California Could Solve Its Budget Problems by Starting a Public Bank Like North Dakota Did
by John Lawrence
The most solvent state in the US is North Dakota which has low unemployment, no budget deficit and a burgeoning economy. The main reason is that the state has a public bank (BND) in which state revenues and pension funds can be invested making it unnecessary to send the money out of the state to Wall Street. All state revenues are deposited in the BND by law. Instead of Wall Street making the profits on North Dakota’s money, North Dakota is making the profits.
Instead of paying interest on debt bonds, North Dakota is reinvesting the interest its public bank makes on infrastructure improvements and lowering state income taxes among other things.
Whereas private banks are required by law to extract as much in debt service as the market will bear, a public bank can pass on the lower interest rates it has access to to its customers such as public agencies, local businesses and residents. Infrastructure projects are effectively interest free since the bank returns interest on its loans to the state treasury in the form of an annual dividend.
The BND’s revenues have been a major boost to the state budget. In the first decade of this century the BND contributed over $300 million to state coffers, a substantial sum for a state with a population one-fifteenth the size of Los Angeles County. In April 2011 the BND reported annual profits of over $62 million. These profits belong to North Dakota’s citizens, and, please note, they are not generated by taxation. In fact the BND added nearly as much to the state’s general fund from 2007 to 2009 as oil and gas tax revenues did.
As mentioned in Part 1, California could follow North Dakota’s lead and start a public bank. The Public Bank of California (PBC) could reap the interest on California’s immense pension funds instead of paying interest to Wall Street. The California Public Employees’ Retirement System, or CalPERS, is the nation’s largest pension fund for government workers. CalSTRS is the pension fund that provides retirement benefits for California’s teachers. Together these funds have $400 billion in assets, a huge pot of money which they have been farming out to Wall Street in the hopes of growing this prodigious sum even more. Echoing former New York Mayor Ed Koch, we might ask ‘how is Wall Street doing?’
Ellen Brown in her book The Public Bank Solution responds this way:
“Every year from the 2008 banking crisis up through 2012, the BND has reported a return on investment of between 17 percent and 26 percent. Compare that to California’s pension funds – CalPERS and CalSTRS – the largest pension funds in the world. From a peak of $260 billion in 2007, CalPERS fell to $160 billion in March 2009, a 37% decline. CalSTRS peaked at $180 billion in October 2007 and dropped to $112 billion in the same period, a 34% decline. They did better in 2011 and 2012, but they are still way below where they were before the crisis. For their questionable performance in managing the CalPERS portfolio, Wall Street firms reported earning $1.1 billion in 2010.”
Many pension funds, not just California’s, have lost money on Wall Street investing in fancy derivatives. Many cities have gone bankrupt investing in interest rate swaps. Take San Bernadino and Stockton, for example. Their bankruptcies have let them off the hook for theircontributions to CalPERS making that pension fund even worse off. All of this could have been prevented if, instead of farming California municipal and state revenues out to Wall Street, those same revenues could have been invested by a public bank, whether at the state or municipal level. Monies thus invested would not have had to leave the state, would have been earmarked for the benefit of Californians and not subjected to the profit imperatives of Wall Street.
A California public bank could use its power to create credit in many ways. It would have the same power of fractional reserve banking as any other bank. That is it could take in deposits and loan out ten times the amount of those deposits using the deposits as collateral. The interest collected, however, would go into California’s public coffers and not into Wall Street pockets. Instead of paying bond interest to Wall Street, the California public bank (PBC) could use collected interest to pay down its budget deficit. In November 2010 the state of California had outstanding general obligation bonds and revenue bonds of $158 billion. Of that $70 billion was owed just for interest!
If California had been funding its debt through its own public bank, the state could have saved that $70 billion which would have been enough to pay its budget deficit several times over. By depositing its revenues and investing its capital on Wall Street, the state is effectively giving this money away to line the pockets of Jamie Dimon, CEO of JP Morgan Chase, and Lloyd Blankfein, CEO of Goldman Sachs.
As a recent example of the fleecing of California by Wall Street consider the new San Francisco-Oakland Bay Bridge which just opened recently. The price tag for the new east span jumped from an estimated $1.3 billion in 1996 to $6.3 billion in 2009 to an estimated final price of over $12 billion. due largely to interest on bond debt and other Wall Street finance charges. Commuters will be paying this debt off until at least 2049. Tolls have shot up to $6 during rush hours for regular vehicles and $35 for some trucks. Debt servicing now eats up 55.2% of toll revenue. With a PBC this debt service would be plowed right back into public coffers for the benefit of taxpayers and no toll might even be required.
Public banking is now under consideration by at least 20 states. Among the states now considering the establishment of a public bank is Pennsylvania. You can check out their website here. This is from their website: “Through partnerships with community banks, credit unions, savings and loans and municipal authorities, public banks inject sustainable and affordable credit into local economies: for business start up and expansion, farmers, students, home buyers and home builders, economic development, infrastructure, assistance to municipalities and jobs.”
It is not just states that can establish public banks. They can be set up by cities and municipalities as well. The City of San Diego could start one. If it did, there might be funds available for such things as improving neighborhoods, fixing potholes, keeping libraries open longer hours, fixing infrastructure such as water lines which burst frequently, more parks and recreation, building adequate facilities for the homeless and many other items.
Too bad we just lost a Mayor who might have been interested.