Public sector man sitting in a bar: “They’re trying to take away our pensions.”
Private sector man: “What’s a pension?”
— Cartoon in the Houston Chronicle
As states struggle to meet their budgets, public pensions are on the chopping block, but they needn’t be. States can keep their pension funds intact while leveraging them into many times their worth in loans, just as Wall Street banks do. They can do this by forming their own public banks, following the lead of North Dakota—a state that currently has a budget surplus.
Wisconsin Governor Scott Walker, whose recently proposed bill to gut benefits, wages, and bargaining rights for unionized public workers inspired weeks of protests in Madison, has justified the move as necessary for balancing the state’s budget. But is it?
After three weeks of demonstrations in Wisconsin, protesters report no plans to back down. Fourteen Wisconsin Democratic lawmakers—who left the state so that a quorum to vote on the bill could not be reached—said Friday that they are not deterred by threats of possible arrest and of 1,500 layoffs if they don’t return to work. President Obama has charged Wisconsin’s Governor Scott Walker with attempting to bust the unions. But Walker’s defense is:
“We’re broke. Like nearly every state across the country, we don’t have any more money.”
Among other concessions, Governor Walker wants to require public employees to pay a portion of the cost of their own pensions. Bemoaning a budget deficit of $3.6 billion, he says the state is too broke to afford all these benefits.
Broke Unless You Count the $67 Billion Pension Fund . . .
That’s what he says, but according to Wisconsin’s 2010 CAFR (Comprehensive Annual Financial Report), the state has $67 billion in pension and other employee benefit trust funds, invested mainly in stocks and debt securities drawing a modest return.
A recent study by the PEW Center for the States showed that Wisconsin’s pension fund is almost fully funded, meaning it can meet its commitments for years to come without drawing on outside sources. It requires a contribution of only $645 million annually to meet pension payouts. Zach Carter, writing in the Huffington Post, notes that the pension program could save another $195 million annually just by cutting out its Wall Street investment managers and managing the funds in-house.
The governor is evidently eying the state’s lucrative pension fund, not because the state cannot afford the pension program, but as a source of revenue for programs that are not fully funded. This tactic, however, is not going down well with state employees.
Fortunately, there is another alternative. Wisconsin could draw down the fund by the small amount needed to meet pension obligations, and put the bulk of the money to work creating jobs, helping local businesses, and increasing tax revenues for the state. It could do this by forming its own bank, following the lead of North Dakota, the only state to have its own bank — and the only state to escape the credit crisis.
This could be done without spending the pension fund money or lending it. The funds would just be shifted from one form of investment to another (equity in a bank). When a bank makes a loan, neither the bank’s own capital nor its customers’ demand deposits are actually lent to borrowers. As observed on the Dallas Federal Reserve’s website, “Banks actually create money when they lend it.” They simply extend accounting-entry bank credit, which is extinguished when the loan is repaid. Creating this sort of credit-money is a privilege available only to banks, but states can tap into that privilege by owning a bank.
How North Dakota Escaped the Credit Crunch
Ironically, the only state to have one of these socialist-sounding credit machines is a conservative Republican state. The state-owned Bank of North Dakota (BND) has allowed North Dakota to maintain its economic sovereignty, a conservative states-rights sort of ideal. The BND was established in 1919 in response to a wave of farm foreclosures at the hands of out-of-state Wall Street banks. Today the state not only has no debt, but it recently boasted its largest-ever budget surplus. The BND helps to fund not only local government but local businesses and local banks, by partnering with the banks to provide the funds to support small business lending.
The BND is also a boon to the state treasury. It has a return on equity of 25-26%, and it has contributed over $300 million to the state (its only shareholder) in the past decade — a notable achievement for a state with a population less than one-tenth the size of Los Angeles County. In comparison, California’s public pension funds are down more than $100 billion—that’s billion with a “b”—or close to half the funds’ holdings, following the Wall Street debacle of 2008. It was, in fact, the 2008 bank collapse rather than overpaid public employees that caused the crisis that shrank state revenues and prompted the budget cuts in the first place.
Seven States Are Now Considering Setting Up Public Banks
Faced with federal inaction and growing local budget crises, an increasing number of states are exploring the possibility of setting up their own state-owned banks, following the North Dakota model. On January 11, 2011, a bill to establish a state-owned bank was introduced in the Oregon State legislature; on January 13, a similar bill was introduced in Washington State; on January 20, a bill for a state bank was filed in Massachusetts (following a 2010 bill that had lapsed); and on February 4, a bill was introduced in the Maryland legislature for a feasibility study looking into the possibilities. They join Illinois, Virginia, and Hawaii, which introduced similar bills in 2010, bringing the total number of states with such bills to seven.
