“Illinois
is insolvent, unable to pay its bills. According
to Moody’s, the state has $15 billion in unpaid bills and $251 billion in
unfunded liabilities. Of these, $119 billion are tied to shortfalls
in the state’s pension program. On July 6, 2017, for the first time in two
years, the state finally passed
a budget, after lawmakers overrode the governor’s veto on raising taxes.
But they used massive
tax hikes to do it – a 32% increase in state income taxes and 33% increase
in state corporate taxes – and still Illinois’ new budget generates only $5
billion, not nearly enough to cover its $15 billion deficit.
“Adding to its budget woes, the state is being considered by
Moody’s for a credit downgrade, which means its borrowing costs could shoot up.
Several other states are in nearly as bad shape, with Kentucky, New Jersey,
Arizona and Connecticut topping the list. U.S. public pensions are underfunded by at least $1.8 trillion
and probably more, according to expert estimates. They are paying out more than
they are taking in, and they are falling short on their projected returns. Most
funds aim for about a 7.5% return, but they barely made 1.5% last year.
“If Illinois were a corporation, it could declare
bankruptcy; but states are constitutionally forbidden to take that route. The
state could follow the lead of Detroit and cut its public pension funds, but
Illinois has a constitutional provision forbidding that as well. It could
follow Detroit in privatizing public utilities (notably water), but that would
drive consumer utility prices through the roof. And taxes have been raised
about as far as the legislature can be pushed to go.
“The state cannot meet its budget because the tax base has
shrunk. The economy has shrunk and so has the money supply, triggered by the
2008 banking crisis. Jobs were lost; homes were foreclosed on, and businesses
and people quit borrowing, either because they were ‘all borrowed up’ and could
not go further into debt or, in the case of businesses, because they did not have
sufficient customer demand to warrant business expansion. And today, virtually
the entire circulating money supply is created when banks make loans. When loans are paid down and
new loans are not taken out, the money supply shrinks. What to do?
Quantitative Easing for Munis
“There
is a deep pocket that can fill the hole in the money supply – the Federal
Reserve. The Fed had no problem finding the money to bail out the profligate
Wall Street banks following the banking crisis, with short-term loans totaling
$26 trillion. It also freed up the banks’ balance sheets by buying
$1.7 trillion in mortgage-backed securities with its ‘quantitative easing’
tool. The Fed could do something similar for the local governments that were
victims of the crisis. One of its dual mandates is to maintain full employment,
and we are nowhere near that now, despite some biased figures that omit those
who have dropped out of the workforce or have had to take low-paying or
part-time jobs.
“The case for a ‘QE-Muni’ was made in an October 2012
editorial in The New York Times titled ‘Getting More Bang for the Fed’s Buck’ by Joseph Grundfest
et al. The authors said Republicans and Democrats alike have been decrying the
failure to stimulate the economy through needed infrastructure improvements,
but shrinking tax revenues and limited debt service capacity have tied the
hands of state and local governments. They observed:
‘State and municipal bonds help finance new infrastructure
projects like roads and bridges, as well as pay for some government salaries
and services.
‘. . . [E]very Fed dollar spent in the muni market would
absorb a larger percentage of outstanding debt and is likely to have a greater
effect on reducing the bonds’ interest rates than the same expenditure in the
mortgage market.
‘. . . [L]owering the borrowing costs for states, cities and
counties should not only forestall tax increases (which dampen individual
spending), but also make it easier for local governments to pay for police
officers, firefighters, teachers and infrastructure improvements.’
“The authors acknowledged that their QE-Muni proposal faced
legal hurdles. The Federal Reserve Act prohibits the central bank from
purchasing municipal government debt with a maturity of more than six months,
and the beneficial effects expected from QE-Muni would require loans of longer
duration. But Congress was then trying to avoid the ‘fiscal cliff,’ so all
options were on the table. Today the fiscal cliff has come around again, with
threats of the debt ceiling dropping on an embattled Congress. It could be time
to look at ‘QE for Munis’ again.
Getting More Bang for the Pensioners’ Bucks
“Scott Baker, a senior advisor to the Public Banking
Institute and economics editor at OpEdNews, has another idea. He argues that the states are far from
broke. They may not be able to balance their budgets with taxes, but a search
through their Comprehensive Annual Financial Reports (CAFRs) shows that they
have massive surplus funds and rainy day funds tucked away around the state,
most of them earning minimal returns. (Recall the 1.5% made by the pension
funds collectively last year.)
“The 2016 CAFR for Illinois shows $94.6 billion in its pension fund
alone, and well over $100 billion if other funds are included. To say it
is broke is like saying a retired couple with a million dollars in savings is
broke because they can earn only 1.5% on their savings and cannot live on
$15,000 a year. What they need to do is to spend some of their savings to meet
their budget and invest the rest in something safe but more lucrative.
So here is Baker’s idea for Illinois:
- Make an iron-clad pledge by law, even in the State Constitution if they can get quick agreement, to provide for pension payouts at the current level and adjusted for inflation in the future.
