Municipals: ripe for disruption?

By:
Helen Avery
Published on:

Want to see improvements to your town or city? Don’t just rely on municipal budgets. New crowdfunding sources are springing up. The disruptors even have municipal bond markets in their sights.

The City of Central Falls, Rhode Island, filed for bankruptcy in 2011. With budgets fully allocated until 2017 under the terms of its debt adjustment plan, the city has no room for manoeuvre when it comes to making improvements within the community.

“We have limited resources and a limited set of financial parameters, but we still have needs in the city,” says Stephen Larrick, director of the Office of Planning and Economic Development.

Andrew Teacher-large
 There was money floating around before the financial crisis in local communities, but there’s never been this kind of mechanism to access ideas

James Stewart

One such need was to replace the refuse bins in the city’s Jenks Park that were regularly being knocked or blown over, resulting in strewn litter. Bins were already emptied less frequently due to cutbacks and the amount of rubbish was becoming a problem that the community was finding increasingly frustrating. It would cost $10,044 to replace the bins, but even that small amount was not going to be possible within the budget.

So Larrick decided instead to turn to crowdfunding using civic funding platform Citizinvestor. Within 73 days the full $10,044 had been raised. The majority of the donors were from Rhode Island. “The effect was that citizens felt empowered. We promoted the campaign as a way of saying: ‘Things can still happen, even if the budget isn’t there from us’,” says Larrick.

Citizinvestor is one of several civic crowdfunding platforms that are springing up around the world, enabling residents to donate and invest in their local communities. CEO Tony de Sisto set up the platform after experiencing first hand how inefficient it was to get small projects funded by donations done in local government. It has funded over 50 projects such as bike racks in Oregon, an animal care centre in Texas and sculptures in Illinois.

A quick assertion would be that as municipals find themselves cash-strapped from the economic downturn, citizens are taking it upon themselves to fund the difference. But this isn’t the only reason, says Andrew Teacher, director of policy for Spacehive, another civic crowdfunding website. It was set up in the UK by Chris Gourlay, a former Sunday Times architecture correspondent.

Unlike Citizinvestor, Spacehive allows anyone – from individuals, businesses or government bodies – to post a project idea that it then verifies as viable.

Projects are similar to that of Citizinvestor and range in cost from several hundred pounds for local Christmas lights or murals to £140,000 projects to create a sculpture walk along the River Thames or turn a flyover in Liverpool into an urban park.

Teacher says that a lack of public money isn’t the only reason people are taking part in civic crowdfunding. “There was money floating around before the financial crisis in local communities, but there’s simply never been this kind of mechanism to access ideas.”

It makes no sense that trader fees in the muni market
are twice the fees of the corporate market

Jase Wilson

He says there has been a shift in mindset over civic funding that has coincided with the popularity of crowdfunding platforms like Kickstarter. For one, he says, people are becoming more interested in their local communities.

“Technology has resulted in a greater focus on the individual and on convenience. Many more people work from home and have a greater awareness of their local community. They’re more aware of what could be improved and they have ideas they want to share because technology enables them to. Tech has transformed the way we connect with everyone, and this is a manifestation of that,” says Teacher.

Civic funding platforms allow for those ideas to be voiced, and that’s positive for both civic funding and urban planning. Teacher says that urban planning has been a barrier more than an enabler in many aspects of development, and while successive governments have promoted a localist approach, the reality is that this results in “getting people to come to a boring local meeting when they want to stop something being built.”

Platforms like Spacehive are opening up urban planning to local residents in an empowering way. “There is a mindset slowly shifting from: ‘I pay my taxes so that local governments will do their work for me’,” says Teacher, “to the mindset of: ‘Where can I fit in with regards to shaping and improving the place where I live?’ – be that through ideas, supporting ideas, or donating money. It’s a more rational way of looking at society.”

Support system

If Teacher's comments are correct – that people are becoming more interested and inspired to help their local communities invest – then the current wave of technology disruption within finance could provide the perfect support system to lift that sentiment to the next level – municipal funding.