If Governor Walker wanted to explore this possibility for his state, he could drop in on the Center for State Innovation (CSI), which is located down the street in his capitol city of Madison, Wisconsin. The CSI has done detailed cost/benefit analyses of the Oregon and Washington state bank initiatives, which show substantial projected benefits based on the BND precedent. See reports here and here.
For Washington State, with an economy not much larger than Wisconsin’s, the CSI report estimates that after an initial startup period, establishing a state-owned bank would create new or retained jobs of between 7,400 and 10,700 a year at small businesses alone, while at the same time returning a profit to the state.
A Bank of Wisconsin Could Generate “Bank Credit” Many Times the Size of the Budget Deficit
Economists looking at the CSI reports have called their conclusions conservative. The CSI made its projections without relying on state pension funds for bank capital, although it acknowledged that this could be a potential source of capitalization.
If the Bank of Wisconsin were to use state pension funds, it could have a capitalization of more than $57 billion – nearly as large as that of Goldman Sachs. At an 8% capital requirement, $8 in capital can support $100 in loans, or a potential lending capacity of over $500 billion. The bank would need deposits to clear the checks, but the credit-generating potential could still be huge.
Banks can create all the bank credit they want, limited only by (a) the availability of creditworthy borrowers, (b) the lending limits imposed by bank capital requirements, and (c) the availability of “liquidity” to clear outgoing checks. Liquidity can be acquired either from the deposits of the bank’s own customers or by borrowing from other banks or the money market. If borrowed, the cost of funds is a factor; but at today’s very low Fed funds rate of 0.2%, that cost is minimal. Again, however, only banks can tap into these very low rates. States are reduced to borrowing at about 5% — unless they own their own banks; or, better yet, unless they are banks. The BND is set up as “North Dakota doing business as the Bank of North Dakota.”
That means that technically, all of North Dakota’s assets are the assets of the bank. The BND also has its deposit needs covered. It has a massive, captive deposit base, since all of the state’s revenues are deposited in the bank by law. The bank also takes other deposits, but the bulk of its deposits are government funds. The BND is careful not to compete with local banks for consumer deposits, which account for less than 2% of the total. The BND reports that it has deposits of $2.7 billion and outstanding loans of $2.6 billion. With a population of 647,000, that works out to about $4,000 per capita in deposits, backing roughly the same amount in loans.
Wisconsin has a population that is nine times the size of North Dakota’s. Other factors being equal, Wisconsin might be able to amass over $24 billion in deposits and generate an equivalent sum in loans – over six times the deficit complained of by the state’s governor. That lending capacity could be used for many purposes, depending on the will of the legislature and state law. Possibilities include (a) partnering with local banks, on the North Dakota model, strengthening their capital bases to allow credit to flow to small businesses and homeowners, where it is sorely needed today; (b) funding infrastructure virtually interest-free (since the state would own the bank and would get back any interest paid out); and (c) refinancing state deficits nearly interest-free.
Why Give Wisconsin’s Enormous Credit-generating Power Away?
The budget woes of Wisconsin and other states were caused, not by overspending on employee benefits, but by a credit crisis on Wall Street. The “cure” is to get credit flowing again in the local economy, and this can be done by using state assets to capitalize state-owned banks.
Against the modest cost of establishing a publicly-owned bank, state legislators need to weigh the much greater costs of the alternatives – slashing essential public services, laying off workers, raising taxes on constituents who are already over-taxed, and selling off public assets. Given the cost of continuing business as usual, states can hardly afford not to consider the public bank option. When state and local governments invest their capital in out-of-state money center banks and deposit their revenues there, they are giving their enormous credit-generating power away to Wall Street.
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Ellen Brown wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Ellen is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com andellenbrown.com.
Filed under: Ellen Brown Articles/Commentary |
WEB OF DEBT BLOG 
Another good article.
The woes in Wisconsin are based on a power grab by the Republican governor and legislature. The state began 2011 with an estimated 121.4 million surplus. Walker squandered the public’s money with tax breaks to wealthy cronies and Voila: budget crisis!
