{"id":825394,"date":"2022-10-04T12:07:54","date_gmt":"2022-10-04T12:07:54","guid":{"rendered":"https:\/\/jacobin.com\/2022\/10\/jackson-water-crisis-debt-wall-street\/"},"modified":"2022-10-05T12:17:26","modified_gmt":"2022-10-05T12:17:26","slug":"wall-street-is-to-blame-for-the-water-crisis-in-jackson-mississippi","status":"publish","type":"post","link":"https:\/\/radiofree.asia\/2022\/10\/04\/wall-street-is-to-blame-for-the-water-crisis-in-jackson-mississippi\/","title":{"rendered":"Wall Street Is to Blame for the Water Crisis in Jackson, Mississippi"},"content":{"rendered":"\n \n\n\n\n

The water crisis in Jackson, Mississippi, wasn\u2019t the product of government mismanagement. It was the result of Wall Street jacking up the city\u2019s interest rates, which left residents with decaying infrastructure that couldn\u2019t even deliver clean water.<\/h3>\n\n\n
\n \n
\n Rodney Moore, maintenance supervisor at Addison Place apartments, receives cases of bottled water from City of Jackson workers for elderly and disabled residents on September 3, 2022 in Jackson, Mississippi. (Joshua Lott \/ Washington Post via Getty Images)\n <\/figcaption> \n<\/figure>\n\n\n\n\n \n

In August, clean water stopped flowing from residents\u2019 taps in Jackson, Mississippi. The crisis lasted more than six weeks, leaving\u00a0150,000 people<\/a> without a consistent source of safe water. The catastrophe can be traced back to a decision by a credit ratings agency four years ago that massively inflated the city\u2019s borrowing costs for infrastructure improvements, most notably for its water and sewer system.<\/p>\n

In 2018, ratings analysts at Moody\u2019s Investors Service \u2014 a credit rating agency with a\u00a0legacy of misconduct<\/a>\u00a0\u2014 downgraded Jackson\u2019s bond rating to a junk status,\u00a0citing<\/a>\u00a0in part the \u201clow wealth and income indicators of residents.\u201d The decision happened even though Jackson has never defaulted on its debt.<\/p>\n

Moody\u2019s move jacked up the price of borrowing for Jackson, costing the cash-strapped city between $2 and 4 million per year in additional debt service costs \u2014 a massive financial roadblock to officials\u2019 plans to fix the municipality\u2019s aging water system. And since the state of Mississippi and the federal government refused to use their powers to address the city\u2019s infrastructure problems, that meant Jackson was essentially powerless to stop the impending catastrophe.<\/p>\n

The situation underscores how Wall Street works to prevent governments from fixing their public works, contributing to an infrastructure crisis nationwide. Such actions by ratings agencies are particularly harmful in majority black and brown areas like Jackson, which have tight budgets and often receive minimal federal support.<\/p>\n

All major \u2014 and most minor \u2014 cities, states, school, and utility districts take on debt to pay for infrastructure improvements. That debt is issued as bonds, which are agreements to pay back loans at a set interest rate. Bondholders are typically wealthy residents of the state where the bonds were issued who are seeking to accrue tax advantages; banks; insurance companies; and mutual funds.<\/p>\n

To determine creditworthiness for this debt, bond rating agencies give state and municipal governments a credit rating, based on factors like the community\u2019s existing debt load and its current pension obligations. When the rating is lower, the debt is considered higher risk, and the interest rate to pay back the loans increases substantially.<\/p>\n

Historically, the lowest possible bond ratings have been reserved for Jackson, Puerto Rico, American Samoa, Detroit, and other places long plagued by systemic disinvestment \u2014 meaning that it becomes almost impossible for these communities to finance their way out of their infrastructure crises.<\/p>\n