In August the City of Denver launched $12 million of mini bonds. The mini bonds were offered only to Colorado residents, are tax-free and available in $500 increments that pay back $750 in nine years or $1,000 in 14 years. Proceeds would finance the final part of the $550 million Better Denver Bond Program to improve roads and civic buildings.

Denver offered the sale of its bonds online – two hours before they would go on sale in some local bank branches. The sale was expected to take five days. It took 23 minutes and the branches had no bonds to sell when they opened. No underwriters were paid, and no brokers on the buy side were taking a cut. Community members, enabled by online access and small increments, were able to support their municipality directly, and wanted to – at a lower cost to everyone.

Further reading
crowdfunding-large
Crowdfunding: special focus

Jase Wilson, CEO and founder of Neighbor.ly, is banking on this idea of direct municipal funding between cities and residents taking shape. His firm was set up two years ago to create a platform that directly connects municipal borrowers to local investors. “It makes no sense that trader fees in the muni market are twice the fees of the corporate market. Less liquidity is cited, but really it is more to do with the system of layering and passing around the bond that adds on the fees. It has been a very opaque market for a long time and seems ripe for disruption.”

Wilson dipped a toe into the civic financing world by opening up a civic crowdfunding platform first. “We have done a couple of million dollars of projects, and it enabled us to get a view into how people like to invest in their own backyard,” he says.

Now Neighbor.ly is going to phase two and is in the process of launching a platform that lists municipal bond sales that will be fully up in the first quarter of 2015. Neighbor.ly screens muni bond sales as they come up to see that they are creditworthy, focusing on double-B ratings and above, as well as being retail friendly, before posting them on the platform. It’s a long way from making a direct investment platform available, says Wilson.

In phase two investors will still buy through a broker, while the issuer will still pay an underwriter. Neighbor.ly is in effect a marketing platform in this phase.

Wilson hopes that in three years or so the platform will have evolved to be a place where investors come to purchase bonds directly from their local government issuer.

“It’s going to take some time, and we are not in a rush,” says Wilson. “Only last year [2013] did the issue of flipping muni bonds become addressed and the MSRB [Municipal Securities Rulemaking Board] made some clarifications about recording commissions. So transparency into the high cost of fees is only slowly starting. Add to that the misunderstanding among retail investors regarding the risk of muni bonds. People heard about Detroit and thought that munis are poor investments, and they think that by buying through a mutual fund and paying fees that they will reduce their risk. But triple-A corporate bonds are 10 times more likely to default than a triple-B govenrment muni bond.

“Muni bonds are inherently safe, but some re-education will need to take place, and that will take some time.”

Community bonds

Community bonds also fall into the category of providing alternatives and are growing in popularity. While it is unlikely that the bonds or crowdfunding projects that tend to tap individual investors will be used to fund big projects such as bridges, they do provide alternatives and even top up projects, as in Denver.

In Toronto, Canada, the Center for Social Innovation is offering community bonds (of C$1,000 ($873) minimum) to raise the final C$4.3 million needed for a building purchase for social entrepeneur co-working space. It already has a C$12.7 million loan from two banks, C$1 million of its own and C$1.4 million from the building vendor. By November 13 it had raised C$1.5 million in the three weeks it had been selling the bonds.

Elsewhere in Canada Zooshare is raising money through community bonds to help finance its bio-gas plant (collecting excrement from zoos) and Solarshare is using them to fund its solar projects.

This new way of connecting community to civic funding – while it may seem entirely novel and technology-driven – isn’t really all that new, Wilson points out.

“This isn’t charting new territory,” he says. “Rather it’s returning to the way we used to get capital as a community.

“There was a time when local residents just went down to the courthouse to buy their bond in the construction of a ball-park because they wanted an investment and to help their community. Somehow along the line that became intercepted by middlemen and banks, which consolidated to become bigger banks and all of a sudden Wall Street had to be involved in every interaction. This is a return to how it used to be, and looking at the case of Denver and its 23-minute sale, there appear to be powerful signals that this is what the market wants.”