The most likely story is a gigantic public sector union-busting effort and eventual privatization of public assets scheme to create a neo-feudal state. http://www.huffingtonpost.com/2011/02/24/shep-smith-wisconsin-figh_n_827547.html
Obviously this comes from Huffingtonpost, I do though like the article and would like to see about the possibility of every state looking at this option to assist in funding it. One problem that I do see though is that the unions will feel like the money is theirs and will insist on it being paid all to them. I would still like to see the unions eliminated as a way to extort more money from the taxpayers. As we can see the Democrats are dong the same thinga s the union right now, do it our way or we won’t play. I look forward to taxpayers having the right to vote them all out next election for not performin the jobs they were elected to do.
The budget woes of the 50 states are caused by a credit crisis on wall street or, in blunter words, by the credit crisis of the Federal Government. One root cause of this credit crisis is the National Debt owned to foreign Investors. Trillions (as in T) of Dollars in interest payments have been paid out to Foreign Investors and this money represents Income taxes paid by American Citizens who thought all along it would be spent inside the United States. For what its worth, I propose that the Federal Reserve do the whole nation (and world) a big favor by undertaking a JUMBO QE to swap the 11 Trillion in T-Bills held by Foreigners with cash. This will eliminate the Yoke of making massive Interest Payments from the neck of the Federal Government and it will permanently eliminate the need to pay interest to foreign investors. Heaven knows if the Tea party will ever get this but I know a few people will.
Great Article!
Wisconsin could indeed resolve this crisis by creating their own public bank, but Ellen is wrong if she thinks these angry public employees are not replaceable.
They are.
Given the massive unemployment in Wisconsin and all over the United States, does anyone seriously believe there’d be a shortage of available labor to do these jobs? Would anyone other than the current membership of public unions complain about having to pay toward a portion of their pensions when non-public union workers pay for 100% of their pensions and half the cost of their healthcare?
Add to that the breaches of their collective bargaining agreements the Wisconsin unions have engaged in by “calling in sick” in order to protest and getting doctors to write fake notes for the purpose (for which said physicians ought to lose their medical licenses). The State of Wisconsin has every right to FIRE THEM ALL and bring in people who will perform the required work… perhaps at a more satisfactory level.
However, if Wisconsin did that without claiming their power to generate public credit and remained dependent on the Wall Street criminals for liquidity, it will all be in vain as the State would eventually collapse. Ditto if our monetary system is not changed at the Federal level.
My suggestion?
Set up a Bank of Wisconsin, plug the deficit, make cuts to truly unnecessary government largess and meet the current obligations to the public labor unions. After that, refuse any new contracts to the unions and ban collective bargaining for Wisconsin workers.
The bankers are far more overpaid and parasitic than public labor unions, but that doesn’t mean public labor unions are not overpaid or parasitic at all.
I think the union should retain its bargaining rights. I don’t see the difference between unions for workers in private businesses and unions for workers in government organizations. In both cases, the unions exist because the other organization did not treat the employees as they should. In both cases, the unions provide a counter-balance to the power of the other organization.
When the other organizations have their power reduced, then unions can have their power similarily reduced. So when our nation starts enforcing the publicized intent of our anti-trust laws and breaking up the oversized monopolies, then it will have grounds for reducing union power. And since government power can be just as badly mis-used against public workers, when government power is reduced, then public union power can be reduced.
Unions can be just as bad as the corporations (or government entities) whose power they attempt to balance. In both cases, an individual has to become a slave to one or both to get the benefits and generally has little to no power to bargain for a better situation. However, without unions, working conditions and salary would quickly reach the same level as found in 3rd world countries.
I often feel like I’m choosing the lesser of two nearly equal evils when deciding to support or oppose unions. Sort like choosing to vote democrat vs repbulican on election day…
Yes, all state jobs are by definition unskilled, and require absolutely no education or training. Luckily, geographic limits don’t exist in Wisconsin, so people can instantly move into Madison and other places where the government has a presence, at no cost. Fire them all, and start with those who have dedicated 20 years and more of their lives to public service, who through most of that time were making 75% of private sector pay. Keep their pensions, too. What are they going to do about it?
austerity, thy name is blarney. all this clamor arises to pay for the wars. Hysterical reaction to the nineteen volunteers have brought the USA to its knees, begging.
Now the perps who brought us this misery buy elections to guarantee themselves tax breaks. The rest of us get stuck with their bills. Who’da thunk it?
Of course, state banks will help. The new money will help pay to round up the lying politicos, their voters, and their media. Enough palaver already.
