Originally posted by Ellen Brown at www.webofdebt.com/articles on May 21, 2010

For over a decade, accountant Walter Burien has been trying to rouse the public over what he contends is a massive conspiracy and coverup, 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 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 coverup.  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.  If that is not what is going on, however, why such an inefficient use of public monies? 

A Simpler Explanation
When I was invited to speak at a conference of Government Finance Officers in April, I got a chance to ask that question.  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 dire straits, 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.  For example, one finance officer 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 efficient 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.

One state already 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.

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. However, some major U.S. banks were 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. California has expected revenues for 2010-11 of $89 billion, and the Treasurer’s website reports that as of June 30, 2009, over $18 billion was held 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. The $64 billion or so left in the Treasurer’s investment pool could also be invested in State Bank of California CDs. Most of the bank CDs in which it is invested in now 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 this money. In North Dakota, local banks are not only not threatened by the BND but are actually served by it. The BND partners with them, engaging in “participation loans” that help local banks with their capital requirements.
 
Bringing It All Back Home
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.
 
 

First published here 7/6/2005 

1. What do the Social Security trust funds consist of?

The Social Security trust funds are United States Treasury bonds. These bonds are issued by the U.S. Treasury to raise money to pay for budget deficits. The total value of all outstanding Treasury bonds is the national debt. The Social Security trust funds own part of the national debt.

The trust funds have been accumulating Treasury bonds since the mid-1980s because Congress, at the recommendation of Alan Greenspan and Ronald Reagan, decided to collect more in taxes than were needed to pay current benefits. That decision was made in order to build up reserves against the retirement of the baby boomers. As workers, baby boomers have been accumulating Treasury bonds to help pay for their retirement.

Figure 1 shows how the total national debt increased from March 1994 through March 2005 and who owns the Treasury bonds that constitute the national debt. The total national debt did not grow steadily over this period. In the seven years between 1994 and 2001, the national debt increased by a little more than a trillion dollars. In the four years since 2001, it has increased by two trillion dollars. When budget deficits were small or there were surpluses (as in the late 1990s), debt grew little. When they were large (as in recent years), total national debt rose rapidly.
Picture
Source: U.S. Department of Treasury, Ownership of Federal Securities, Table OFS-2, available online at
http://www.fms.treas.gov/bulletin/b25ofs.doc.


In contrast to the growth of total national debt, between 1994 and 2005, the Social Security trust fund holdings of Treasury bonds (see the bottom segment of the bars in Figure 1) increased at a steady pace. But in spite of the steady increase in Social Security trust fund purchases of Treasury bonds, the trust funds still own less than a quarter of the total debt. Other federal agencies, and, in recent years, foreign central banks each own more of the debt than the Social Security trust funds. Private U.S. investors (pension funds, mutual funds, wealthy individuals), the owners of more than half of the debt in 1994, today own only 23 percent, about the same as the Social Security system. In recent years, Treasury bonds have not been an attractive investment for those with private wealth to invest.

2. How have we benefited from the Social Security trust funds?

To date, the Social Security trust funds have accumulated about $1.7 trillion worth of U.S. Treasury bonds. This means that the Treasury has had to borrow less from other lenders to finance our budget deficits. Consequently, the Treasury has not had to raise the rate of interest on its bonds to attract private investors, and it has had to rely less on foreign lenders such as the Central Banks of China and Japan. Private investors have put their saving into assets such as stocks, corporate bonds, and housing instead of Treasury bonds, which has led to construction of new buildings and purchases of new equipment in the United States, contributing to economic growth.

3. How secure are the Treasury bonds in the trust funds?

Any bond represents a promise by the borrower to pay the lender. In the past, some private borrowers and even nations have defaulted on their debts. Enron, Pan Am, Polaroid, and Bethlehem Steel went bankrupt. Debt issued by Argentina and Ecuador can be purchased for far less than its face value because many investors doubt that it will be repaid. And bonds issued by the Confederate States of America are suitable for framing, but for little else; they will never be repaid.

