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A Better Way To Finance Public Projects

Politics / Credit Crisis 2012 Jul 15, 2012 - 05:50 PM GMT

By: Rudy_Avizius

Politics Best Financial Markets Analysis ArticleIn a local newspaper I recently read an article regarding how a school district was looking to “refinance” their outstanding bonds in an effort to reduce the interest burden on their debt. In the same issue I read how another school district expends nearly $2,000,000 yearly just to pay the interest burden on their debt.


Clearly our school systems face a considerable interest burden on their debts.  It is already a matter of public record that US municipalities, school districts, and pension funds were victims of fraud due to the rigging of the commission bids as laid out in an article called “The Scam Wall St Learned from the Mafia” by Matt Taibbi. Many of these municipalities, schools, or other entities were also the victims of a type of derivative called Interest Rate Swaps where the big banks induced them to gamble with public money on the direction of the market, but the end result was often that the “bet” went bad. A great example of this was Jefferson County in  Alabama where the original cost for a sewer project was estimated at $250 million and ended up indebting the county $5 BILLION. Since we do not know all the details, it is difficult at this time to determine specifically how many states, counties, municipalities, and school districts may have been victims of financial fraud which resulted in an increased debt burden paid by the taxpayers as a result of the LIBOR rate rigging scandal that is still unfolding.

Consider this…., when a municipality or school district wishes to do a repair, a capital improvement or infrastructure project, the amount of money paid in interest costs to the financiers exceeds the amount of money paid to those who supply the materials and do the labor on the project. Most people should feel angered by this. Why should those who simply move money around, make more money than those who produce the materials and do the actual labor on the project? Most readers can probably relate to this personally because the interest burden of financing the purchase of their homes causes the final total cost of the purchase to far exceed the original cost of home itself. There needs to be a better system of financing public projects.

Perhaps engaging in creative thinking would result in cheaper financing of public projects. Proposed solutions still center on using conventional or Wall Street financing instead of looking to alternative sources. Well, there is a better way and it can provide any sized government or community entity with financing at zero or near zero interest. One needs only to look at the Bank of North Dakota (BND) for a solution, which is currently the only state-owned bank in the country. This bank has been in existence for 92 years and has a history of safe, secure, and highly profitable banking. In fact North Dakota has a budget surplus, much of which can be attributed to the reduced borrowing costs of public projects. The BND’s purpose is to provide loans to build economic capacity within the state. Examples include loans to state entities in the form of low cost loans to municipalities, schools, small businesses, agriculture, infrastructure projects, and students. The BND does not imperil state funds or tax money but is self-funding and self-sustaining. The BND enjoys broad political support from both major parties inside of North Dakota. 

A public bank can be state wide or can be started or acquired by any sized government or community. It could extend county wide, allowing municipalities and other public entities access to its credit. It could be a consortium of school districts that form their own bank to save financing costs for large projects or purchases such as Haddonfield is considering. It could also be a consortium of colleges and universities seeking to reduce their interest costs which is currently driving the huge debt burden of higher education for students. Some might criticize this as “socialism”, but the system we currently have is “socialism”, where the big bank profits are kept by the banks, and the losses are subsidized by the taxpayers. The biggest advantage of a public bank is that public entities could access the resources of the bank to obtain zero or near zero interest loans. The bank would have access to the Federal Reserve discount window which makes loans available to banks currently at approximately .25% interest. This significant savings could be passed on to the loan seekers. Any profits generated by the bank are recycled back into its operation allowing it to charge the lowest rates possible. By keeping the profits inside of public coffers instead of sending them to Wall Street, the taxpayers are saved most of the costs of public projects by eliminating the financiers.

The costs associated with running a public bank are significantly lower than those for the large Wall Street banks because the employees are public workers and are not paid exorbitant salaries and multi-million dollar bonuses. A public bank is also counter-cyclical, meaning that is can extend credit precisely when private banks are reducing their credit availability and credit is most needed. A public bank is economically sustainable because they are run by professional bankers, operating transparently according to applicable banking principles. By returning credit income to the community in the form of near zero interest rates, the pressure for tax increases is reduced.

So why has this not been done outside of North Dakota?  Inertia is a major force. Most commissioners, business administrators, treasurers, and others who handle local finance are not familiar with the concept of public banking. There are also the vested money interests on Wall Street who do not want to see their cash cow removed and they vigorously oppose any moves to initiate public banks or to advertise their advantages. Despite this, the momentum for public banking has been increasing with fourteen states now having either introduced bills to form state-owned banks or to do feasibility studies. The bills were introduced in Oregon, Washington State, Massachusetts, Arizona, Maryland, New Mexico, Maine, California, Montana, and New York. They join Illinois, Virginia, Hawaii, and Louisiana which introduced bills in 2010. Washington and Oregon commissioned the Center for State Innovation based in Madison Wisconsin to do a detailed analysis and it concluded that “state-owned banks would have a positive impact on employment, new lending, and state and local government revenue.” This is a viable solution.

As a former teacher for 15 years and a school administrator for 16 years, I have seen the devastating effect that budget cuts have had on our educational programs. During my time as an administrator, due to budget pressures I witnessed the elimination of the following programs and personnel in the school district where I was employed: Wood Shop, Home Economics, Metal Shop, Child Care Program, Cooperative Industrial Experience (work-study), Print Shop, Philosophy, Auto Shop, elementary librarians, the entire Business Department, Technology Lab, and Carpentry. There were also reductions in the following programs: Art, Music, Performing Arts, and Foreign Language.  The loss of these enrichment programs degrades our educational offerings and leaves our society at a distinct disadvantage to other countries where the curriculum is more robust. Don’t we want more for our children and our country’s future?

Isn’t it time to redirect interest payments back into our schools? Isn’t it time to lower debt costs for local governments? Isn’t it time to cut the costs of infrastructure projects in half? Isn’t it time to invest local dollars into the local economy? Isn’t it time for interest payments for public projects to be returned back to be used for tax reduction instead of going into the pockets of the Wall Street bankers?

So how can we make this happen? Taxpayers need to go to their town councils, their school boards, their county commissioners and ask them if public banking is being considered. If the answer is no, then ask why not? Ask these questions, do not accept “no” as an answer. If you are told that you do not understand these things, tell them to make you understand.

To those public officials who are truly interested in serving their communities better: be bold, be innovative, and empower your communities. We owe this to our fellow citizens, our children and our future. To learn more about the possibilities that that public banking offers, to learn how to get started, and where to find help in implementation, visit the following site: http://publicbankinginstitute.org/advantages.htm

By Rudy Avizius

http://www.endtheillusion.org/

Email: rudy@endtheillusion.org

Rudy Avizius is a retired school district administrator and a former Director of Technology who has been following economic and political news very carefully for the last 2 decades. He has recently become active in trying to make sure that the government spends taxpayer money wisely with long term benefits to the nation.

© 2012 Copyright Rudy Avizius - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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