[…] is no alternative to state employees contributing more to the cost of their own pensions. "Fortunately, there is another alternative. "Wisconsin could draw down the ($67 billion pension) fund by the small amount needed to […]
I have been fallowing Ms Brown’s site for years! Hoping and cheering for the chance of publicly owned banks. A few states have been looking into that very possibility. I want to know how close are these states to actually setting up a bank? How serious are they?
Hi, they’re serious, but how close is hard to know!
Thanks! A “state” doesn’t have personhood, but there are people in those states who are very serious and getting close.
[…] look at the lessons of history is one thing that got us into our current economic mess. "'…Banks actually create money when they lend it.' They simply extend accounting-entry bank credit, which is extinguished when the […]
[…] a budget deficit of $3.6 billion, he says the state is too broke to afford all these benefits. Broke Unless You Count the $67 Billion Pension Fund . . . "That’s what he says, but according to […]
[…] Is… "Broke Unless You Count the $67 Billion Pension Fund . . . "That’s what he (Walker) says, but according to […]
[…] Quote: Originally Posted by Skull Pilot Maybe we should look at states that are doing it right and emulate them Joel Kotkin: Why North Dakota Is Booming – WSJ.com The biggest reason North Dakota is booming. "…The state-owned Bank of North Dakota (BND) has allowed North Dakota to maintain its economic sovereignty, a conservative states-rights sort of ideal. "The BND was established in 1919 in response to a wave of farm foreclosures at the hands of out-of-state Wall Street banks. "Today the state not only has no debt, but it recently boasted its largest-ever budget surplus. The BND helps to fund not only local government but local businesses and local banks, by partnering with the banks to provide the funds to support small business lending. "The BND is also a boon to the state treasury. It has a return on equity of 25-26%, and it has contributed over $300 million to the state (its only shareholder) in the past decade — a notable achievement for a state with a population less than one-tenth the size of Los Angeles County. "In comparison, California’s public pension funds are down more than $100 billion—that’s billion with a 'b'—or close to half the funds’ holdings, following the Wall Street debacle of 2008. "It was, in fact, the 2008 bank collapse rather than overpaid public employees that caused the crisis that shrank state revenues and prompted the budget cuts in the first place." Wisconsin: Broke Unless… […]
I have a few economic questions for Ms. Brown:
1) What is the appropriate level of spending a State should allocate to employee benefits? Ms. Brown asserts that Wisconsin’s budget woes were caused “not by overspending on employee benefits.” This implies she knows what level of spending on employee benefits is appropriate.
2) If it is true that “neither the bank’s own capital nor its customers’ demand deposits are actually lent to borrowers,” then why must a bank be capitalized in the first place?
3) If it is true that state pension funds need not be used to capitalize state-owned banks, why does Ms. Brown focus on a scenario in which state pension funds are used to capitalize a possible Bank of Wisconsin?
4) Why does Ms. Brown refer to Wisconsin state employee trust funds as “state assets?” I realize this isn’t strictly an economic question. However, I am an ex-Wisconsin state employee and I am a vested member of the state’s pension plan. I, and I dare say many other pensioners, like to consider these pension funds assets of the pensioners, not the State in general.
Thank you for your article and your consideration of my questions.
I can’t answer for Ms. Brown, but I think I understand enough about question #2 to answer it.
Banks create money through accounting book entries. It’s a little mathematical and accounting trickery that prevents their net balance from changing. When money is lent out, the bank creates a positive entry – the money added to someone’s account. And a negative entry, the debt owed back to the bank. As the borrower makes payments, they return the positive money they received and the make reduces the negative money account by the same amount.
Now, the bank requires people to return not only the principle that was created, but also interest. Only the priniciple portion reduces the negative loan account – the bank keeps the interest.
As for capitalization, that is simply a way for larger banking organizations to control smaller organizations. The World Bank sets capitalization limits on the the central banks of each nation, which pass those limits onto the banks under them. The capitalization helps the banks avoid problems when their borrowers default on their debt. The rules require the banks to repay the negative loan balance left by their defaulting borrowers. At least that is what they claim… I’m not sure that’s actually what happens.
At any rate, riskier loans have higher capital requirements than less risky loans. Those running the banking system want to make sure they have tight control over how much money exists in the economy. Letting banks create, even through lending, as much money as they want could allow liberal banks to offset monetary contractions – reducing the control exercised by those at the top.
Z –
I understand the bookkeeping mechanics of money creation as described by Ms. Brown. My question has to do with the economics of this money creation.
Forget about bookkeeping and capitalization laws and think only in terms of abstract economics. If neither the bank’s capital nor the customers’ deposits are lent to borrowers, then new money is created as Ms. Brown suggests — out of thin air.