\u201cThe practices of the ratings agencies are often extremely racist,\u201d Brittany Alston, research director at the Action Center on Race and the Economy<\/a> (ACRE), told us. \u201cWe did an analysis<\/a> that showed that all the cities at the bottom of the ratings scale have been majority-minority. As I\u2019ve been monitoring the reporting, I\u2019ve noted how the local government is characterized, and I\u2019ve heard the term \u2018mismanagement\u2019 multiple times.\u201d<\/p>\n

Alston continued: \u201cI think that term has been used to really vilify local governments who are working with what they have and are struggling because they\u2019re stuck in a system that has denied them federal support for decades.\u201d The federal government\u2019s share of contributions to water infrastructure fell from\u00a031 percent in 1977 to just 4 percent<\/a>\u00a0in 2017.<\/p>\n\n \n\n \n \n \n

Jackson\u2019s Water Crisis Has Deep Roots<\/h2>\n \n

Some of Jackson\u2019s water infrastructure dates to 1914<\/a>. The city has a longtime problem<\/a> with industrial concerns dumping their waste into the city\u2019s water system, in part driven by Environmental Protection Agency underfunding and weak environmental regulations in Mississippi.<\/p>\n

Nationally, federal government support for water infrastructure has dwindled. And at the state level, Mississippi has seemed more interested in diverting\u00a0$8 million<\/a>\u00a0of state funding to enrich former NFL player Brett Favre than investing in Jackson\u2019s infrastructure, despite frequent water system failures in the past.<\/p>\n

In 2010, the transnational engineering firm Siemens made an offer to automate Jackson\u2019s water billing system, assuring the city that the energy savings it could create would more than pay for the contract. In the\u00a0largest contract<\/a>\u00a0in Jackson\u2019s history, the city agreed to pay $90 million based on Siemens\u2019 promise to create $120 million in \u201cguaranteed savings,\u201d according to a\u00a0lawsuit<\/a>\u00a0the city later filed against the company for what\u00a0appeared to be<\/a>\u00a0a fraudulent and defective system.<\/p>\n

The Siemens performance contract put Jackson on the hook to Wall Street bondholders for over $200 million, with more than 55 percent of that total collected as\u00a0interest<\/a>\u00a0on the $91 million principal loan amount.<\/p>\n

Money that could have gone to new water infrastructure, in other words, instead went to Siemens, as well as the banks and investors who owned Jackson\u2019s water sewer debt.<\/p>\n

Progressive Jackson mayor Chokwe Antar Lumumba\u00a0pledged<\/a>\u00a0during his 2017 mayoral campaign to use the city\u2019s bonding authority to fix the water and sewer lines. But the following year, Moody\u2019s downgraded Jackson\u2019s debt to junk status.<\/p>\n

The drop in credit rating severely limited the city\u2019s ability to refinance the 2013 water bond it issued for the Siemens project. If Jackson had been given the highest possible bond rating \u2014 AAA \u2014 it would have been able to score a\u00a03.55 percent<\/a>\u00a0interest rate on the twenty-year bond. Instead, it was forced to pay interest rates as high as\u00a06.75 percent<\/a>.<\/p>\n

That move stopped Jackson from being able to get decent borrowing terms for any new infrastructure investment, which is likely why the bond Lumumba campaigned on was never issued.<\/p>\n

One other major ratings agency, S&P Global Ratings, also rates Jackson\u2019s municipal debt. While S&P has been\u00a0less critical<\/a>\u00a0of Jackson\u2019s general obligation debt, which was issued to fund day-to-day operations of the city, it has rated the city\u2019s water and sewer debt\u00a0harshly<\/a>.<\/p>\n

Meanwhile, Jackson has faced significant challenges. A freeze in November 2021 that caused the city to lose potable water was the canary in the coal mine, said Catherine Robinson, a community organizer based in Jackson.<\/p>\n

