Thursday, May 31, 2012

The state budget shell game

Pennsylvania broke, unless you count the $91 billion

By Mike Krauss
Bucks County Courier Times

For almost four years, the administration and Congress have showered money, protection and even praise on those who caused an economic catastrophe that still rolls across America like a slow motion tidal wave.

It is crystal clear who Washington represents, and what the American people can expect from the next administration and Congress -– more of the same, rhetoric and excuses.

But the needs of the American people can’t wait another four years. States and local governments must do the job Washington will not. New leaders and new ideas are urgently needed. One such idea is public banking.

A public bank, such as the hugely successful Bank of North Dakota (BND), is capitalized with public funds, has one shareholder — the people — no outrageous compensation for managers and no incentive to gamble.

A public bank partners with community banks, credit unions, other local financial institutions and municipal governments to provide the sustainable and affordable credit that is essential to support locally directed economic development, restore vital public services and create jobs.

Wall Street hates the idea, fearing the loss of trillions of dollars of state and municipal deposits, and the huge fees they reap for providing cash management, payroll and other services that states and municipalities could provide internally and at far lower cost -– if they owned their own bank.

The parasites-in-pinstripes argue, “But your state is broke. Where will you get the money to capitalize a bank?”

But are the states broke? An examination of the finances of U.S. states and municipalities turns up an astonishing fact. They keep two sets of books.

The one that gets all the attention is used for operating budgets, and generally paints a picture of state and municipal budgets stretched to the limit. But the other set of books, required by law and called the Consolidated Annual Financial Report (CAFR), indicates that there is public money stashed all over the place. Nationally, it amounts to trillions of dollars.

California, with its giant economy, reports more than $600 billion in these “off budget” funds. In Pennsylvania, the total is about $91 billion -- not exactly small change –- and it can be found in the state’s 2011 CAFR in three categories.

Proprietary Funds, generated when a government charges customers for the services it provides.

Fiduciary Funds, in which the state acts as a trustee to hold resources for the benefit of others, such as pensions; and

Component Units, which are legally separated organizations for which the government is financially accountable, and the revenue is derived from assessments, fines, penalties, licenses, etc.

If only 20 percent of these funds were used to capitalize a bank and were leveraged at a conservative ratio of 8-1, Pennsylvania could inject more than $145 billion into its economy, creating an economic revival on a scale never before seen.

Wall Street responds to this prospect with scare tactics. “You mean put 20 percent of your pensions at risk?”

To which proponents rightly respond, “No, we mean get those pension funds under better and more productive management.”

As the New York Times reported, the $26.3 billion Pennsylvania State Employees’ Retirement System (PSERS) has more than 46 percent of its assets in what analysts describe as “riskier” alternatives, including hundreds of private equity, venture capital and real estate funds. PSERS paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent.

“That is below the target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.

“By contrast, Georgia’s $14.4 billion municipal retirement system, which is prohibited by state law from investing in the alternative investments favored in Pennsylvania, has earned 5.3 percent annually over the same time frame and paid about $54 million total in fees.”

Even adjusting for the size of the respective funds, Pennsylvania retirees paid out 13 times more in fees than Georgia, for a worse result.

The conservatively managed BND produced a 17 percent return on equity last year, while the PSRS reported in a press release that it had “achieved” a 2.7 percent return for 2011 -– not even meeting the previous and anemic 3.6 percent average return.

That’s like boasting about a C- report card.

A far more prudent and productive policy would be to rein in risk-taking fund managers, reduce their gigantic fees and shift at least 20 percent of investments from their riskier deals into the lower risk, higher return equity of a public bank.

A closer look at Pennsylvania’s 2011 CAFR turns up another interesting item. At page 99, there is a discussion of how these off-budget funds manage the risk of investments in 36 foreign currencies.

Foreign currencies? Thirty-six? The high-rolling fund managers are shifting billions of dollars out of the Pennsylvania economy, and into foreign economies and job creation, while Pennsylvanians go begging.

Even a modestly capitalized public bank can put billions of dollars of affordable credit to work in Pennsylvania, generate substantial non-tax revenue as a direct return on investment and increase local and state tax revenue in an improving economy.