However, because this new money is not tied in anyway to bank capital or customer deposits, then there would be no economic limit on the quantity of new money that can be created.
Is this what Ms. Brown means to imply?
Furthermore, if new money can be created out of thin air, then any individual or social entity should be able to create such money, private or public, government or non-government.
Is this what Ms. Brown means to imply?
Ellen: Following your notes I studied the near 100-year history in the BND’s own website.
The lessons I think it teaches from its own troubles came from its start in 1919 and occurred NOT chiefly because of the depression but during the roaring 1920s
To PLACATE the banks they agreed to redeposit the state deposits to local banks, leaving them with no money for loans until the late 40s!
I don’t see how any state bank can succeed unless legislators have the enough GUTS to insist the state government can deposit all of their revenues in the newly formed state bank.
This will counter the BANK LOBBY which I fear will be far too powerful, and how can we get around that? Its not hard to understand that six other state banks formed about the same time as BND all failed.
With admiration for your work, Bill Q.
Agreed!
What’s not clear to me is the assumption that trust funds could be leveraged into bank equity.
Are they truly the property of the state, or of the public employees? Is it reasonable to expect the trustees of these funds to accept that these funds may be lost in case a relatively small % of loans go bad?
We’re only talking about investing the money — basically buying bank stock. Calpers lost 25% and 31% investing its money on Wall Street in the two years following the 2008 banking collapse. Was that reasonable? Meanwhile, the Bank of North Dakota had a return on equity of 26%. If my money were in the pension fund, I’d be clamoring to get some of those BND returns! The BND has been in business for 92 years and hasn’t gone bust yet. The state itself would have to go bankrupt for the BND to go bankrupt. It’s a very sound bank and a very sound investment. Pension funds are required to make a good return — 8% for Calpers, I think — and there aren’t any guaranteed safe investments at that rate. You just pick your winners.
Ms. Brown,
Thank you for your article and the links within. I am researching your proposal.
I am trying to understand how such a Bank of Wisconsin will work — economically, not politically. I know a little about economics and I have a vested interest in the Wisconsin Pension Fund.
I am intrigued by your article, but I can’t advocate for such a plan unless I fully understand how specifically it will work. I am having a hard time “following the money.”
I understand your belief that a “Bank of Wisconsin” would return money to the state general revenue coffers. Is this because a Bank of Wisconsin would basically operate the same way as a commercial bank only it would pay no taxes to the federal government? In effect, the State of Wisconsin receives those tax monies instead of Uncle Sam?
Also, as I understand your proposal, a Bank of Wisconsin would extend credit in the state for things like small business expansion, homebuilding and construction of infrastructure. As a result jobs would be created in the private sector, goods and services would be produced and the tax base expanded.
At a result of this, the state could avoid things like “slashing essential public services, laying off workers, raising taxes on constituents who are already over-taxed, and selling off public assets.”
However, as I see it, this would all be made possible by the state Pension Fund selling off its current investment portfolio (private sector securites, bonds and the like) and reinvesting in new Bank of Wisconsin paper.
Is my understanding correct?
If so, this seems to me a little like ma and pa selling the family farm and all of their investment portfolio in order to invest the proceeds in a family “Trust Fund” which would finance the kids’ education, their home ownership, their business ventures and the like in the expectation that they will in turn support ma and pa in their sickness and old age.
Is this understanding correct?
I confess I’m frustrated. I have a ton of questions and don’t know where to go to get the answers or whom to ask.
If I can’t get my questions answered at this website, where will I go with my questions and who will answer them?
Hi Sherman, you could check our new website at PublicBankingInstitute.org; it has lots of information, including FAQs and a blog with a slew of articles. StateInnovation.org also has information and detailed studies on how a public bank would work for WA and OR (which have bills pending).
The profits that go into state coffers in ND aren’t from avoiding taxes; they’re the actual earnings of a very profitable bank, and it IS profitable because of its business model. You can read on the Bank of North Dakota website for more information.
On capitalization, first, not ALL of the pension fund money would go into the WI bank (and maybe none of it — there are other funds that could be used). Just $4 billion (1/14th of the WI pension fund, as I recall without looking it up) is enough to capitalize $50 billion in loans, a tidy sum. And you’re not spending it; you’re just shifting it out of some Wall Street investment into dividend-paying equity in a bank.
If you write to “contact us” I can put you in touch with people in WI working on this idea.