Public banking: throwing out the money changers
Why is financial socialism still alive in North Dakota? Why haven't the North Dakotan free-market crusaders slain it dead?
Because it works.--AlterNet.com, March 26, 2013
3-26-13
AlterNet.com
Why Is Socialism Doing So Darn Well in Deep-Red North Dakota?
North Dakota's thriving state bank makes a mockery of Wall Street's casino banking system -- and that's why financial elites want to crush it.
Les Leopold
http://www.alternet.org/corporate-accountability-and-workplace/why-socia...?
akid=10253.259010.Y-1JOp&rd=1&src=newsletter816540&t=3
|
North Dakota is the very definition of a red state. It voted 58 percent to 39 percent for Romney over Obama, and its statehouse and senate have a total of 104 Republicans and only 47 Democrats. The Republican super-majority is so conservative it recently passed the nation's most severe anti-abortion resolution – a measure that declares a fertilized human egg has the same right to life as a fully formed person.
But North Dakota is also red in another sense: it fully supports its state-owned Bank of North Dakota (BND), a socialist relic that exists nowhere else in America. Why is financial socialism still alive in North Dakota? Why haven't the North Dakotan free-market crusaders slain it dead?
Because it works.
In 1919, the Non-Partisan League, a vibrant populist organization, won a majority in the legislature and voted the bank into existence. The goal was to free North Dakota farmers from impoverishing debt dependence on the big banks in the Twin Cities, Chicago and New York. More than 90 years later, this state-owned bank is thriving as it helps the state's community banks, businesses, consumers and students obtain loans at reasonable rates. It also delivers a handsome profit to its owners -- the 700,000 residents of North Dakota. In 2011, the BND provided more than $70 million to the state's coffers. Extrapolate that
profit-per-person to a big state like California and you're looking at an extra $3.8 billion a year in state revenues that could be used to fund education and infrastructure.
One of America's Best Kept Secrets
Each time we pay our state and local taxes -- and all manner of fees -- the state deposits those revenues in a bank. If you're in any state but North Dakota, nearly all of these deposits end up in Wall Street's too-big to-fail banks, because those banks are the only entities large enough to handle the load. The vast majority of the nation's 7,000 community banks are too small to provide the array of cash management services that state and local governments require. We're talking big bucks; at least $1 trillion of our local tax dollars find their way to Wall Street banks, according to Marc Armstrong, executive director of the Public Banking Institute.
So, not only are we, as taxpayers, on the hook for too-big-to-fail Wall Street banks, but we also end up giving our tax dollars to these same banks each and every time we pay a sales tax or property tax or buy a fishing license. In North Dakota, however, all that public revenue runs through its public state bank, which in turn reinvests in the state's small businesses and public infrastructure via partnerships with 80 small community banks.
How the State Bank Creates Jobs
Banks are supposed to serve as intermediaries that turn our savings and checking deposits into productive loans to businesses and consumers. That's how jobs are supported and created. But the BND, a state agency, goes one step further. Through its Partnership in Assisting Community Expansion, for example, it provides loans at below-market interest rates to businesses if and only if those businesses create at least one job for every $100,000 loaned. If the $1 trillion that now flows to Wall Street instead were deposited in public state banks in all 50 states using this same approach, up to 10 million new jobs could be created. That would effectively end our destructive unemployment crisis.
No Bailouts for the BND
Banking doesn't have to be a casino. It doesn't have to be designed to create gambling opportunities so bank traders and executives can make seven- and eight-figure salaries. As BND president Eric Hardmeyer said in a 2009 Mother Jones interview:
We’re a fairly conservative lot up here in the upper Midwest and we didn’t do any subprime lending and we have the ability to get into the derivatives markets and put on swaps and callers and caps and credit default swaps and just chose not to do it, really chose a Warren Buffett mentality—if we don’t understand it, we’re not going to jump into it. And so we’ve avoided all those pitfalls.
As state government employees, BND executives have no incentive to gamble their way toward enormous pay packages. As you can see, the top six BND officers earn a good living, but on Wall Street, cooks and chauffeurs earn more.
Eric Hardmeyer, President and CEO: $232,500
Bob Humann, Chief Lending Officer: $135,133
Tim Porter, Chief Administrative Officer: $122,533
Joe Herslip, Chief Business Officer: $105,000
Lori Leingang, Chief Administrative Officer: $105,000
Wally Erhardt, Director of Student Loans of North Dakota: $91,725
The very existence of a successful BND undermines Wall Street's claim that in order to attract the best talent big banks need to offer enormous pay packages. Yet somehow, North Dakota is able to find the talent to run one of the soundest banks in the country? The BND is living proof that Wall Street's rationale for sky-high executive pay is a self-serving fabrication. (For
more information on financial inequality please see my latest book, How to Earn a Million Dollars an Hour , Wiley, 2013.)
