Facing Federal and State cuts and a declining revenue, what do cities and municipalities have as alternatives to finance their local projects?

While recently emerged data is uncovering the economic damage of the current healthcare crisis across all business sectors nationwide, a more devastating reality is showing how much US cities’ budgets have been affected by this pandemic and its aftermath. Some mayors and city managers who have been around for a while describe this economic crisis worst ever even more than the 2008 crisis as the whole economy came to halt abruptly. 

All over the US states, cities’ revenue mainly comes from sales taxes, hospitality & tourism activities taxes as well as property taxes. As governors in most states issued the “shelter at home” order, people staying home stopped going out to buy things save visiting restaurants, entertainment places and activities centers. This had an immediate effect on cities’ revenues all over the nation, while in states in which cities are more dependent on tourism such as California the impact was much more devastating.

Learning from the 2008 crisis, many of the cities have been saving in a “rainy day fund” to sandbag against economic downturns; nevertheless, as one mayor described it, we were preparing for a rainy day but we got a hurricane instead. Cities did not only have to deal with drastically diminishing revenues but also with a huge surge of non-budgeted items related to newly introduced public health measures, medical equipment, emergency shelters and other expenses caused by the pandemic. Adding to the above funding coming from federal and state sources is now much less than before with even more reduced budgets for the next fiscal year. 

Tracking the development of this situation is of a great interest for us, as Agora Neos, Inc. our new technology startup is building a micro bonds issuance platform for the municipal markets. This platform enables cities and municipalities to go directly to their communities to fund their local projects. It is a new way for how public finance can be approached introducing one additional source of funding for counties, cities and districts. This innovation comes in a timely manner as these municipalities are in huge need for any type of funding to cover part of what they lost out of revenue. Moreover, this new source will support the existing public financing ecosystem such as government programs and institutional municipal bonds investment firms which will not be able to cover all the huge needs coming forward because of the current crisis, especially for the smaller issuance and seed funds local governments need to kick start some of their projects.

These micro bonds are a new financial asset class which enable local constituents who traditionally are not typical investors in municipal bonds to participate in their cities’ local offerings as a new way to invest and to support their local economy as well. These micro bonds can be made available via an online platform and a mobile app later, which will make investing in municipal bonds accessible, feasible and trade-able to all.

Governments, both federal and local, crowdfunding their needs of financing out of public directly is not a new practice, as the US has sold “War Bonds” starting at $10 of value to the public before, also several states and cities have offered their bonds directly to their local communities in multiple occasions in which some were very successful. Nevertheless, this practice has not been very popular among local government as it comes with an additional administrative burden to the issuer. With a technology platform that can automate the process, it will carry the heavy administration weight from the city and its advisors and provide all type of processing, tracking and reporting needed to make this happen.

On the top of that, this platform will enable these cities and municipalities to engage their local constituents better in allowing them to participate in supporting their local project through an investment opportunity, which comes usually as a tax exempt one. This approach will also add to the feeling of solidarity and unity between the local government and its community. The community will feel that they have a stronger influence to direct how things are done in their city as they will be more engaged in financing desirable projects and the local government will be more likely to offer projects of more social and economic impact which appeal better to the community and motivate them to participate further.  

We call all counties, cities and local districts to look at the micro bonds’ issuance platform as an opportunity not only to tap into new ways of funding, but also to build a better-connected community.