The United States, too, could default on its debt. The country could lose a war or a plague could decimate the population. Or our government could simply announce "We will no longer honor our promises to the Central Bank of China or the Federal Reserve Bank or the Social Security trust funds or anybody unlucky enough to have trusted us at our word."

How likely is it that the U.S. government would renege on its promises to its creditors? One way to determine the likelihood of such a thing happening is to see how Treasury promises are valued in financial markets. After all, debt issued by Argentina and Ecuador are available at fire sale prices in international financial markets. Is any debt issued by the U.S. Treasury similarly discounted? Absolutely not. Markets treat promises by the Treasury as essentially risk free. What is more, it would be quite impossible for the Treasury to announce "we are only defaulting on this portion of our national debt" without infecting all markets in which Treasury debt is sold. It is as if a person were to say "only my left leg has gangrene; the rest of me is fit and healthy."

The fact that a default on any part of the national debt is almost unthinkable is underlined by the reaction of financial markets when former Treasury Secretary Paul O'Neill and President Bush announced in speeches that the Social Security trust funds are nothing but paper. If markets really believed that the U.S. government would fail to redeem its bonds, there would have been an immediate rise in the risk premium on Treasury bonds, with interest rates spiking upward. But nothing happened. Everybody knows: it is only political talk.

4. Where will the money come from when the Treasury must redeem the bonds in the Social Security trust funds?

The U.S. government gets funds in three ways. It can look for increased revenues (through higher taxes). It can look to cut expenses (through lower spending). Or it can borrow by issuing new Treasury bonds. Replacing old bonds with new bonds is called "rolling over the debt," and it is done every day by households, businesses, and governments.


The ability of the government to service its obligations to the Social Security trust funds (that is, to future retirees) is inseparable from its ability to service the entire national debt. The question is not whether the Treasury will be able to repay the 22 percent of the national debt that is owed to the Social Security trust funds. The real question is whether the entire national debt, the sum of all the borrowing from all lenders, is getting out of control. Will the federal government be able to tax and borrow and scrimp in the future to meet its commitments?

One way to evaluate our nation's debt burden is to see what is happening to the size of the national debt relative to the nation's ability to pay. This ability to pay is closely tied to income, that is to the size of our national economy. Is our debt growing relative to our income? Figure 2 shows the answer to this question for the past half century.

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Source: Economic Report of the President 2005 Table B-78, available online at http://a257.g.akamaitech.net/7/257/2422/17feb20051700/www.gpoaccess.gov/eop/2005/B78.xls.

The surprising message of Figure 2 is that every Democratic president (Kennedy-Johnson, Carter, and Clinton) left office with the ratio of national debt to income below where it was at the beginning of his administration, while the last three Republican administrations (Reagan, George H.W. Bush, and George W. Bush) have presided over explosive growth of the national debt relative to national income. Since 1960, Republican administrations have added 38 percentage points to the national debt/GDP ratio, while Democratic administrations have subtracted 23 percentage points from that ratio. This record stands on its head all the clichés about who is fiscally responsible.

Ultimately, the ability of the Treasury to keep its promises to pay bondholders what they are owed depends on government's ability to control its taxation and spending policies, in other words, to keep the entire national debt manageable relative to the size of the economy.


There is no special obligation or special problem posed by the Social Security trust funds. That debt is part of the national debt. The nation's ability to honor its commitments to its seniors is part of the larger effort to honor its commitments to all bondholders.

In historical perspective, the national debt relative to the nation's ability to pay is lower today than it was in the early 1950s (coming off the Second World War), but it is much higher than it was in the 1970s. Over the past three decades, Republican administrations have issued new debt much faster than the economy has grown. To meet its commitments to all its creditors, including the Social Security trust funds, future U.S. governments will have to control the fiscal policies that have produced such huge deficits-such rapid growth of the national debt. Will they? For the next few years, with the administration repeatedly asking for supplementary appropriations to fund the wars in Iraq and Afghanistan while striving to make the tax cuts permanent, it seems unlikely. Any decline in the national debt/GDP ratio would represent the first such decline under a Republican president since 1974.

