Derivatives weren’t the only toxic asset pawned off on Americans before the financial collapse, something called swaps were foisted on school districts, local and county governments and even the state government. Con men who referred to themselves as “financial consultants” told our elected officials these were safe, conservative investments for public funds which provided higher rates of return. I actually witnessed a few of these presentation and couldn’t comprehend why a county government would invest in something which was impossible to understand. There’s one simple rule for investing: if you can’t understand how the money is made don’t buy the investment. Joe Hoeffel came out today and said it’s time for Pennsylvania to invest in Pennsylvania:
Democratic gubernatorial candidate Joe Hoeffel thinks it is about time Pennsylvania invests in Pennsylvania, and he will do something about it.
At a press conference today, Hoeffel outlined a plan that will encourage investment in Pennsylvania’s banks and credit unions and award contracts to Pennsylvania businesses.
“Homeowners across America entered into mortgages which seemed like good deals at the time — only to later discover big banks were profiting at their expense,” Hoeffel said. “Pennsylvania’s financial crisis, and the difficulties faced by many cities, counties, and school districts across the commonwealth, has similar roots. Municipalities and agencies made risky investments with taxpayer money, and big banks profited while we lost.”
Hoeffel’s plan calls for investment in local and community banks and credit unions and recognizing the added value of awarding contracts to Pennsylvania businesses. He believes Pennsylvania can build a system where taxpayers, financial institutions, and businesses work together with the common interest of investing in our communities and rebuilding Pennsylvania’s economy.
Hoeffel explained that in the years leading up to the current financial crisis, a complex and controversial fiscal practice called interest-rate swaps became commonplace in Pennsylvania. These exotic “financial instruments” were supposed to benefit the governments that entered into them, but when the economy changed and floating rates took off, taxpayer dollars became big profits for big banks, according to Hoeffel.
He cited several examples:
* In late 2008, the Bethlehem Area School District spent $10.2 million of taxpayer’s money not on reducing class size or providing activities for their students. They gave it to J.P. Morgan.
* In 2009, Montgomery County paid $12.3 million to two banks, United Bank of Scotland and PNC.
* This past November, the Delaware River Port Authority, the intergovernmental agency that operates ports, bridges, and transportation between Pennsylvania and New Jersey, paid United Bank of Scotland $111 million, even though the agency’s budget for the entire year was supposed to be $159 million.
* On April 8th of this year, the cash-strapped City of Philadelphia, facing a second year of debilitating service cuts and the prospect of charging a fee to collect trash, raised funds not to clean streets or put more cops on them but to pay Citigroup $48.6 million.
“Bethlehem schools, Montgomery County, the DRPA, and the City of Philadelphia paid these exorbitant costs just to get out of reckless investments, Hoeffel said. Today, he said, 86 of Pennsylvania’s municipal governments and 107 school districts have nearly $15 billion in public debt tied up in these interest-rate swaps. The Philadelphia School District alone ties over $1 billion in debt to interest-rate swaps.
Hoeffel said he would ban future interest-rate swaps by adding a provision to the Local Government Unit Debt Act and the Municipal Authorities Act to explicitly prohibit local governments from gambling tax dollars in interest-rate swaps, or any other bizarre “financial instruments.” He then would act to end all active swap arrangements as soon as possible and refinance using conventional financial instruments, preferably utilizing responsible Pennsylvania community banks and credit unions.
One of the keys to growing Pennsylvania is investing in Pennsylvania’s financial institutions. “Unlike J.P. Morgan and Citigroup, Pennsylvania’s community banks and credit unions are tied to the success of our towns, schools, and communities. Many are rated as much safer than the big banks.
“According to a study published in January, smaller, safer community banks in Pennsylvania “play a significant role in the economic growth of both rural and urban” parts of the state, he said. “Furthermore, one of the most valuable traits of community banks is their unique knowledge of the local economy and expertise in local business prospects, which makes them integral to growing the economies of communities around the state.”
He said he would encourage municipalities, agencies, and school districts across the Commonwealth to rethink the way we use public assets and invest in the institutions that invest in us. “By shifting public assets out of the banks that have bilked us for millions, and into local institutions that support our taxpayers and grow our small businesses, we can make our money work for us, not the tycoons of Wall Street,” he said.
To make these policies possible, Hoeffel supports two key changes to state law.
* Drop the mandated collateral for state deposits in all banks from the Pennsylvania requirement of 120 percent of the deposit to the more common standard of 102 percent used around the country. “Our higher requirement is unnecessary and puts undue restrictions on community banks and credit unions,” Hoeffel said.
* Extend from one year to three years the life of the Certificates of Deposit that the state invests in banks. “Three years will make it much easier for community banks to loan the money into the local community,” Hoeffel explained.
Hoeffel said he would also:
* Encourage the state treasurer to increase the investment of state assets into community banks and credit unions, rewarding those that make loans in the state.
* Establish goals for placing unused bond proceeds in community banks and credit unions in the same ratio and shifting the state pension money from big banks into community banks and credit unions.
* Push for a change in the way two percent of the state’s pension funds are invested in venture capital funds, from the current directive to “consider geographical diversity” to a strategy of investment in businesses in the commonwealth, which will give businesses a greater incentive to start in Pennsylvania.
Hoeffel also pledged to create fairer bidding practices for Pennsylvania businesses.
“When the state buys goods from out-of-state businesses, we send money out of the state and never see it again,” he explained. “But when we buy from in-state businesses, some of that money returns to Pennsylvania in the form of taxes from the companies and workers.”
Sam Durso, Philadelphia Coordinator of the national Move Your Money Campaign, joined Hoeffel in calling for greater support of community banks and credit unions: “We thank Joe Hoeffel for his timely support, and we call on all candidates across the city and the state to join the Move Your Money campaign in supporting the community banks and credit unions that support our local economies and small businesses. Financial reform is coming, and the message is clear: now is the time to invest in the institutions that invest in us.”