by Ellen Brown
at Global Research
For over a decade, accountant Walter Burien has been trying to rouse
the public over what he contends is a massive conspiracy and cover-up,
involving trillions of dollars squirreled away in funds maintained at every
level of government. His numbers may be disputed, but these funds
definitely exist, as evidenced by the Comprehensive Annual Financial Reports
(CAFRs) required of every government agency. If they don’t represent a
concerted government conspiracy, what are they for? And how can they be
harnessed more efficiently to help allay the financial crises of state and
local governments?
The Elusive CAFR Money
Burien is a former commodity trading adviser who has spent many years
peering into government books. He notes that the government is composed
of 54,000 different state, county, and local government entities, including
school districts, public authorities, and the like; and that these entities all
keep their financial assets in liquid investment funds, bond financing accounts
and corporate stock portfolios. The only income that must be reported in
government budgets is that from taxes, fines and fees; but the investments
of government entities can be found in official annual reports (CAFRs),
which must be filed with the federal government by local, county and state
governments. These annual reports show that virtually every U.S. city, county,
and state has vast amounts of money stashed away in surplus funds.
Burien maintains that these slush funds have been kept concealed
from taxpayers, even as taxes are being raised and citizens are being
told to expect fewer government services.
Burien was originally alerted to this information by Lt. Col. Gerald Klatt,
who evidently died in 2004 under mysterious circumstances, adding fuel
to claims of conspiracy and cover-up. Klatt was a an Air Force auditor and
federal accountant, and it’s not impossible that he may have gotten too close
to some military stash being used for nefarious ends. But it is hard to envision
how all the municipal governments hording their excess money in separate
funds could be complicit in a massive government conspiracy.
Still, if that is not what is going on, why such an inefficient use
of public monies?
A Simpler Explanation
I got a chance to ask that question in April, when I was invited to speak
at a conference of Government Finance Officers in Missouri.
The friendly public servants at the conference explained that maintaining
large “rainy day” funds is simply how local governments must operate.
Unlike private businesses, which have bank credit lines they can draw on
if they miscalculate their expenses, local governments are required by law
to balance their budgets; and if they come up short, public services and
government payrolls may be frozen until the voters get around to approving
a new bond issue. This has actually happened, bringing local government
to a standstill. In emergencies, government officials can try to borrow
short-term through “certificates of participation” or tax participation loans,
but the interest rates are prohibitively high; and in today’s tight credit market,
finding willing lenders is difficult.
To avoid those unpredictable contingencies, municipal governments will keep
a cushion of from 20% to 75% more than their budgets actually require.
This money is invested, but not necessarily lucratively. One finance officer,
for example, said that her city had just bid out $2 million as a 30-day certificate
of deposit (CD) to two large banks at a meager annual interest of 0.11%.
It was a nice spread for the banks, which could leverage the money into loans at
6% or so; but it was a pretty sparse deal for the city.
Meanwhile, Back in California
That was in Missouri, but the figures I was particularly interested were for my
own state of California, which was struggling with a budget deficit of $26.3 billion
as of April 2010. Yet the State Treasurer’s website says that he manages a Pooled
Money Investment Account (PMIA) tallying in at nearly $71 billion as of the same
date, including a Local Agency Investment Fund (LAIF) of $24 billion.
Why isn’t this money being used toward the state’s deficit?
The Treasurer’s answer to this question, which he evidently gets frequently,
is that legislation forbids it. His website states:
“Can the State borrow LAIF dollars to resolve the budget deficit?
“No.
California Government Code 16429.3 states that monies placed with the
Treasurer for deposit in the LAIF by cities, counties, special districts,
nonprofit corporations, or qualified quasi-governmental agencies shall
not be subject to either of the following:
“(a) Transfer or loan pursuant to Sections 16310, 16312, or 16313.
“(b) Impoundment or seizure by any state official or state agency.”
The non-LAIF money in the pool can’t be spent either. It can be borrowed,
but it has to be paid back. When Governor Schwarzenegger tried to raid the
Public Transportation Account for the state budget, the California Transit
Association took him to court and won. The Third District Court of Appeals
ruled in June 2009 that diversions from the Public Transportation Account
to fill non-transit holes in the General Fund violated a series of statutory and
constitutional amendments enacted by voters via four statewide initiatives
dating back to 1990.
In short, the use of these funds for the state budget has been blocked by the
voters themselves. Bond issues are approved for particular purposes.
When excess funds are collected, they are not handed over to the State toward
next year’s budget.
They just sit idly in an earmarked fund, drawing a modest interest.
What’s Wrong with This Picture?
California’s budget problems have caused its credit rating to be downgraded
to just above that of Greece, driving the state’s interest tab skyward.
In November 2009, the state sold 30-year taxable securities carrying an
interest rate of 7.26%. Yet California has never defaulted on its bonds.
Meanwhile, the too-big-to-fail banks, which would have defaulted on
hundreds of billions of dollars of debt if they had not been bailed out by
the states and their citizens, are able to borrow from each other at the
extremely low federal funds rate, currently set at 0 to .25%
(one quarter of one percent).
The banks are also paying the states quite minimal rates for the use of
their public monies, and turning around and relending this money,
leveraged many times over, to the states and their citizens at much higher rates.
That is assuming they lend at all, something they are increasingly reluctant to
do, since speculating with the money is more lucrative, and investing it in
federal securities is more secure.
Private banks clearly have the upper hand in this game.
Local governments have been forced to horde funds in very inefficient ways,
building excessive reserves while slashing services, because they do not have
the extensive credit lines available to the private banking system.