\u201cFor me, when the Jackson water crisis first hit in November 2021, my mom had just had a stroke,\u201d Robinson told us. \u201cI had to go outside of Jackson to take showers and to cook. It was a winter storm \u2014 we really couldn\u2019t travel like that because the roads were so icy.\u201d<\/p>\n

There is an entrenched racial component to this state of affairs. Mississippi\u2019s leadership \u2014 every statewide official, the speaker of the house and the president pro tempore of the state senate, and both US senators \u2014 have been white since the Reconstruction era ended 140 years ago, despite the state being 37 percent black.<\/p>\n

In an analysis of five million bonds issued to cities in the municipal bond market between 1970 and 2014, economic historian C. S. Ponder at Florida State University\u00a0found<\/a>\u00a0that majority-black cities are categorically charged higher interest rates to build basic infrastructure for water systems and sewage.<\/p>\n

The same applies to Moody\u2019s. The firm is very disconnected from life on the ground in Jackson. Moody\u2019s CEO, Rob Fauber, earned\u00a0$9.7 million<\/a>\u00a0in 2021. The firm spent\u00a0$6.5 billion<\/a>\u00a0on stock buybacks over the past decade, using the capital of the company to drive up the stock.<\/p>\n

Two of the largest municipal bankruptcies in US history have been filed by majority-black urban areas \u2014 Detroit, Michigan, and Jefferson County (Birmingham), Alabama \u2014 whose water systems were made targets of financial extraction. In both places, the federal government mandated upgrades to their water and sewage systems without providing funding to do so, creating roughly $5.7 billion in debt for Detroit and $3.3 billion for Jefferson County on the municipal bond market.<\/p>\n

For its part, the Federal Reserve has the\u00a0authority<\/a>\u00a0to purchase municipal bonds directly to support the finances of communities like Jackson, as it has done with bonds for major corporations, such as when the Fed made a multitrillion-dollar\u00a0intervention<\/a>\u00a0in the early stages of the COVID-19 pandemic.<\/p>\n

However, a Fed facility set up to support municipalities during the pandemic only purchased\u00a0$16 billion<\/a>\u00a0worth of municipal debt, as opposed to the\u00a0$42 billion<\/a>\u00a0thrown at the corporate market.<\/p>\n\n \n \n \n

Flooding Cities With Toxic Debt<\/h2>\n \n

While state and federal government action, or lack thereof, has factored into the shoddy infrastructure of several American cities, Moody\u2019s also bears significant responsibility for the current state of affairs.<\/p>\n

The bonds ratings agency made incredibly consequential decisions in the lead-up to the 2008 financial crisis, which caused\u00a07.8 million<\/a>\u00a0foreclosures and nearly\u00a0nine million<\/a>\u00a0job losses.\u00a0Often deemed<\/a>\u00a0the most consequential factor contributing to the crisis was Moody\u2019s decision to rate large tranches of controversial collateralized debt obligations (CDOs) and mortgage-backed securities (MBSs), financial products composed of low-quality mortgages, at the safest possible rating of AAA.<\/p>\n

The firm did so because of a perverse incentive model whereby Moody\u2019s and other ratings agencies would inflate ratings to generate additional fees from Wall Street firms. Holders of many of those assets, however, were nearly\u00a0wiped out<\/a>\u00a0in the 2008 financial crisis when the housing market collapsed.<\/p>\n

The other two major ratings agencies,\u00a0S&P<\/a>\u00a0and\u00a0Fitch Ratings<\/a>, also engaged in the ratings inflation of risky Wall Street financial products leading up to the 2008 financial crisis.<\/p>\n

At the same time, Moody\u2019s and other agencies often rated many states and municipalities with far lower ratings \u2014 even though they had much lower probability of default, due to the unlimited taxing power of states and municipalities, as well as harsh consequences for politicians that allow defaults.<\/p>\n