There is no special problem of meeting the Treasury's obligations to the Social Security trust funds. The fundamental problem is the larger one of servicing the national debt. And the solution lies in controlling federal deficits.

 
 

Original Blog Post


COCHABAMBA, Bolivia—Here in this small Andean nation of 10 million people, the glaciers are melting, threatening the water supply of the largest urban area in the country, El Alto and La Paz, with 3.5 million people living at altitudes over 10,000 feet. I flew from El Alto International, the world’s highest commercial airport, to the city of Cochabamba.

Bolivian President Evo Morales calls Cochabamba the heart of Bolivia. It was here, 10 years ago this month, that, as one observer put it, “the first rebellion of the 21st century” took place. In what was dubbed the Water Wars, people from around Bolivia converged on Cochabamba to overturn the privatization of the public water system. As Jim Shultz, founder of the Cochabamba-based Democracy Center, told me, “People like a good David-and-Goliath story, and the water revolt is David not just beating one Goliath, but three. We call them the three Bs: Bechtel, Banzer and the Bank.” The World Bank, Shultz explained, coerced the Bolivian government, under President Hugo Banzer, who had ruled as a dictator in the 1970s, to privatize Cochabamba’s water system. The multinational corporation Bechtel, the sole bidder, took control of the public water system.

On Sunday, I walked around the Plaza Principal, in central Cochabamba, with Marcela Olivera, who was out on the streets 10 years ago. I asked her about the movement’s original banner, hanging for the anniversary, that reads, in Spanish, “El agua es nuestra, carajo!”—“The water is ours, damn it!” Bechtel was jacking up water rates. The first to notice were the farmers, dependent on irrigation. They appealed for support from the urban factory workers. Oscar Olivera, Marcela’s brother, was their leader. He proclaimed, at one of their rallies, “If the government doesn’t want the water company to leave the country, the people will throw them out.”

Marcela recounted: “On the 4th of February, we called the people to a mobilization here. We call it ‘la toma de la plaza,’ the takeover of the plaza. It was going to be the meeting of the people from the fields, meeting the people from the city, all getting together here at one time…. The government said that that wasn’t going to be allowed to happen. Several days before this was going to happen, they sent policemen in cars and on motorcycles that were surrounding the city, trying to scare the people. And the actual day of the mobilization, they didn’t let the people walk even 10 meters, and they started to shoot them with gases.” The city was shut down by the coalition of farmers, factory workers and coca growers, known as cocaleros. Unrest and strikes spread to other cities. During a military crackdown and state of emergency declared by then-President Banzer, 17-year-old Victor Hugo Daza was shot in the face and killed. Amid public furor, Bechtel fled the city, and its contract with the Bolivian government was canceled.

The cocaleros played a crucial role in the victory. Their leader was Evo Morales. The Cochabamba Water Wars would eventually launch him into the presidency of Bolivia. At the United Nations climate summit in Copenhagen, he called for the most rigorous action on climate change.

After the summit, Bolivia refused to support the U.S.-brokered, nonbinding Copenhagen Accord. Bolivia’s ambassador to the U.N., Pablo Solon, told me that, as a result, “we were notified, by the media, that the United States was cutting around $3 million to $3.5 million for projects that have to do with climate change.” Instead of taking U.S. aid money for climate change, Bolivia is taking a leadership role in helping organize civil society and governments, globally, with one goal—to alter the course of the next major U.N. climate summit, set for Cancun, Mexico, in December. Which is why more than 15,000 people from more than 120 countries have gathered here this week of Earth Day, at the People’s World Conference on Climate Change and the Rights of Mother Earth. Morales called for the gathering to give the poor and the Global South an opportunity to respond to the failed climate talks in Copenhagen.

