems to aggregate and make sense of the information. But that investment can ultimately save money down the road and increase citizens’ trust in their government. 

And when that happens, democracy—and the public purse—is stronger.

In solidarity with Ukraine

As a show of support for Ukraine, state and local governments are putting their own economic sanctions on Russia. Here’s what’s happened so far.