Banks Take Advantage of States in Fiscal Crisis

Banks Take Advantage of States in Fiscal Crisis

Thursday, March 4, 2010




Banks Take Advantage of States in Fiscal Crisis

The same large banks whose unregulated actions were primary contributors to the economic downturn have also been manipulating state and local governments to profit from budget deficits for years.

Essentially, banks are alluring states with the promise of a means to cut borrowing costs and increase returns through the use of an interest rate swap.  The mechanism is a derivative that allows cash-strapped municipalities and states to exchange interest payments on a variable bond deal for an allocation of funds from a bank.  So, the bank would establish a fixed rate on the bond and swap for the variable "interest rate of the bond that was set by larger macroeconomic forces, such as the Federal Reserve."  Unfortunately, the results have been disastrous.

These type of deals are losing propositions for states and municipalities.  Under unfavorable marketing conditions, interest payments and fees associated with these deals can jump dramatically.  Since the federal government decreased interest rates to shore up financial institutions, the banks were able to profit tremendously while budget gaps at the local and state level continue to grow.  As Mike Elk from the Campaign for America's Future explains:

"While banks are still collecting fixed rates of from 4 percent to 6 percent, they are now regularly paying state and local governments as a little as a tenth of one percent on the outstanding bonds...Banks and states were supposed to be paying equal rates. However, with the Fed lowering interest rates, which was anticipated, now states and local governments are paying about 50 times what the banks are paying...To make matters worse, these state and local governments have no way of getting out these deals. Banks are demanding that state and local governments pay tens or hundreds of millions of dollars in fees to exit these deals."

The deals have cost state governments and taxpayers almost $28 billion in interest and fees at a time when states are already collectively facing billion dollar deficits and considering huge cuts to essential public services.

Some of the areas in the country that are being hit the hardest have amassed massive debt as a result of similar deals.  For instance, Detroit, with an unemployment rate of almost 15 percent, entered a derivatives deal with UBS and other banks that supposedly permitted $2 million in annual interest savings on $800 million worth of bonds.  In order to protect against losses, the deal carried a stipulation that if Detroit's credit rating dropped, the banks could negate on its obligations and charge a breakup fee.  As the city's credit rating plummeted during the recession, it found itself in a position of owing over $400 million.  Now, the city is using casino revenue to pay $4.2 million in monthly payments to the banks.  The city must pay the banks before considering funding other services.

Similar to U.S. Representative Elijah Cummings' (D-MD) comments on the use of bailout funds, the banks are basically "slapping these American taxpayers in the face by continuing attitude."  Fortunately, states are taking proactive steps to confront these issues.

  • Pennsylvania State Auditor General Jack Wagner called on the legislature to prohibit municipalities and school districts from entering interest rate swap contracts.  He stated, "[q]uite simply, the use of swaps amounts to gambling with public money.  The fundamental guiding principle in handling public funds is that they should never be exposed to the risk of financial loss.  Swaps have no place in public financing and should be banned immediately.”
  • Tennessee Comptroller of the Treasury Justin P. Wilson recommended the state place limitations on variable rate debt for financing projects.

Some states are even considering the creation of state-owned banks to protect against the abuses of private banks, foster public accountability and fiscal integrity, increase local economic development investments, promote competition, and expand lending to small businesses. North Dakota, with a 4.4 percent unemployment rate and a $700 million budget surplus last year, is home to the country's only state-owned bank.

  • Legislative and gubernatorial candidates in Florida, Oregon, Idaho Illinois, and California have floated the idea of creating a state bank.
  • Massachusetts Sen. President Therese Murray and Virginia Del. Bob Marshall each advanced initiatives in their respective states to study the creation of a state bank.
  • Washington Rep. Bob Hasegawa introduced HB 3162 this year, a bill that would create a state-owned bank.

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Close the Revolving Door on Legislators-Turned-Lobbyists

While the shenanigans of former U.S. Representative-turned-pharmaceutical lobbyist Billy Tauzin and other legislators-turned-lobbyists make national headlines, the abuse of power in the states often receive scant attention.  A recent decision by the U.S. District Court for Southern Ohio reminds us that the revolving door among legislators-turned-lobbyists is as much a problem in the states as we hear about at the federal level.  And in Ohio, the problem isn’t going away.  Just this month, an Ohio court ruling has struck down the state’s revolving-door laws, which required a one-year cooling period for elected officials and their staff to wait-out before accepting jobs where their political influence would be in play.  The court based its ruling on the fact that the state had not established a link to corruption and “even cited the recent U.S. Supreme Court decision that lifted the ban on corporate contributions in federal elections, saying the high court's reasoning ”˜refutes the premise (that Ohio's revolving-door law) is necessary to prevent former General Assembly members from having special access to the legislative process.’”

