The Public Bank Solution

Using Existing Government Funding to create a Public Bank in Santa Fe, New Mexico

Presented By: Scott Baker

SSBAKER305@YAHOO.COM

What is a Comprehensive Annual Financial Report (CAFR)?

It is not the “Budget.” A "Budget Report" is a selective funding of x accounts from y

resources - set up to be primarily funded with taxation and done for the year.

A ”Comprehensive Annual Financial Report" is the showing of all income: Investment, Taxation, and Enterprise, plus the accumulated wealth over decades. Budgets are for the year, a CAFR is for it all since creation of the government entity. CAFRs describe the assets of government agencies and pensions. Due to the GASB’s GAAP rules and some recent “standardizing” rule

changes, CAFRs tend to project future liabilities years, even decades, out, while offsetting them only with current assets and revenue projections based on current receipts. This leads to a false deficit projection. It’s as if you were expected to pay your entire 30-year mortgage with only the assets you have now and the income you will have based on your current level of income…and sometimes not even that!

There is a big difference between the two. A correct analogy would be: The annual budget to operate your house vs. your statement of net worth.

Every Government entity has a CAFR – there are ~184,000* of them, totaling $10s of trillions, almost all online.

Santa Fe CAFR sources: http://www.santafenm.gov/financehttp://www.santafenm.gov/archived_cafr

* As of 2007: http://cafr1.com

We are NOT interested in changing fund outlays, we are interested in changing fund investments.

We are trying to preserve the ability for government agencies and pensions to cover their future

expenditures.

Can investments in a Public Bank be more:Prudent and safe?Counter-cyclical?Able to provide consistent returns?Supportive of the local community/job-creation?Fiduciarily responsible?

Note: Although money will be used throughout the year, this usage is predictable and the remainder can form the deposit base for making loans from a Public Bank until then. (this is how North Dakota does it with the Bank of North Dakota).

The real question: Is a Public Bank strategy safer and better, for reasons listed above, than current investment strategies?

Breakdown of Bonds and Loans Payable – p. 205-206

Fund and Purpose TotalRevenue bonds payable solely from state-shared taxes $116,135,000Revenue bonds payable from Enterprise funds (primary Gov't)

$194,225,000

Total Long-term Bond Indebtedness $310,360,000

Loans payable from tax revenue $4,150,201Loans payable from Enterprise Funds $15,694,070Loans from Special Sources (third parties) $27,932,000Total Long-Term Loan Indebtedness $47,776,271Total Outstanding Indebtedness $358,136,271

How is money raised for Santa Fe currently, besides taxes and investments? The city issues Bonds & takes

out Loans. Bonded debt – The city currently has $26,510,000 in outstanding debt,

and .72% in long term debt to present assessed value - $3,669,453,816* - in 2013. p. 184-185.

Bond Rates – the city pays a wide range of rates, up to 15% for a $45,000,000 bond issued in 2007 for Commercial Office space, due in 2037 – p. 204. Generally, revenue and general obligation bonds carry a 2.00% - 6.20% rate and are due in the 2020s to 2030s. Total Outstanding Indebtedness is $358,136,271 – p. 206

Loans to the city and its Enterprises are at 0.25% (Water Enterprise Fund) - 6.12% (railroad infrastructure), but these are loans made from the funds the city already controls.

* Assessed value is just 1/3 of market value, as set by state statuteSanta Fe is paying 2% to 6% interest, or more, on bonds for credit

it could create itself from a Public Bank that would also pay the city dividends.

If the city or its agencies can issue debt (bonds) to itself, why can’t it deposit tax

dollars in a public bank and save the interest?

Santa Fe Bonds, rated by Moody’s, Standard & Poor’s, and Fitch

• The rating agencies’ outlook on the city’s debt portfolio is stable.

• The city’s net debt applicable to its limit is just 18.06% - p. 187

• Generally, a Public Bank will assume the same rating as the government it is serving, if it is set up as a Doing Business As (DBA) entity, as the Bank of North Dakota is.

Bond Type Moody’s Investor Service

Standard & Poor’s

Corporation Fitch IBCA

General Obligation Bonds

Aa2 AA+ AA

Santa Fe Investments – as of June 30, 2013 Breakdown by investment type – p. 47 & 200

                                                                                                                                                                      

Classifications  Fair ValueTotal Bank and carrying balances (Wells Fargo, Los Alamos National Bank, First National Bank of Santa Fe, etc.)

96,280,052

Money Market Funds, NM State Local Investment Pool, Contingency Fund, U.S. Gov’t Agency Securities, NM Municipal Securities, etc.

123,059,120

Total Accounts 220,059,727*Less: joint venture share of pooled cash (23,476,062)Total    $196,583,665*Total Accounts does not sum from subtotals in original CAFR – no explanation given for the $720,555 difference.

