Taxpayers thrive on simplicity…. Banks thrive on complexity… and in the end those seeking simple solutions to complicated problems pay through the nose while those who understand complexity make money hand over fist.
Ellen Brown’s Truthdig blog post earlier this week explained how this chain of events played out in California… and how taxpayers “easy solution” to a complicated problem turned into “easy profits” for Goldman Sachs.
In the 1970s California voters passed a proposition that capped property taxes and made it extremely difficult for public schools to build new facilities. They did this because they wanted to save money. Over time, School Boards and parents needed to replace decaying and overcrowded facilities but couldn’t do so because of the caps on property taxes. The Governor at the time this confluence of events occurred didn’t want to raise taxes either… so when lobbyists for the banks approached him, the legislature, and key voters with a clever workaround in the form of a product called “Capital Appreciation Bonds” (CABs) everyone signed on… but as the second paragraph below indicates, paybacks on these CABs were daunting!
In 2009, the lenders’ lobbying group then proposed and promoted AB1388, a California bill eliminating the debt ceiling requirement on long-term debt for school districts. After it passed, bankers traveled all over the state pushing something called “capital appreciation bonds” (CABs) as a tool to vault over legal debt limits. (Think Greece again.) Also called payday loans for school districts, CABs have now been issued by more than 400 California districts, some with repayment obligations of up to 20 times the principal advanced (or 2000%).
The controversial bonds came under increased scrutiny in August 2012, following a report that San Diego County’s Poway Unified would have to pay $982 million for a $105 million CAB it issued. Goldman Sachs made $1.6 million on a single capital appreciation deal with the San Diego Unified School District.
Ellen Brown intimates that the sharks in the banking industry took advantage of the naiveté of school boards and administrators, but the real dupes in all of this were the voters who wanted to believe that there was a cheap, fast, and effective way to build new facilities and the politicians who never bothered to look closely at the too-good-to-be-true deal offered by banks. This naiveté on the part of voters and politicians was especially egregious given the melt-down caused by the banks promoting these “payday loans” one year prior it should have been a tip off that reading fine print was necessary. Nevertheless, Ms. Brown pulled no punches in assigning responsibility for these loans, in effect analogizing school districts with those who took out liar loans banks offered for McMansions:
Gullible school districts agreed to these payday-like loans because they needed the facilities, the voters would not agree to higher taxes, and state educational funding was exhausted. School districts wound up sporting shiny new gymnasiums and auditoriums while they were cutting back on teachers and increasing classroom sizes. (AB1388 covers only long-term capital improvements, not daily operating expenses.) The folly of the bonds was reminiscent of those boondoggles pushed on Third World countries by the World Bank and IMF, trapping them under a mountain of debt that continued to compound decades later.
She does offer two ways to solve this problem, noting that the Federal Reserve COULD have issued its own low interest loans to municipalities thereby cutting out the profiteering middlemen or California districts COULD learn a lesson from North Dakota, which is the only state with its own depository bank. In contrast to the legislative debacle that led to interest payments that were ten times more than the face value of the loan:
The state-owned Bank of North Dakota (BND) was making 1% loans to school districts even in December 2014, when global oil prices had dropped by half. That month, the BND granted a $10 million construction loan to McKenzie County Public School No. 1, at an interest rate of 1% payable over 20 years. Over the life of the loan, that works out to $.20 in simple interest or $.22 in compound interest for every $1 borrowed. Compare that to the $15 owed for every dollar borrowed by Anaheim’s Savanna School District or the $10 owed for every dollar borrowed by Santa Ana Unified.
How can the BND afford to make these very low interest loans and still turn a profit? The answer is that its costs are very low. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; pays no dividends to private shareholders; and has low borrowing costs. It does not need to advertise for depositors (it has a captive deposit base in the state itself) or for borrowers (it is a wholesale bank that partners with local banks, which find the borrowers). The BND also has no losses from derivative trades gone wrong. It engages in old-fashioned conservative banking and does not speculate in derivatives. Unlike the vampire squids of Wall Street, it is not motivated to maximize its bottom line in a predatory way. Its mandate is simply to serve the public interest.
A bank that is required to “simply serve the public interest” is an idea whose time has arrived. I know that some progressive economists have advocated such a plan… but this article by Ellen Brown explains how this idea would help public schools relieve their debts and thereby free up more funds to help children in the classroom.