Ambassador Solon explained the reasoning behind this people’s summit:

“People are asking me how this is coming from a small country like Bolivia. I am the ambassador to the U.N. I know this institution. If there is no pressure from civilian society, change will not come from the U.N. The other pressure on governments comes from transnational corporations. In order to counteract that, we need to develop a voice from the grass roots.”
 
Denis Moynihan contributed research to this column.


Amy Goodman is the host of “Democracy Now!,” a daily international TV/radio news hour airing on more than 800 stations in North America. She is the author of “Breaking the Sound Barrier,” recently released in paperback and now a New York Times best-seller.
 
 
The experiment has failed and it’s time to go back to what built the strongest and largest middle class in world history. From the 1940’s to the 1970’s our government set the rules of the economy in favor of America and its citizens. The rules were set up so companies would reinvest capital back into the American economy, technology, and its workers. America was the manufacturing superpower and had a blue-collar middle class that could survive on a single-income home. With this single income we could afford to own a home, have health care, send our kids to college or trade school, take vacations, and have a pension for retirement with relatively low debt. Today two-income homes can’t afford many of these things and are waste deep in debt, and an increasing number of people are over their head in debt. It is all about the incentives, which changed in 1981 with the economic strategy of what was called Supply Side or Trickle Down economics. 

This new economic strategy promised to bring more investment into the American economy and jobs. The first step was to cut taxes for the investment class (top 1%), allowing them to keep more of their money so they could invest back into the economy creating more jobs: the trickle-down effect. The next step was to deregulate or stop enforcing rules, to allow more efficient production and help increase the supply of goods. In this sense, supply-side theory has worked. Productivity in America has steadily increased over these 30 years. The theory went on to suggest that excess goods would then drop the prices, creating more demand by having more affordable goods.

What has happened is the capital that was originally reinvested back into the American economy, technology, and its workers have gone to a few administrators and CEOs. In 1980 a CEO made on average 40 times as much as the company’s lowest paid worker. Today that number is well over 500 to 1, and in some industries this ratio can be 5,000 to 1. The executives then invest the money into Wall Street for quick short-term personal profits instead of where the capital was created, in their company and workers. This results in bubble economies of boom and bust cycles. It also created a new very wealthy and powerful class in America that has corrupted our government. In 1980 there were about 500 lobbyists in Washington, D.C., and today there are as many as 40,000 lobbyists donating to campaigns and legally influencing/ bribing elected officials. 

Ross Perot was correct in 1992 about the “Giant Sucking Sound” of American jobs leaving the country because of Free Trade Agreements. 
 
In the 1990’s, with the new rules of economics, CEO’s and their lobbyists influenced our government to openly embrace Free Trade in the guise of America companies selling their goods to the world market. What wasn’t mentioned to the American people in these trade agreements was that the U.S. handed over its economic sovereignty to mediators such as the World Trade Organization. We no longer can set our own tariffs or protect U.S. jobs because of these agreements, and that is why our jobs are leaving the country. When this happens American workers are forced to compete with Communist China and their oppressed work force and other oppressed third-world countries that don’t have the external costs of adequate work conditions, living wages, health care, pensions, and most of all, environmental standards.  

The result of our shift from demand-side to supply-side economics created a wage/ productivity gap. In the United States’ strong middle-class era, wages created demand and productivity increased as the demand went up. As wages went up so did demand, and this created more jobs. Wages in the U.S. for 30 years have remained stagnant while productivity has increased, creating a huge gap of too many goods and not enough money to buy them. It was filled with easy credit and low interest rates. The Federal Reserve has kept interest rates amazingly low for this entire period, creating an economy based on credit, not wages. In the last few years the credit bill has come due with interest, and the American economy has become a house of cards with no way of paying it back. 

The experiment of supply-side economics and free trade has failed miserably and created monopoly capitalism. We need to go back to sane economic and trade policies that protect America and its jobs.