Santa Fe does not invest in equities, mutual or hedge funds and all bond investments are AA or above – p. 48-49. Interest amounts are not given in the CAFR and may be at or close to nil.

These investments may be safe, but are they providing an adequate return?

How have Investments Fared? The Debt Service Fund lost $3,049 (-0.06%) on an asset base of

$4,788,945 in FY 2013 – p. 139-141 Enterprise Funds gained $10,969 (0.02%) on a Cash, Investment

and cash equivalents combined asset base of $66,536,791 – p. 143 – 145

Nonmajor Enterprise Funds gained $9,174 (0.15%) interest & dividends on a Cash, Investment and cash equivalents combined asset base of $6,115,431 – p. 147

Internal Service Funds gained $12,593 (0.09%) interest & dividends on a Cash, Investment and cash equivalents combined asset base of $14,772,816 – p. 161

Would dividends returned by a Public Bank be higher than from traditional investments? Would they be safer from market gyrations?

The Bank of North Dakota has had a 20% ROE for 20 years.

Schedule of Industrial Revenue Bonds Authorized and Outstanding – p. 204

Recipient Year Issued

Year of Retirement

Interest Rate

Amount of Issue

Purpose

First Interstate Plaza Assoc.

1994 2013 10.25% 400,000 Refunding of 1983 for Commercial Office

St. John’s College 1998 2024 4.5%-5.5% 6,900,000 Refunding of 1992 Issue and Facilities Construction

Ridgetop Road LLC 2007 2037 15.00% 45,000,000 Commercial OfficeSt. John’s College 2011 2028 4.10% 8,310,000 Facilities ConstructionTotals $60,610,00

0Interest on Industrial Revenue bonds range from 4.1% - 15% and have long-term maturities out to 2037! Could renegotiated rates from a Public Bank better serve Santa Fe?

Which is the safest kind of Investment Portfolio? A Broadly Diversified Portfolio that Includes some Risky Investments, or a Portfolio that

Includes a Public Bank that Invests in the Community?

• Standard & Poor's (S&P) maintained Bank of North Dakota's (BND) credit ratings in its latest review of the Bank released July 23, 2013. Its long-term issuer credit rating remained "AA-" and its short-term issuer credit rating to "A-1+” - http://banknd.nd.gov/financials_and_compliance/credit_rating.html

• Proper risk analysis should include more than that for the Public Bank itself and should also include the community banks it supports.  North Dakota has not had a bank failure in over 20 years, while nationwide there have been 523 failures just from October 2000 - April 25, 2014, says the cash-strapped FDIC which has to pick up the pieces: http://www.fdic.gov/bank/individual/failed/banklist.html

• What about “key man” risk? What is the risk of key executives leaving and what does that portend for the safety of the bank? Maybe this is an over-rated fear. While Jamie Dimon makes millions running JP Morgan Chase, the president of the Bank of North Dakota – a Civil Servant - makes less than $300 thousand a year. Which is the safer, better-run bank? Well, JP Morgan recently paid over a billion dollars in fines related to multiple government agency Civil violations (not criminal…so far). The BND has never been found guilty of securities or bank fraud.

What is Santa Fe paying for?

Community banks

Dividends

(Interest)

A typical Megabank like JP Morgan has just a 31% Loan to Asset ratio – less than ½ of what ND’s community banks have. Large banks don’t make many loans!

Detroit, MI and Stockton, CA are in bankruptcy proceedings. Funding and outlays from pensions and agencies will be cut, yet their CAFRs contain billions.

See Detroit is Not Broke: http://www.opednews.com/articles/Detroit-is-Not-Broke-by-Scott-Baker-130805-986.html

22 States* are considering some form of State Banking Legislation – and many municipalities are too. Many of these proposals look to fund a Public Bank with CAFR funds.

• By law, all taxes from North Dakota and the Chickasaw Indian Nation Banc2 in Oklahoma, go first to the Public Banks.

Other Municipalities are Investigating alternate CAFR Investment strategies

Existing Public Banks in Green:North Dakota: Bank of North DakotaOklahoma: Chickasaw-owned Bank2 of Oklahoma City.

Is it a better fiscal solution for Santa Fe to reallocate some CAFR Funds into a Public Bank?

* http://www.nytimes.com/roomfordebate/2013/10/01/should-states-operate-public-banks/many-states-see-the-potential-of-public-banking - citing National Conference of State Legislatures

The biggest banks are now even bigger than ever.

Are they still Too Big To Fail…or will they actually Fail next time?

The operations of the TBTF banks have been compared to a Casino, but this is unfair…to Casinos! In a Casino, you have consistent rules, and if you go bust, you don’t get bailed out, you get thrown out.