Wall Street Is Gunning for Bank of North Dakota
As you can well imagine, our financial elites would love to see this successful (socialist!) bank disappear. Its salary structure and local investments makes a mockery of Wall Street's casino banking system. But the bigger threat comes from the possible spread of this public banking concept to other states. Already, there are 20 or so state legislatures that are exploring state banks. Collectively, more public banks would pose an enormous threat to the $1 trillion in state and local bank deposits that now run through Wall Street.
But elite financiers also stand to lose much more. In the 49 states without a public bank, there's no safe place to turn for loans to rebuild schools and finance other public infrastructure projects. That creates an enormous opportunity for Wall Street firms to hook localities on expensive bond programs -- like capital appreciation bonds, which can lead to repayments equaling 10 times the original loan. Investment bankers and advisers also make enormous fees by selling expensive, high-risk
financial schemes to state and local governments ( read an investigative report here). But such schemes are useless in North Dakota where the state bank provides the capital the state needs for a fraction of the long-term costs.
Trade Agreements: Wall Street's Weapon of Mass Destruction
Clearly, from Wall Street's perspective, the North Dakota bank must go, and all other state efforts to replicate it must be thwarted. Wall Street's stealth weapon may be lodged within the latest corporate trade agreement called the Trans-Pacific Partnership (TPP), which currently is being negotiated in secret. We already know that Wall Street is seeking to remove all tariff restrictions that prevent the U.S. financial services industry from doing business in countries like Brunei, Chile,
Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The biggest banks also want the treaty to eliminate "non-tariff" barriers including regulations that create "unfair" competition with state-owned financial enterprises.
Depending on the final language, it is possible that the activities of the Bank of North Dakota could be ruled illegal because "foreign bankers could claim the BND stops them from lending to commercial banks throughout the state," according to an analysis by Sam Knight in Truthout. How perfect for Wall Street: a foreign bank can be used as a shill to knock out the BND.
The Public Bank Movement
A small but highly dedicated group of financial writers, public finance experts and former bankers have formed the Public Bank Institute to spread the word. Working on a shoestring budget, its president Ellen Brown (author of Web of Debt ), and its executive director Marc Armstrong have become the Johnny Appleseeds of public banking, hopping from state to state to encourage legislatures to explore state-owned banks.
The movement is gathering steam as it holds a major conference on June 2-4 at Dominican University in San Rafael, CA featuring such anti-Wall Street hell raisers as Matt Taibbi and Gar Alperowitz, along with Brigitte Jonsdottir, a member of
the Icelandic parliament, and Ellen Brown.
Is America Up For This Fight?
Since the crash, the financial community has largely managed to wriggle off the hook. In fact, fatalism may be replacing activism as we sense that maybe Wall Street is simply too big and too powerful to change. After all, the big banks seem to own Washington, as too-big-to-fail banks are permitted to grow even larger and more invulnerable to prosecution and control.
But this new public banking movement could have legs, especially if it teams up with those fighting for a financial transaction tax (see National Nurses United.) Most Americans remain furious about how financial elites profited from the crisis -- before, during and after -- while the rest of us pick up the tab. Americans know deep down that Wall Street is the predator and we are the prey.
The state-owned and operated Bank of North Dakota proves that it doesn't have to be that way. This is the time to fight for public state banking in a big way.
You game?
Les Leopold is the executive director of the Labor Institute in New York, and author of How to Make a Million Dollars an Hour: Why Hedge Funds Get Away with Siphoning Off America's Wealth (J. Wiley and Sons, 2013).
1-31-13
San Francisco Chronicle
School districts pay dearly for bonds
Trey Bundy and Shane Shifflett, California Watch
Read more: http://www.sfgate.com/education/article/School-districts-pay-dearly-for-...
The Napa Valley Unified School District had a quandary: The district needed a new high school in American Canyon, but taxpayers appeared unwilling to take the financial hit required to build it.
So in 2009, the district took out an unusual loan: $22 million with no payments due for 21 years. By 2049, when the debt is paid, it will have cost taxpayers $154 million - seven times the amount borrowed.
School board member Jose Hurtado said he stands by the deal. But if it were a mortgage, he acknowledged, "we would run."
Napa is one of at least 1,350 school districts and government agencies across the nation that have turned to a controversial form of borrowing called capital appreciation bonds to finance major projects, a California Watch analysis shows. Relying on these bonds has allowed districts to borrow billions of dollars while postponing payments, in some cases for decades.
This form of borrowing has created billions of dollars in debt for taxpayers and hundreds of millions of dollars in revenue for financial advisers and underwriters. Voters are usually unaware of the bonds' high interest. At least one state,
Michigan, has banned their use.
In California, where rules governing the loans are among the loosest, more than 400 school districts and other agencies have racked up greater capital appreciation bond debt in the past six years than agencies in any other state.
