By Tyler Suksawat & Scott Ferguson
What chance do local governments have in fighting authoritarian austerity, especially when they are left to rely on feckless legislators at the state and federal levels who refuse to push back? Right now, we see austerity budgets appearing across every institution and major employer in the U.S. If the federal government continues to sabotage municipalities, and the state governments (even in liberal states) are proposing cuts-only budgets, then what hope do cities have? In truth, there are several meaningful alternatives to the present order, particularly if we follow the lead of what Money on the Left calls Democratic Public Finance. We only need to get creative about local monetary design.
Extending money creation powers from the federal level directly to local governments remains an urgent political project. In the meantime, however, we propose that a powerful public option for municipal finance exists at the intersection between bond issuance and public banking. What if a city established a public bank and that public bank regularly purchased the city’s debt? Such a mechanism would liberate the city’s munis from private bond markets and punishing rating agencies, while expanding the city’s fiscal capacity beyond projected tax revenues.
To understand why this works, we must discard a pervasive myth: banks do not lend deposits. They create credit “endogenously” through acts of authorization. Banks certainly have to meet liquidity and reserve requirements. However, meeting such requirements is a separate matter from crediting operations, which are legally enabled and protected by the Federal Reserve. A bank’s crediting operations do not recycle a limited pool of pre-existing investor funds. They actively expand the amount of total credit that is presently available.
Therefore, when a public bank purchases its own city’s municipal debt, the result is not a closed loop in which a finite amount of money is passed back and forth. Because the public bank actively generates money to purchase the debt, the operation dramatically enlarges the city’s fiscal space. In such an arrangement, the municipal government acquires funds in the short term to meet community needs. The public bank grows its holdings by receiving interest payments from the city. The loops, then, are not redundant; they are kinetic. Far from an inert circuit, a public bank that purchases city debt is a dynamic design that defies the artificial gravity of austerity.
Most importantly, this arrangement halts the depletion of fiscal capacity by ensuring that debt service payments remain on the city’s own public ledger. Unlike with the private bond market, the public bank would be legally required to deposit earned interest into the city’s general fund. By cutting out the rentiers, the city thus transforms a parasitic financial drain into a regenerative cycle, guaranteeing that public interest is no longer just a yield for private financiers, but a shared benefit in the public interest.
We do not have to look far for a successful precedent. The Bank of North Dakota (BND) already acts as the depository for all state taxes, fines, and fees. While BND operates more conservatively than the model we propose—acting primarily as a registrar and facilitator rather than a direct purchaser of munis—it still remits its profits to the state’s general fund. In 2023 alone, the bank posted profits of $192.7 million. To put that in perspective, this figure greatly exceeds the $115 million in annual revenue projected for Washington State’s highly contested wealth tax proposal. For states like Washington, which rely heavily on regressive property tax levies to pay for almost everything, the BND model offers a wealth of untapped potential.
While the BND focuses primarily on state and municipal operations, if a new generation of public banks were chartered to provide consumer financial services alongside municipal finance, the benefits would be exponential. Private retail banks routinely generate massive profit margins of 15% to 30% through rapacious fees and predatory lending. Crucially, a public bank would not simply transfer this rentier model to the public sector. By functioning as a true public utility, it would offer high-quality, low-cost financial services instead. Public banks should provide an affordable, non-predatory alternative for working people. Even without exorbitant fees, however, it would still generate a robust and ethical source of revenue to be invested directly back into the community—funding the very policies, programs, and budgets voted on by the people the bank serves.
To realize this vision, establishing democratically accountable public banks—whether at the municipal or state level—must become a top political and legislative priority. Chartered as public utilities rather than profit-seeking enterprises, these institutions would be governed by public appointees and remain 100% accountable to city halls, county commissions, or state legislatures. By legally mandating that all net earnings (derived from interest and fees) be deposited back into the government’s general fund, municipalities can organically grow their revenues over time without continuously hiking taxes. As an added democratic benefit, their daily operations would be entirely transparent, with balance sheets published for the public.
The practical strength of this arrangement lies in the specific mechanics of the yield. With the federal funds rate currently sitting at a target range of 3.50% to 3.75%, a municipality could intentionally set its internal bond yields just above this floor. Because the public bank holds the debt, the spread guarantees a steady stream of revenue for the public ledger. Furthermore, by indexing the yield to the rate of inflation, the city constructs a resilient financial instrument in the face of unpredictable circumstances. Should an emergency or unforeseen project cost require rapid liquidity beyond the public bank’s immediate capacity, this competitive yield would generate intense demand from the private sector to hold the city’s munis—effectively subordinating private capital to the public interest.
Unlocking a municipality’s latent ability to sell bonds directly to its own public bank reveals a startling truth: the primary limits on local finance are not economic, but political. The constraints cities currently face are mostly self-imposed regulations—arbitrary debt ceilings or rules enforced by oversight boards captured by private banking interests. While every municipality will navigate different statutory limits on bond issuance, we can begin by maxing out current legal capacities and organizing to expand those horizons later.
Consider the political implications for building local public capacity. Lately, wealth taxes have dominated local discussions around budget expansion. While taxing the rich remains a vital tool for combating economic inequality and checking the anti-democratic power of concentrated wealth, relying on taxation as the sole lifeline for municipal survival is politically precarious. A public bank shifts this paradigm. By carefully managing the yields and maturities on internally held municipal bonds, a city can steadily expand its general fund. Wealth taxes would no longer be a desperate necessity for basic funding, but rather one tool among many.
Instead of begging for scraps from state legislatures or private bond markets, local governments can directly create the capacity to care for their communities. Once we are willing to get creative with Democratic Public Finance, we see that the blueprint is already here. We only need the political will to use it, guaranteeing that every local dollar created is an investment in the public interest.
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