Lehman Brothers, the Wall Street firm at the epicenter of the 2008 financial crisis, was rated at A1 \u2014 seven notches above Jackson\u2019s water and sewer current debt \u2014 in July 2008, just two months before the firm collapsed and Lehman\u2019s bondholders received twenty-five cents on the dollar.<\/p>\n

When government defaults do occur, as happened in Detroit in\u00a02013<\/a>\u00a0and Puerto Rico in\u00a02016<\/a>, Wall Street is almost always the culprit. Wall Street firms loaded up these<\/a> communities<\/a> with toxic debt<\/a> that required huge debt service payments, precipitating their bankruptcies.<\/p>\n

Moody\u2019s largest\u00a0shareholder<\/a>\u00a0is America\u2019s fifth-richest person, Warren Buffett, who has also waged an\u00a0aggressive campaign<\/a>\u00a0to keep rail workers from having paid sick days. In 2021, a European regulator\u00a0fined<\/a>\u00a0Moody\u2019s $4 million for inflating the credit ratings of other Buffett-owned companies.<\/p>\n

Moody\u2019s has in the past justified the yawning discrepancies between its corporate and financial ratings and its municipal ratings by\u00a0saying<\/a>\u00a0that it had different standards for each class of debt. Those claims were not taken seriously when Congress wrote and passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 to address the misconduct leading up to the 2008 financial crisis. The law\u00a0mandated<\/a>\u00a0that Moody\u2019s and the other ratings agencies use \u201cconsistent application of rating symbols and definitions,\u201d and that the Securities and Exchange Commission (SEC) initiate rulemaking to that effect.<\/p>\n

However, under President Barack Obama, the SEC\u00a0failed<\/a>\u00a0to mandate that the ratings agencies actually use consistent ratings symbols and definitions across the board, allowing the agencies to continue to rate municipal debt more harshly than other forms of debt, despite its far lower likelihood of default.<\/p>\n

The massive discrepancies have continued to today. In November 2018, Moody\u2019s rated Pacific Gas & Electric\u2019s (PG&E) debt at\u00a0Baa3<\/a>\u00a0\u2014 two notches above Jackson\u2019s current water debt rating \u2014 just two months before the\u00a0long-troubled<\/a>\u00a0utility company suffered one of the largest bankruptcies in history.<\/p>\n

Jackson, meanwhile, has never defaulted on its debt. And unlike PG&E executives, who collected\u00a0millions of dollars<\/a>\u00a0in raises in the aftermath of the company\u2019s bankruptcy, a default by Jackson would likely prove to be a major blow to Lumumba and his expected campaign for a third term in 2025.<\/p>\n

Congressional Democrats are now\u00a0proposing<\/a>\u00a0$200 million in aid to Jackson, which is a fraction of the\u00a0$1 billion<\/a>\u00a0that experts say is needed to meet the scale of the crisis. If Republicans gain control of either chamber of Congress in November, it is likely that any additional aid to the city will be cut off.<\/p>\n\n \n \n \n\n \n \n

You can subscribe to David Sirota\u2019s investigative journalism project, the\u00a0Lever<\/i>,\u00a0here<\/a>.<\/p>\n\n\n\n

This post was originally published on Jacobin<\/a>. <\/p>","protected":false},"excerpt":{"rendered":"

In August, clean water stopped flowing from residents\u2019 taps in Jackson, Mississippi. The crisis lasted more than six weeks, leaving\u00a0150,000 people without a consistent source of safe water. The catastrophe can be traced back to a decision by a credit ratings agency four years ago that massively inflated the city\u2019s borrowing costs for infrastructure improvements, [\u2026]<\/p>\n","protected":false},"author":138,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"_links":{"self":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/825394"}],"collection":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/users\/138"}],"replies":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/comments?post=825394"}],"version-history":[{"count":2,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/825394\/revisions"}],"predecessor-version":[{"id":827516,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/825394\/revisions\/827516"}],"wp:attachment":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/media?parent=825394"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/categories?post=825394"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/tags?post=825394"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}