Joe Nocera’s column in today’ NYTimes bemoans the fact that billionaire owners of football teams are employing “The LA Gambit” to extort funds from local taxpayers to build stadia in their communities. How does this gambit work? Well it seems that Los Angeles, the second most populous city in the US, lacks a professional football team. Billionaire owners whose teams are housed in “outdated” stadiums and want to make as much profit as possible tell the town fathers that they need some kind of tax breaks or outright subsidies to build a brand new stadium or they might just move their team to another venue. The threat is clearly NOT an idle one as several owners over the decades have done just that.
But as I noted in a comment I left on Nocera’s article,
The “LA gambit” has been played out in the states, cities, and communities for decades… and the taxpayers and public sector has paid the price. When a corporation announces it’s plans to open a new facility, states, cities and counties across the country open their wallets to lure them offering taxpayer subsidized incentives and infrastructure upgrades on the pretext that the new warehouse/factory/office will bring jobs and money to the community. And it’s even worse when an existing business threatens to leave a community… all kinds of incentives and tax breaks are made available! And who ends up suffering? The publicly funded services who are told there is no money left in the budget for them! Virtually every Republican governor has this gambit in their playbook…
For example, Scott Walker managed to find money in the WI state budget for a basketball arena and to offer a tax cut while cutting funds for schools and colleges. But Walker is not alone and, alas, as noted in earlier blog posts, this is nothing new. Why write again about it? Because until the public is aware of this misleading shell game they will continue to believe that governors have “no choice” but to cut budgets for schools and services, to defer major maintenance projects, and to pony up money for “investments” that do not pay off in the long run. If won see this happening in your community or state, please let your elected officials know you are wise to their game.
Today’s NYTimes features an op ed article by Jon Cowan and Jim Kessler, two administrators from “The Third Way” which the Times identifies as “a centrist institute”. “How to Hold Colleges Accountable” the Third Way’s solution to “the well known” problems with college is wrong in many ways:
- It overlooks the fact that college tuitions have skyrocketed in large measure because virtually every states in the union has trimmed their funding for post secondary education forcing those institutions to either increase tuitions or cut programs.
- It overlooks the fact that more and more colleges are relying on low paid adjunct staff instead of tenure track teachers, a factor that contributes to the lack of solid teaching in colleges.
- It overlooks the fact that colleges are offering “luxurious dormitories (and) lavish student activity centers” because students and parents expect those to be a part of the college experience… not because they want to spend money foolishly.
- It advocates that colleges be measured based on the earnings of graduates ten years later… thereby reinforcing the notion that the mission of college should be career preparation and not the development of thoughtfulness as Frank Bruni rightly advocated in yesterday’s newspaper.
- It oversells the value of data reporting. Cowan and Kessler assert that “More informed student choice would put pressure on colleges to focus on academic outcomes rather than on student amenities and athletics. This data could be broken down by gender, race, income and major.” As noted above, “student amenities” are an important consideration for most middle class parents and if they don’t know the impact of NCAA championships in major sports they need to read ESPN.
They are right on one point: Congress should take taxpayers off the hook for student loans. As Cowan and Kessler note:
Right now, no matter how high tuition climbs, there is always a federal loan to make up the difference between price and aid.
Just as new mortgage laws require banks to hold on to some of the mortgages they issue before bundling and selling the loans — so that they have an incentive to avoid making bad loans — so too should colleges be held responsible for a portion of student-loan defaults, which stood just shy of 14 percent in 2013.
When students default, colleges should have to cover some portion — maybe 5 percent of the yearly principal and interest — to share some of the burden; right now, the taxpayers are on the hook for 100 percent. Colleges that genuinely focus on educating low-income students should not be punished for doing so, but high-turnover schools that consistently enroll students while failing to graduate them should be pushed out of business.
So from this non-centrist’s perspective, the best way to hold colleges accountable is to regulate for-profit schools that “consistently enroll students while failing to graduate them”, forgive the loans those colleges gave to misled students, and seize all their assets before they are “pushed out of business”. At the same time, the federal government should institute some kind of hold-harmless funding requirement to states whereby the amount allocated for state schools would have to remain constant in order for the state funded colleges to offer student loans. Finally, colleges who employ a majority of their staff as adjuncts should not be eligible for loans. Those actions would restore funding accountability to state governments, implement staffing accountability to colleges, and end the usurious loan practices for-profit colleges put in place.