Ferguson Relied on Fines and Fees: It Hurt Its Finances

by
Adam Rust

Wall Street noticed when Michael Brown was shot.

The August 2014 shooting of Michael Brown brought nationwide attention to the policing practices in Ferguson, Missouri. The City’s aggressive policing of its largely low-income, African-American population smothered its residents with millions of dollars in fines and fees.

The story of what happened to the value of Ferguson's municipal bonds underscores how there can be a financial cost for those who resort to racist policies. Relying on fines and fees created political risk. Wall Street has always hated risk, and once Ferguson’s methods became well-known, the City’s fiscal reputation nosedived.

Broadly speaking, the City used fines and forfeitures to shore up its finances. Its leaders recognized the headwinds faced by its local economy. The population was dropping, per capita income was falling, and property tax collection rates were declining. A local Crack Barrel restaurant was the town’s 10th largest employer. More than 14 percent of people looking for work were jobless. The assessed value of real estate fell $40 million between 2007 and 2012.

In the short run, aggressive ticketing covered up the fundamental fiscal problems. As revenues from ticketing increased from 2010 to 2013, the City’s finances brightened. The City refinanced one outstanding bond in 2011, and in 2013, the City issued another $9.055 million in new municipal debt. It did so affordably. Moody's rated the bonds A1.

With some time, though, it’s clear that the practice caught up with the City. The evidence can be seen in how the price of its bonds fell. The steep declines evidence how investors grew suspicious.

Records kept by the Municipal Securities Rulemaking Board (the "MSRB") provide a sale-by-sale accounting of the trading. While its bonds have always been trading infrequently, it was still unusual that no trading occurred for almost 18 months after Brown was killed. It’s possible that investors were wary of being associated with the City.

However, in February 2016, dealers executed three trades. In between then and the prior sale, the value of Ferguson’s bonds fell 42 percent. A short record of trading activity:

Initial sale: January 23rd, 2013: $100.71 for$100 of debt obligation (above face value)

1.      October 23, 2013: $91.25

2.      October 29th, 2013: $91.00

3.      October 31st, 2013: $90.38

4.      November 1st, 2013: $92.25

5.      November 5th, 2013: $90.88

6.      November 7th, 2013: $91.50

7.     August 8th, 2014: Michael Brown is shot and killed by a Ferguson, Missouri police officer.

8.      No sales for 14 months

9.      February 1, 2016: $51.53

10.  March 7th, 2016: $44.80

11.  March 14th, 2016: $52.53

When Ferguson’s bonds sold at $44.80 on March 7th, it implicitly meant that investors were only willing to pay that sum for $100 of debts owed by the City. By comparison, municipal bonds issued by St. Louis County from the same time period trade above $100.

I would not imagine that Wall Street’s judgment sprung from a sudden burst of morality. True, some people on Wall Street do have morals, but decision-making in markets is not the product of any individual. It is merely a thoughtful assessment of the future of the City, based on the collective wisdom of many analysts. Bond prices represent the best guess of the chances that an issuer will pay back the investors. In this case, Ferguson’s ability to pay its debts depended on its ability to fund its operations from fines and forfeitures.

The estimate Wall Street made underscores an inescapable truth – you can run, but you can’t hide. Racism is not based on logic. It is rooted in poor reasoning by people who let fear cloud their thinking.

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The City’s Strategy

Ferguson’s City Budget relied on municipal fines and fees to increase revenues, a practice that was called out by the US Department of Justice. The DOJ’s 2015 report referred to a written statement from the City Finance Director to the Police Chief. “Unless ticketing ramps up significantly before the end of the year, it will be hard to significantly raise collections next year….Given that we are looking at a substantial sales tax shortfall, it’s not an insignificant issue."  

The City established a schedule of fees for violations at amounts well beyond the norm. For example, the penalty imposed on homeowners with weeds/tall grass ranged from $77 to $102. The DOJ said most cities charged as little as $5 per day. Parking fines in some places – particularly towns where overall demand for spaces is low – might be $5, yet in Ferguson – where reports on business activity would suggest that demand was minimal – a ticket cost $102.

Having established high fees, stewards of the town’s finances made it clear that it expected diligent efforts by the police department to implement those fines. The report noted that in 2013, the City’s Finance Director had exhorted the Chief of Police to do better with ticketing. Promised an increase of 7.5 percent in ticketing revenues, he asked instead for a 10 percent year-over-year gain. The DOJ believes that Ferguson’s rank-and-file police officers were told to place a priority on generating revenue, including that raises and promotions were tied to their “productivity” in issuing citations.

The police department increased staffing and changed how it set schedules for its officers. The City's Police Chief noted he would “place more officers on the street, which in turn will increase traffic enforcement per shift.” The number of citations increased by fifty percent between 2010 and 2014.

Here is a short summary of annual fines and fees collected between 2010 and 2014:

• 2010: $1.38 million

• 2011: $1.41 million

• 2012: 2.11 million

• 2013: $2.46 million

• 2014: $2.63 million

The 2010 Census counted 21,203 residents in Ferguson. That would suggest that per capita fines were approximately $124. Since children do not drive, that sum translates to a cost of $372 for a three-person household.

Ferguson’s municipal court helped with the effort, too. It flooded the community with warrants. Most of the 9,000 warrants issued in 2013 were for parking infractions, traffic tickets, and housing code violations. The practice had a cascading effect. When individuals failed to appear, it could result in a driver’s license suspension. Thus, a future moving violation would trigger not just a fine but also a fee for driving on the suspended license.

Details from the original description provided to potential investors by Stifel Nicolaus provide clarity on the extent of the City’s reliance on ticketing.

Known as a prospectus, the document’s description of the City's finances shows that “fines and forfeits” represented 19.2 percent of the City’s general fund revenues in 2012. Property taxes accounted for only 7.3 percent.

Stories given by citizens echo the financial turmoil created by a defaulted payday loan. The DOJ cites that example of an African-American woman who received two citations (for a total of $151 in fines and fees) for a parking violation, ultimately spent six days in jail and paid $550 to the court. She received new penalties for making partial payments and for failing to appear at new hearings. At the end of 2014, having paid $550, she still owed $541.

The DOJ’s report showed how those practices also had a disparate impact on African-Americans. African-Americans received 95 percent of all citations for jaywalking and 94 percent for “failure to comply.”  

Five Years Later

Things have changed in Ferguson. In 2018, the City collected $338,154 in “fines and forfeits” - a drop in the bucket from the $2.63 million in collected in 2014. https://emma.msrb.org/ER1183086-ER925248-ER1326125.pdf

To its credit, the City has continued to pay its debt. The City has improved its collections on local property taxes. Whereas the City collected $7.9 million from taxes in 2012, it reported tax revenues of $9.88 million in 2018. Fines and fees are now only 2.7 percent of total revenues. The City is paying its obligations more equitably.

Lesson learned, but not easily.

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