A public bank has the capacity to turn a tidal wave of economic devastation into a wave of opportunity and prosperity. Pennsylvania needs to catch that wave.

Thursday, May 24, 2012

Tune out the elections

The first step to a better future

By Mike Krauss
Bucks County Courier Times

It has begun to dawn on even the most ardent of President Obama’s supporters that there is a gap between what he said he would do as a candidate in 2008, and what he has done since his election.

“Gap” might not be the right word. It is a chasm in which you could lose a continent.

He promised to close Guantánamo Bay. It is still there, along with who knows how many secret “rendition centers” where U.S. laws against torture do not apply. Worse, his administration has produced a new rationale for indefinite detention without trial.

He promised to clean out the lobbyists, but they still own Washington.

Candidate Obama promised transparency and access by the media and public to the deliberations of his administration. Instead, his administration has prosecuted more people under the Espionage Act than all former administrations combined, for the crime of getting information to the American people.

Mr. Obama promised an end to war, but the U.S. is still bogged down in Afghanistan, is fighting undeclared wars in Pakistan and Yemen, conducting “operations” in Africa and Latin America and rattling swords against Syria, Iran and China.

The Nobel Peace Prize Mr. Obama won after weeks in office begins to look like the Norwegians’ idea of humor. The joke, of course, is on the U.S. taxpayer, and who knows how many dead civilians on three continents.

Candidate Obama promised health care, and delivered a give-away to the insurance and pharmaceutical companies –- and skyrocketing costs.

And of course, as candidate and president, Mr. Obama promised jobs –- repeatedly. But the layoffs continue, the reality masked by doctored statistics. It is a catastrophe. Unemployment is not only massive, it goes on and on. And the longer it goes on, the less likely it is that those unemployed will ever again find work.

Americans are becoming aware that young people can’t find work, and millions are saddled with student loans they will be paying off for decades. But what is not yet fully understood is that legions of adult Americans will never re-enter the work force. Older men have been especially hard hit.

With prolonged unemployment came the foreclosures. The “sub-prime” borrowers were wiped out in the early stages of the first wave. Now the middle class is being battered. Millions will not make it.

In one area, Mr. Obama has been good for his word. He said it was vitally important to bail out Wall Street. That he did; and surrounded himself with Wall Street advisers, including a Secretary of the Treasury who has protected his once and future colleagues at every turn, and an Attorney General who has turned a blind eye to the fraud that brought the American economy – and people – to their knees.

Two weeks ago JP Morgan and its CEO had to go public with a fantastic loss in the kind of out-of-control speculation that brought down the banks in 2008, proving that nothing has changed and the so-called reforms of Wall Street are a sham.

Incredibly, the president rushed to publicly defend the bank and its CEO.

Given all that –- and there is more –- you might think the president would not stand a snowball’s chance in hell of being re-elected. But my guess is he will be. How is that possible?

The short hand answer of political pundits is that the GOP is on a death march to defeat, doubling down on a shrinking constituency of the ever more marginalized party faithful, playing the “no more taxes for the wealthy,” abortion, marriage, and “Remember the 50s” cards to a nation that has urgent business and will never again be the 1950s.

But that analysis sidesteps what is actually going on.

There are no longer two political parties in the United States, each offering a constructive if differing view of how to secure the welfare, prosperity, security and liberty of the American people. Instead, there is one party, the party of corporate profit and the status quo, kept in power by the ability to spend vast sums of money no political party can hope to match, and able to so dominate elections as to set up a choice for president that can only be described as one between two sides of the same bent coin.

The same money owns Congress.

Where does that leave the American people? I would say, on their own. And that’s OK. There is enormous diversity, vitality and talent in America. And it is beginning to stir.

The first step to a better future is to show that we “get it”. Tune out the elections of 2012. They do not matter. The only possible result is more of the same. Go to the polls in November just long enough to vote for anybody for president but Mr. Obama and Mr. Romney. If there is no other candidate on your local ballot, write in your own name.

And then start looking around locally for the new ideas that can begin to rebuild the American democracy and what was the greatest and most broadly shared prosperity the word had even known.

It is the only way.