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 and leverage them into many times that sum in loans, just as Wall Street banks do. They can do this by forming their own banks, following the lead of North Dakota, the only state either to have its own bank or to have a major budget surplus.
Public workers are not going quietly into that good night of state budgets balanced at the expense of union benefits. After three weeks of protests in Wisconsin, convictions remain strong and pressure is building. Fourteen Wisconsin Democratic lawmakers 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. B emoaning 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 re quires 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. T his 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 b y 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). W hen 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. This is 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.