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Issue municipal bonds? No thanks, we’ll crowdfund instead

Thursday, 26 Sep 2013 | 7:00 AM ET
Don Bayley | E+ | Getty Images

When most towns need trash cans, they use money raised from taxes or municipal bonds. But when a city that emerged from bankruptcy less than a year ago needs trash cans, a touch of creativity is required. That's why Central Falls, R.I., is trying to use a method more commonly associated with Internet start-ups and low-budget movies: Crowdfunding.

In 2011, Central Falls became the only Rhode Island city to ever file for bankruptcy. And while the impoverished 1.2-square-mile city of about 20,000 residents never missed a bond payment, pensions were slashed, and the city budget became very tight. So tight, in fact, that the city couldn't afford to buy trash cans for its public park.

"We have these plastic blue bins that we literally got for free from the state," explained Stephen Larrick, the city's director of planning and economic development. "They're not mounted to the ground at all. So if they're empty, they will just blow over. Or kids will push them over. And the trash gets everywhere."

In addition to being unsightly, the spilled trash increases the city's maintenance costs. And since the cans don't provide a recycling option, Central Falls is also paying more than necessary to landfills, and missing out on a Rhode Island recycling-based rebate.

But due to the city's precarious financial situation, simply buying trash cans proved a daunting task for Central Falls.

"The outlook is bleak to get additional things funded," said Larrick (who is a college acquaintance of the author). "I don't have a line item that would cover that."

That point was emphasized by Len Morganis, the city's administration and finance officer, who is responsible for ensuring that the city abides by its bankruptcy plan. "There's very little discretionary spending," Morganis said. "There is not a lot of room for, 'Hey, this just came up, let's put ten grand towards it.' That doesn't happen."

And the city won't turn to the bond market for additional funding anytime soon. The city hasn't issued debt since the bankruptcy, and according to Morganis, "that's a long way off. We haven't even talked about it."

After all, even though Moody's recently upgraded the city's credit rating from B1 to B2, Morganis said bond issuance "would still be too cost-prohibitive."

Real estate crowdfunding
CNBC's Diana Olick reports that real estate crowdfunding is about to get easier and looks at Fundrise, which connect investors and projects.

So Larrick turned to crowdfunding, and specifically to a new company called Citizinvestor. Its concept is simple: Municipal employees post projects that they are trying to get funding for on to the site. Citizinvestor, which is a for-profit company, increases the total project costs by 8 percent—3 percent for transaction fees, and 5 percent for the company. Individuals then donate online, and their credit cards aren't charged until the project is fully funded.

(Read more: Filmmakers look to crowdfunding for Snowden movie)

"We're giving citizens an alternative way to fund projects," explains Citizinvestor co-founder Jordan Raynor. "Government has never had enough resources to provide every good and service that citizens want. This was exacerbated by the recession, but it's always been true."

But while the need was simply for mounted trash cans with a recycling capability, Larrick wanted something more. He wanted the project to "reflect a sense of place or purpose."

He also needed the somewhat-staid municipal project to stoke interest online. So he proposed artistic garbage bins constructed by The Steel Yard, a Providence, R.I.-based nonprofit industrial art firm.

All in all, the project, which would see five creative garbage units installed (each with a bin for trash and a bin for recycling) has a price tag of $9,300. With Citizvestor's 8 percent added on, the city is trying to raise $10,044. The project quietly went live on Friday ("Clean up CF: New bins in Jenks Park") and as of Wednesday evening, $246 has been raised from eight people.

(Read more: Real estate's new frontier: Crowdfunding)

When asked about the effort, the city's bondholders were supportive.

"It's interesting that they're exploiting opportunities and being creative," commented John Miller, co-head of global fixed income at Nuveen Asset Management, which holds some Central Falls debt in its $92 billion municipal bond portfolio. Miller praised Central Falls' emergence from bankruptcy as "a success."

The Central Falls garbage can project certainly presents a unique case. But in the future, could crowdfunding be an increasingly important part of the municipal funding picture?

"Right now we're focused on these mini-projects, but as we build a community of citizen investors across the country, we expect to scale up to bigger projects," Raynor said. He gives the example of the Luchtsingel pedestrian bridge in Rotterdam, the Netherlands, which was paid for with crowdfunding.

But to the Central Falls city planner, this project is about more than building something the city couldn't fund by itself.

"Since the bankruptcy, things have kind of been cut down to the bare essentials, so projects that are about a sense of place or reflecting a sense of community pride go unfunded," Larrick said. "And not only do we have a big problem with trash and litter, but we have a big need for public pride."

Crowdfunding may not make municipal bonds obsolete anytime soon. But it certainly confers certain advantages.

When you issue bonds, "you have a lot of criteria built in there. But something like this gives the municipality much more freedom," Morganis said, adding: "If you can get residents involved in turning things around, that's a big thing."

—By CNBC's Alex Rosenberg. Follow him on Twitter: @C NBCAlex.

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