In light of these court decisions and the lack of ethics standards, states continue to grapple with the issue -- facing a range of consequences along the way.  Without meaningful reform, many elected officials and their staff will continue to exploit public service and the connections that come with it for personal gain. And industries continue to exploit through greed, buying connections through lucrative salaries — often times negotiated before the legislator’s term has ended.

According to the National Conference on State Legislatures, 19 states currently have a one-year cooling period and at least eight states have a two-year cooling period.  And this year alone, at least 29 states have new legislation to tighten the rules on business and ethics.  In fact, StateNet analysts report identifying more than 3,000 bills on this issue since the start of the year.

Among other remedies, legislators should implement ethics reform similar to that proposed by Common Cause and allies:

  • Prohibit elected officials from gaining undue lobbying access by increasing the “cooling off” period from one to two years before they can lobby their respective legislature.
  • Prohibit high level executive staff and other very senior executive personnel from lobbying the department or agency in which they worked for two years after they leave their position.
  • Prohibit legislative staff and officers from lobbying contacts with the entire legislative body for one year, instead of just their former employing office.
  • When appropriate, require that executive and legislative branch employees who leave government positions and seek to lobby on behalf of Indian tribes face the same revolving door provisions as others, with an exemption for those who serve as elected or appointed officials of Indian tribes.

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States Move Forward on Health Care Reforms

As Congress debates the last steps needed to pass historic comprehensive health care reform, state legislators continue to press forward their efforts to enact state reforms as well as lay the groundwork for implementing reforms in a federal bill.  Here is a summary of some of the most recent developments taking place across the country.

Medical Loss Ratios (MLR):  Despite New Mexico’s short session this year, their legislature has passed House Bill 12 that requires at least 85 percent of premiums for HMOs and nonprofit policies in the small group market.  The Superintendent of Insurance will establish an MLR for the individual market that cannot be under 75 percent.  These requirements become some of the strongest in the country and makes New Mexico the 14th state to impose a medical loss ratio baseline.

Prior Rate Approval:  In New York, Gov. Paterson has included a provision in his proposed 2010-11 budget to restore a prior approval process, whereby the State Insurance Department will review any increases in health insurance premiums before they take effect and triggering public hearings when annual rate increases are greater than 10%.  Senate Insurance Committee chair Neil Breslin (D-Albany) and Assembly Insurance Committee chair Joe Morelle (D-Rochester) are working to craft joint legislation in support of the Governor's proposal.  In addition, Gov. Paterson is proposing to raise medical loss ratios to 85% for small group and individual policies.

Across the border in Connecticut, Senate Bill 194 will require the state’s insurance department to hold a public hearing prior to rate hikes taking effect.  Insurance companies are to notify all policyholders of requests for rate increases as well as the date, place, and time of the public hearing.  Other provisions require insurers to disclose documentation in support of rate increases for public scrutiny, limits the allowable reasons for a rate increase, and puts the burden of proving that an increase is “reasonable” on the insurer.  It empowers the Attorney General and the state Healthcare Advocate to intervene in rate cases and appeal rate decisions to the Superior Court.

Two bills under consideration in Connecticut’s House are HB 5303 that would require managed care organizations to report claims denial data, require the Insurance Department to include such data in the consumer report card and to post such data on its web site.  A public hearing on HB 5303 is scheduled for today.  HB 5235 moves to protect consumer rights by requiring insurance companies to notify consumers in writing that a claim has testified in support of SB 194 and HB 5235.

Implementing Federal Reforms:  An Iowa bill, Senate File 2356 received Senate approval by a bipartisan vote of 45 to 5 on March 1st.  This health care reform bill sets the groundwork for how potential federal health care funding may be used to benefit Iowans.  The bill includes an insurance exchange, an information clearinghouse that makes it easier for individuals and small business employees to compare insurance plans using transparent, standardized information that includes data on quality.  It also expands the state’s unofficial public option program for adults below 200% FPL.  The legislation is based on recommendations approved unanimously by the bipartisan Legislative Health Care Coverage Commission that included Democratic and Republican legislators as well as representatives of insurers, health care providers and consumers.

In Illinois, SB 3047 passed the Public Health Committee yesterday.  The bill establishes the bipartisan Health Care Justice Implementation Task Force whose mission goals are: 1) to monitor the implementation of the federal health care reforms and make recommendations per state implementation; 2) assess current state programs and how they interface with the federal reform and 3) develop a plan regarding additional reforms needed to ensure affordable health care.  The bill provides for four public hearings a year and by January 1, 2011, the Department of Public Health shall contract with an independent research entity that will assess the implementation of health care reforms, health care financing, and health care delivery models. The President of the Senate has expressed his belief that it will pass the full Senate.

Gender Discrimination:  The Senate in New Mexico has passed SB 148 leads the way to the prohibition of gender rating in New Mexico, phasing out the allowed differential between policies for men and women.  Currently individual rates in the state can be up to 20 percent more for women.  New Mexico joins eleven other states that currently prohibit or restrict gender rating in the individual market.  These include Maine, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New York, North Dakota, Oregon, Vermont, and Washington.