- Liquidate the current pension fund and maybe some of the other liquid funds too to pay off all current debts.
- This will leave them with a great credit rating . . . .
- Put the remaining tens of billions into a new State Bank, partnering with the beleaguered small and community banks . . . . Use that money to finance state and local businesses and individuals instead of Wall Street schemes and high fund manager fees that will no longer be necessary or advisable, saving the state hundreds of millions a year.
“The Public Bank could be built roughly on the model of the
hugely successful Bank of North Dakota example, one of the country’s greatest
banks, measured by Return on Equity, and scandal-free since its founding in
1919.
“The Bank of North Dakota (BND), the nation’s only
state-owned bank, has had record profits every year for the last 13 years, with
a return on equity in 2016 of 16.6%, twice the national
average. Its chief depositor is the state itself, and its mandate is to support
the local economy, partnering rather than competing with local banks. Its
commercial loans range
from 2.4% to 7.5%. The BND makes cheaper loans as well, drawing on loan funds
for special programs including infrastructure, startup businesses and
affordable housing. Its loan income after deducting allowances for loan losses
was $175 million in 2016 on a loan portfolio of $4.7 billion. (2016
BND CAFR, pages 28-29.)That puts the net return on loans at 3.7%.
“Illinois could follow North Dakota’s lead. Looking again at
the Illinois CAFR (page 45), the amount paid out for pension benefits in 2016
was only $1.833 billion, or less than 2% of the $94.6 billion pool. An Illinois
state bank could generate that much in profit, even after paying off the
state’s outstanding budget deficit.
“Assume Illinois guaranteed its pension payouts, as Baker
recommends, then liquidated its pension fund and withdrew $10 billion to meet
its current budget shortfall. This would significantly improve its credit
rating, allowing it to refinance its long-term debt at a reduced rate. The
remaining $85 billion could be put into the state’s own bank, $8 billion as
capital and $77 billion as deposits.
“At a loan to deposit ratio of 80%, $60 billion could be issued
in loans. At a return similar to the BND’s 3.7%, these loans would produce $2.2
billion in interest income. The remaining $17 billion in deposits could be
invested in liquid federal securities at 1%, generating an additional $170
million. That would give a net profit of $2.37 billion, enough to cover the
$1.8 billion annual pensioners’ payout, with $570 million to spare.
“The salubrious result: the pension fund would be
self-funding; the state would have a bank that could create credit to support
the local economy; the pensioners would have money to spend, increasing demand;
the economy would be stimulated, increasing the tax base; and the state would
have a good credit rating, allowing it to borrow on the bond market at low
interest rates. Better yet, it could borrow from its own bank and pay the
interest to itself. The proceeds could then go to its pensioners rather than to
bondholders.
“Where there is the political will, there is a way.
Politicians and central bankers will take radical, game-changing steps in
desperate times. We just need to start thinking outside the box, a Wall
Street-imposed box that has trapped us in austerity and economic servitude for
over a century...”
Ellen Brown is an attorney, founder of the Public Banking
Institute, a Senior Fellow of the Democracy
Collaborative, and author of twelve books including Web of Debt and The Public Bank Solution. A 13th book
titled The Coming Revolution in Banking is due out this fall. She also co-hosts
a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.
Why not an Illinois State Bank? by Al Popowits
ReplyDeleteOpinion: Letters to the Editor, Oak Park/River Forest
Tuesday, October 8th, 2013 10:00 PM
Our state, its people and businesses are drowning in unsustainable debt. Our fellow citizens face a flood of foreclosures, many with home values that are "under water." Banks have kept credit tight, drying up the very resources that businesses need to hire more people and get the economy moving again. If Illinois had its own public banking institution, the state's financial situation would be improved.
North Dakota is the only state to have a state bank. In 2010 it had the lowest unemployment and default rate in the country. It also had the most community banks per capita. This suggests that the presence of a state-owned bank has not hurt local banks.
What is a state-owned bank? It is a bank that is owned by the people through their representative government. Public banks, as distinguished from private banks, have a mandate to operate in the public interest. Private banks have shareholders whose highest priority is short-term profits. Public banks reduce taxes by returning its profits to the state's general fund. Public banks also have access to low-cost funds from the regional Federal Home Loan Banks. A state bank can help a town issue a new bond at a lower interest rate than could be gotten on the open market.
The cost of state projects are also greatly reduced because public banks do not need to charge interest to themselves. Eliminating interest has been shown to reduce the cost of such projects on average by 50 percent.
Illinois currently deposits its tax revenues in private Wall Street banks which use these deposits for their own private gain. Many of these banks take state money and use it to participate in the derivative markets which do not benefit our state. State revenues could be deposited in the state's own bank and used to fund programs which benefit our citizens in the long run — the very same programs that are currently being cut or eliminated.
A state bank in Illinois and its municipalities would have the potential to leverage their revenues to a much greater degree than it does today and invest those proceeds into Illinois. This is an idea whose time has come.
For more information, go to www.PublicBankingInstitute.org.