They have borrowed $9 billion that will cost taxpayers $36 billion to repay over the next 40 years, according to data compiled by California Treasurer Bill Lockyer. He called it "debt for the next generation."
"The average tenure of a school superintendent is about 3 1/2 years, so they aren't going to be around, in most instances, to worry about paying that off," Lockyer said. "Nor will the voters, probably, that enacted it in the first place."
Good for advisers
The capital appreciation bond business in California has been lucrative for dozens of private financial advisers, banks and credit rating firms that have charged government entities nearly $400 million for financial services since 2007, state data show.
The bonds are unusual in public finance because they postpone debt far into the future. Typical school bonds require borrowers to begin making payments within six months and cost two to three times the principal amount to repay. But with deferred payments, districts have ended up paying as much as 23 times the amount borrowed.
The decision to issue these bonds instead of traditional bonds typically is made by district officials after voters have approved bond measures, and the public usually has no knowledge of how much they will cost to repay.
Earlier this month, Lockyer and Tom Torlakson, the state superintendent of public instruction, called for a statewide moratorium on capital appreciation bonds.
Widespread use
Since 2007, school districts and government agencies in at least 27 states and Puerto Rico have financed projects with capital appreciation bonds.
In Texas, 590 districts and other government entities have issued these bonds over the past six years - more than any other state, according to a database maintained by the federal Municipal Securities Rulemaking Board. California was second, with 404, followed by Ohio, with 202.
Bay Area districts that have issued these bonds include:
-- The Hayward Unified School District, which issued $21 million in bonds that will cost $131 million to repay - 6.2 times the principal.
-- The Bellevue Union Elementary School District in Santa Rosa, which issued a bond worth more than $378,000 that will cost $4 million - 10.75 times the amount borrowed.
-- The West Contra Costa Unified School District, which sold $2.5 million in bonds that will cost $34 million - 13.5 times the principal.
To pay off bonds, unified school districts are allowed to tax residents no more than $60 per $100,000 of their assessed property value each year. By issuing capital appreciation bonds, districts that have reached that limit can push the tax burdens of new bonds far into the future.
When districts issue these bonds, they are betting that property values will increase enough over time to pay their debts.
Lockyer said some financial advisers appear to have exaggerated property value growth projections to get the deals approved.
Financial fees
Although private firms are not obligated to report their fees to state regulators, the treasurer's office has compiled some fee information found in official bond statements. At least 42 financial firms have charged school districts and other agencies in California a total of $389 million since 2007, Lockyer's office reported.
Nationwide, falling property values have hurt districts' tax revenues, prompting some to turn to long-term bonds. Outside California, however, tighter regulations helped curb their use.
Ohio, for instance, prohibits the type of ballooning debt structures found in many California deals by requiring bonds to maintain a flat debt service. That means the annual payment amount must remain roughly the same each year.
California removed its flat debt service requirement on long-term bonds in 2009 with the passage of AB1388. The bill was sponsored by the California Public Securities Association, which lobbies state lawmakers on behalf of financial consultants and underwriters. An association official declined to comment.
A workaround
Napa issued its bonds, in part, because officials had pledged to keep the tax rate near $36, well below the $60 state limit.
In 2006, Napa voters authorized $183 million to repair old school buildings and build a new high school in American Canyon.
But by 2009, when the high school was nearly completed, property values had dropped and the district found itself short of cash.
On the advice of KNN Public Finance, an Oakland firm, Napa issued the $22 million capital appreciation bond. The first payment is not due until 2030.
Three months later, the district issued another bond for $7 million that will have cost $28 million by 2033.
KNN charged the district $156,000 for advising on the deals, according to state records.
Government criticism
Some government officials have criticized districts such as Napa for shifting debt to future taxpayers instead of asking voters to pay now.
"If they're trying to stay under a tax rate promised to the voters, that's completely egregious," said Glenn Byers, assistant treasurer of Los Angeles County, who has been critical of capital appreciation bonds that take longer than 25 years to repay.
"If they're not at the tax rate's legal limit, it's a slam dunk: They shouldn't be doing (it)."
Whether Napa's school board understood the long-term implications when it approved the bonds remains unclear. When California Watch first asked school board member Joe Schunk about the deal in November, he said Napa had not issued any capital appreciation bonds.
A week later, he called back and said he had been mistaken.
Hurtado, the school board member, said the deals were hard to understand, but the board had received "adequate advice."
Still, he added, "there has to be a way that schools are financed so that it's not held hostage to other factors that really don't have anything to do with education."
Find your district
Look up your school district in an interactive database: http://bit.ly/14wF45T
California Watch is part of the independent, nonprofit Center for Investigative Reporting, the country's largest investigative reporting team. For more, visit www.californiawatch.org.