States cannot easily incur new debt without voter approval, a process that is
cumbersome, time-consuming and uncertain. Banks, on the other hand, need
to keep only the slimmest of reserves, because they are backstopped by a
central bank with the power to create all the reserves necessary for its member
banks, as well as by Congress and the taxpayers themselves, who have been
arm-twisted into repeated bailouts of the Wall Street behemoths.
How the CAFR Money Could Be Used Without Spending It
California, then, is in the anomalous position of being $26 billion in the
red and plunging toward bankruptcy, while it has over $70 billion stashed
away in an investment pool that it cannot touch. Those are just the funds
managed by the Treasurer. According to California’s latest CAFR,
the California Public Employees’ Retirement Fund (CalPERS) has total
investments of $360 billion, including nearly $144 billion in “equity securities”
and $37 billion in “private equity.”
See the State of California Comprehensive Annual Financial Report for the
Fiscal Year Ended June 30, 2009. (pages 83-84)
This money cannot be spent, but it can be invested -- and it can be invested
not just in conservative federal securities but in equity, or stocks.
Rather than turning this hidden gold mine over to Wall Street banks to earn
a very meager interest, California could leverage its excess funds itself,
turning the money into much-needed low-interest credit for its own use.
How?
It could do this by owning its own bank.
Only one state currently does this -- North Dakota.
North Dakota is also the only state projected to have a budget surplus by 2011.
It has not fallen into the Wall Street debt trap afflicting other states, because
it has been able to generate its own credit through its own state-owned
Bank of North Dakota (BND).
An investment in the State Bank of California would not be at risk unless the bank
became insolvent, a highly unlikely result since the state has the power to tax.
In North Dakota, the BND is a dba of the state itself: it is set up as
“the State of North Dakota doing business as the Bank of North Dakota.”
That means the bank cannot go bankrupt unless the state goes bankrupt.
The capital requirement for bank loans is a complicated matter, but it generally
works out to be about 7%. (According to Standard & Poor’s, the worldwide
average risk-adjusted capital ratio stood at 6.7 per cent as of June 30, 2009;
but for some major U.S. banks it was much lower: Citigroup's was 2.1 per cent;
Bank of America’s was 5.8 per cent.) At 7%, $7 of capital can back $100 in loans.
Thus if $7 billion in CAFR funds were invested as capital in a California state
development bank, the bank could generate $100 billion in loans.
This $100 billion credit line would allow California to finance its $26 billion
deficit at very minimal interest rates, with $74 billion left over for infrastructure
and other sorely needed projects. Studies have shown that eliminating the interest
burden can cut the cost of public projects in half. The loans could be repaid from
the profits generated by the projects themselves. Public transportation, low-cost
housing, alternative energy sources and the like all generate fees.
Meanwhile, the jobs created by these projects would produce additional taxes and
stimulate the economy. Commercial loans could also be made, generating interest
income that would return to state coffers.
Building a Deposit Base
To start a bank requires not just capital but deposits. Banks can create all the
loans they can find creditworthy borrowers for, up to the limit of their capital
base; but when the loans leave the bank as checks, the bank needs to replace
the deposits taken from its reserve pool in order for the checks to clear.
Where would a state-owned bank get the deposits necessary for this purpose?
In North Dakota, all the state’s revenues are deposited in the BND by law.
Compare California, which has expected revenues for 2010-11 of $89 billion.
The Treasurer’s website reports that as of June 30, 2009, the state held over
$18 billion on deposit as demand accounts and demand NOW accounts
(basically demand accounts carrying a very small interest).
These deposits were held in seven commercial banks, most of them
Wall Street banks: Bank of America, Union Bank, Bank of the West, U.S. Bank,
Wells Fargo Bank, Westamerica Bank, and Citibank. Besides these deposits,
the $64 billion or so left in the Treasurer’s investment pool could be invested
in State Bank of California CDs. Again, most of the bank CDs in which these
funds are now invested are Wall Street or foreign banks.
Many private depositors would no doubt choose to bank at the
State Bank of California as well, keeping California’s money in California.
There is already a movement afoot to transfer funds out of Wall Street
banks into local banks.
While the new state-owned bank is waiting to accumulate sufficient deposits
to clear its outgoing checks, it can do what other startup banks do –
borrow deposits from the interbank lending market at the very modest
federal funds rate (0 to .25%).
To avoid hurting California’s local banks, any state monies held on deposit
with local banks could remain there, since the State Bank of California should
have plenty of potential deposits without these funds. In North Dakota,
local banks are not only not threatened by the BND but are actually served by it,
since the BND partners with them, engaging in “participation loans” that help
local banks with their capital requirements.
Taking Back the Money Power
We have too long delegated the power to create our money and our credit to
private profiteers, who have plundered and exploited the privilege in ways that
are increasingly being exposed in the media. Wall Street may own Congress,
but it does not yet own the states. We can take the money power back at the
state level, by setting up our own publicly-owned banks. We can “spend” our
money while conserving it, by leveraging it into the credit urgently needed to
get the wheels of local production turning once again.
......................................THE END........................................................
Ellen Brown developed her research skills as an attorney practicing
civil litigation in Los Angeles. In Web of Debt, her latest of eleven books,
she turns those skills to an analysis of the Federal Reserve and “the money trust.”
She shows how this private cartel has usurped the power to create money
from the people themselves, and how we the people can get it back.
Her websites are:
www.webofdebt.com
www.ellenbrown.com
www.public-banking.com
Thanks to Carl Herman for discovering the CalPERS figures
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