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Research Roundup

Dealing with the Recession and State Fiscal Crises:

  • Over 200,000 to Lose Jobless Benefits this Week - The National Employment Law Project (NELP) finds that Congress' failure to reauthorize unemployment benefits this week will impact over 200,000 Americans without jobs.  NELP also provides a breakdown of how many workers in each state are affected.
  • The Zero-Sum Game - The Center on Budget and Policy Priorities released a report that lawmakers fail to augment economic activity in their states by implementing broad tax cuts or offering job credits.
  • Getting the Best Bang for Your Buck - Transparency and Accountability Tools for Oregon Tax Subsidies -   This Oregon State PIRG report identifies 118 tax subsidies that account for approximately $626 million in uncollected revenues from corporations.  The report was developed from state data, but the report notes that if states make such data available in database form, it would be far easier for the public to track such corporate giveaways.

New Resources for Health Care Reform:

  • Insurance company rate hikes driven by greed, NOT underlying medical costs - With insurers announcing rate increases as high as 39% last month, this report by Health Care for America Now documents that premium increases have far outpaced the actual increases in the costs of medical care, with the excess driving massive insurance company profits and payouts to top executives.
  • State Coverage Initiatives is hosting a webinar on March 11, 2010 from 2— 3:30 p.m. EDT on the potential roles of a health insurance exchange.  This follows their recent brief, Preparing for Health Reform: The Role of the Health Insurance Exchange, that discusses state-specific issues to be considered before establishing an exchange and the different ways in which an exchange might be structured and operated.
  • The Impact of Health Care Reform on State Operations is a February 2010 issue brief by State Coverage Initiatives that examines a wide range of health care reform initiatives implemented over the past few years in five states - Massachusetts, New Mexico,Tennessee, Vermont and Wisconsin and offers recommendations that are applicable to all states.

What Gets Measured Gets Done: How a Supplemental Federal Poverty Measure Will Drive Smarter Policy -  The U.S. Census Bureau has announced that it will develop an alternative way to measure poverty that, unlike the current poverty measure, will more accurately account for all income and costs for low-income families.  This Center for American Progress brief explains how a better poverty measure will encourage better policy by more accurately assessing which approaches actually help those families.

Rage on the Right: The Year in Hate and Extremism - The Southern Poverty Law Center documents the exponential increase in the number of groups that advance xenophobic, racist, or generally extreme right-wing ideology in the past year.  They find that, "the radical right caught fire last year, as broad-based populist anger at political, demographic and economic changes in America ignited an explosion of new extremist groups and activism across the nation." In particular, there was a 244 percent rise in the number of anti-government militias and citizen groups.

Taking on the Tool Belt Recession: Energy Efficiency Retrofits Can Provide a Real Help for Construction Unemployment - Noting that 2.1 million construction workers are out of a job, this Center for American Progress memo and its Interactive Map by state argues that recovery funds for energy retrofits of buildings could be a major job creator, especially for small businesses and their employees across the country and would also jump-start demand for manufacturing goods supporting retrofits.

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Banks Take Advantage of States in Fiscal Crisis

Bankster USA
Business Week - Wall Street Plays Hardball
Campaign for America's Future - How Big Banks' Interest Rate Schemes Bankrupt States
YES! Magazine - Whose Bank? Public Investments, Not Private Debt

Close the Revolving Door on Legislators-Turned-Lobbyists

NCSL Table: "Revolving Door" Prohibitions Against Legislators Lobbying State Government After They Leave Office  
NCSL Revolving Door Laws - Eye on Ethics
The Center for Public Integrity: State lobby rules
Common Cause - Ethics in Government
Stateline - Lobbyists Spend Big On Statehouses, Study Says 
Progressive States Network - Close the Revolving Door

States Move Forward on Health Care Reforms

Health Care for America Now - Health Insurers Falsely Claim Rising Costs Justify Soaring Premiums
Families USA - February 2010 Issue Brief, Medical Loss Ratios: Making Sure Premium Dollars Go to Health Care—Not Profits
Progressive States Network - Letter to President Obama urging the passage of comprehensive health care reform
Progressive States Network - Health Care Reform Resources

State Coverage Initiatives - Webinar on March 11, 2010 from 2— 3:30 p.m. EDT on the potential roles of a health insurance exchange.  This follows their recent brief, Preparing for Health Reform: The Role of the Health Insurance Exchange, that discusses state-specific issues to be considered before establishing an exchange and the different ways in which an exchange might be structured and operated.

State Coverage Initiatives - The Impact of Health Care Reform on State Operations, a February 2010 issue brief that examines a wide range of health care reform initiatives implemented over the past few years in five states - Massachusetts, New Mexico,Tennessee, Vermont and Wisconsin - and offers recommendations that are applicable to all states.


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