Drowning in sea of debt

Pennsylvania to Harrisburg: "Sorry."

By Mike Krauss
Bucks County Courier Times

Harrisburg is going under, drowning in a sea of municipal debt.

Like many American cities, the Pennsylvania capitol’s tax base has steadily eroded over many decades. Jobs have been lost as industry has died or gone offshore, and much of the middle class long ago fled the city.

With the Wall Street crash of 2008, tax revenues took another dive. And an expensive investment in a new trash incinerator has failed to produce anticipated revenues.

City Council members want to file for bankruptcy to buy time to work the city’s way out of this mess. The mayor disagrees, and now the governor with the support of the Legislature is stepping in.

The city will be put in receivership. One recent newspaper editorial headlined, “State had to act to spare Harrisburg.”

But that is not what’s happening.

As the story under the headline explained, the state is moving quickly “to reassure worried bond-holders,” and the state will take control of the city’s finances “to meet its financial obligations by selling off revenue-generating assets and raising taxes.”

In other words, the bond holders get a life boat and the city drowns. Already strapped for revenue, the city will be forced to divest of revenue generating assets, among them the municipal incinerator and parking garages.

These assets will almost certainly be snapped up at fire sale prices, another transfer of wealth to the already wealthy who will raise fees at these facilities and pocket the loot, while for the 45,000 residents of the city, a reported 29 percent of whom already live in poverty, life will get worse in already hard times.

It is doubtful that the legislators will be riding to the city’s rescue. State lawmakers just went through a gut wrenching exercise in slashing state spending. There is little appetite for spending money or raising taxes to save the people of Harrisburg — or anywhere else.

In fairness to Pennsylvania Gov. Corbett, when it comes to paying off the bondholders, he is in a bind.

Almost every public project in America, from roads and bridges to port expansion, parking garages and municipal incinerators is financed with private money.

And it is expensive. Nationwide, the debt service is in the trillions of dollars, to be paid by taxpayers over generations. And now, a growing number of municipalities are in the same sinking boat as Harrisburg.

The governor’s bind is, if the bond holders don’t think they will always get their profits out, they may not invest. Where then will the money come from for vital public projects?

The answer is a new idea emerging in states and cities across the nation: public banks to provide affordable credit for public purposes.

Actually, it is an old idea, first practiced in America by the Quaker founders of the Commonwealth of Pennsylvania, who thought that the common wealth should serve the common good.

But the concept did not survive Alexander Hamilton, the first darling of New York bankers, and by the time the Federal Reserve gave control of the nation’s money and credit to a private banking cartel, the idea was extinguished altogether.

Except in North Dakota, where lawmakers responded to the creation of the Fed private banking monopoly by creating the state’s own bank, a public bank owned by the people of North Dakota..
The state of North Dakota does business as the Bank of North Dakota (BND). By state law, the BND holds all the state’s revenue and other assets. Then, as with any bank, these reserves are leveraged to create credit.

That credit is invested in Main Street and not Wall Street.

The BND is not a retail bank and does not compete with private banks. It is a partner in loans made by those banks, savings and loans and credit unions. And it provides a second level of risk assessment.

Only after a community bank approves a loan is the BND approached for participation; for example, to provide a larger loan amount than the local bank can offer, or to “buy down” the interest to the borrower. And then the loan has to pass the BND’s tests for credit worthiness.

For almost 100 years, the Bank of North Dakota (BND) has been an engine of prosperity.

In 2010 the BND reported: $30 million in profits returned to the state general fund without any taxes; a current loan portfolio of $2.8 billion in commercial loans and residential mortgages, including 255 business and industrial projects; student loans of over $1 billion; a $10 million loan program in partnership with the North Dakota Housing Finance Agency; and a disaster relief program with a fixed rate at 4 percent for five years and a variable rate currently at 2.75 percent.

Pennsylvania has a population almost 19 times greater than North Dakota and a far more varied economy. It is reasonable to project that a public Bank of Pennsylvania could produce some very large results.

And had there been a public Bank of Pennsylvania, to invest in cities like Harrisburg and offer low cost alternatives to municipal finance, the governor, state legislators, city officials and the people of Harrisburg might not be dealing with the present catastrophe.