Only ONE State Does Not Face Fiscal Crisis


Reality Check in California, Michigan and Other States – Except One

In December 2009, the National Governors Association (NGA) and National Association of State Budget Officers (NASBO) issued their latest biannual Fiscal Survey of States, assessing their economies and presenting their outlook for the year ahead, a very glum one in their opening statement saying:

“States are currently facing one of the worst, if not the worst, fiscal periods since the Great Depression. Fiscal conditions significantly deteriorated for states during fiscal 2009, with the trend expected to continue through fiscal 2010 and even into 2011 and 2012.”

They say tax revenues are drastically lower from all revenue sources, and collections are expected to fall further in the current year. Citing a $256 billion budget gap between FY 2009 and 2011, they’ve had to enact sharp spending cuts and find new revenue sources. The federal American Recovery and Reinvestment Act of 2009 (ARRA) made up $135 billion of the shortfall. Another $87 billion in Medicaid funding facilitated critical health and human services spending.

Even so, programs across the board were cut with more coming in 2010 as governors and budget officers prepare for the worst. According to NASBO Executive Director Scott Pattison:

“We expect a continued deterioration in all financial indicators including revenues, balances and expenditures.”

As a result, the fiscal health of America’s states is dire with little in the way of expected relief. Across the country, governors say federal stimulus money is running out, yet conditions are worsening so more spending cuts and revenue increases are planned at a time opposite measures are needed.

However, unlike the federal government, states must balance their budgets, making up shortfalls by borrowing, taxes, and/or cuts in vital services. While constitutional, statutory, or traditional practices vary, three general kinds of balanced budget requirements exist, differing only in detail:

— the governors’ proposed budget must be balanced;

— the enacted one must be as well; and

— the fiscal or biennium fiscal year one must be also, with no deficits carried forward.

Given today’s conditions, that makes for cantankerous debates producing compromises and delicate juggling, satisfying no one, especially households hit hardest by the results.

One state alone stands out in the current environment, North Dakota, with its governor, John Hoeven calling a December 15 news conference to explain that the state has so much money (a $1.3 billion FY 2009 surplus, its largest ever) that individuals and businesses will average $650 in 2009 tax savings from income and property tax cuts enacted by its legislature. In addition, seniors and disabled people who own property or rent will get additional savings from an expanded Homestead Property Tax program.

According to Tax Commissioner Cory Fong:

North Dakota has been able to weather the economic crisis. “While other state governors and legislatures are looking for ways to raise revenue through raising taxes and cutting services, we just came through a historic session of funding both our important priorities and substantial tax relief….The winners are families, businesses and the State of North Dakota,” because it’s unique in one important respect.

It’s the only one with a state-owned bank (The Bank of North Dakota – BND) that sustains its distinctiveness and strength. As a result, it had the nation’s lowest unemployment rate of 4.1 at year end 2009 and created jobs throughout the crisis.

Established in 1919, it’s been a “credit machine” ever since, according to financial writer Ellen Brown, delivering “sound financial services that promote agriculture, commerce and industry,” something no other state can match because they don’t have state-owned banks.

With one, BND “create(s) ‘credit’ with accounting entries on (its) books” through fractional reserve banking that multiplies each deposited amount magically about tenfold in the form of loans or computer-generated funds. As a result, the bank can re-lend many times over, and the more deposits, the greater amount of it for sustained, productive growth. If all states owned public banks, they’d be as prosperous as North Dakota and be able to rebate taxes and expand public services, not extract more or cut them.

Brown explains that the BND:

“chiefly acts as a central bank, with functions similar to those of a branch of the Federal Reserve,” that’s neither federal or has reserves as is owned by major private banks in each of the 12 Fed districts, New York by far the most dominant with Wall Street’s majority control and a Fed chairman doing its bidding.

In contrast, BND is a public bank, 100% owned by the state, operating in the public interest and those of the state. It “avoids rivalry with private banks by partnering with them.” Local banks do most lending. “The BND then comes in to participate in the loan, share risk, buy down the interest rate and buy up loans, thereby freeing up banks to lend more. (One of its functions) is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 to $600 billion” in a state with around 700,000 people and thriving.

Its function in the property market helped it “avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007 and helped it reduce its foreclosure rate….(Its other services) include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions, and a well-funded disaster loan program.” When the state didn’t meet its budget “a few years ago, the BND met the shortfall.”

In sum, state-owned banks have “enormous advantages over smaller private institutions….Their asset bases are not marred by oversized salaries and bonuses, they have no shareholders” demanding high returns, and they don’t speculate in derivatives or other high-risk investments. As a result, BND is healthy with a 25% return on equity, paying “a hefty dividend to the state projected at over $60 million in 2009” and well over five times that amount in the last decade, so it begs the question why other states don’t operate the same way. If enough of their residents demanded it, they might and not suffer the way nearly all of them are today, two notably – California and Michigan.