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.