This “Chapter Ten” is part fourteen of Truthout’s continuing series of excerpts from Gar Alperovitz’s “America beyond Capitalism.”
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A number of state and federal institutions function successfully on the principle that capital can and should be accumulated and managed in ways that provide individual citizens with an income stream from publicly backed investments.
Just below the radar of conventional media reporting, a number of larger efforts based on Pluralist Commowealth principles have also emerged in recent years, especially at the state level. Some are new and innovative; many are in advanced stages of development; several others illustrate long-standing but little-discussed practices that are likely to be extended if current trends continue – and if states continue to function in the future, as they have in the past, as laboratories for subsequent national activity.
Particularly interesting are a group of sophisticated developments that point in the direction of practical – even dramatic – applications of the most radical and far-reaching system-wide Pluralist Commonwealth strategies.
Historically, several states have had considerable experience with the application of larger-scale Pluralist Commonwealth principles. The Bank of North Dakota – founded in 1919 – currently has nearly $2 billion in assets. The bank’s earnings (net income) now provide the fifth-largest source of revenue for the state government; an estimated $75 to $80 million will be returned to North Dakota for the two-year period, 2001 to 2003. The bank makes student loans (27 percent of the total), commercial loans (33 percent), agricultural loans (17 percent), and residential loans (23 percent). Return on equity was 21.3 percent for 2000, a year of record profitability; it was still 18.7 percent in 2001, a year of national economic difficulty.
The Wisconsin State Life Insurance Fund, in operation since 1911, is also instructive. The fund has assets of over $75 million, manages roughly thirty thousand active life insurance policies, and has coverage in force totaling over $200 million. The fund distributed between $3.7 and $3.9 million annually in dividends to policyholders throughout the late 1990s. Premiums are 10 to 40 percent lower than comparable private insurance coverage. Such gains have been recorded even though the fund is subject to statutory restrictions – including a prohibition on advertising and maximum coverage of $10,000 – which limit its capacity to compete with other companies.
More recent state developments include venture capital initiatives that involve direct investment and stock ownership in local companies by state agencies. Though little discussed in the media, this form of public investment and ownership is extremely common. A recent National Governors Association survey found that more than half the states have allocated state funds to venture capital investments. Most involve direct investment by state agencies, often utilizing private firms to help manage the process.
One of the most successful efforts, Maryland’s Enterprise Investment Fund, provides promising high-tech start-ups with up to $500,000 in capital in exchange for equity shares and a guarantee from the firm that it will continue to operate in the state for at least five years. The fund has performed exceptionally well, investing $19 million in fifty-two Maryland companies and helping create an estimated 2,500 jobs as of this writing. From 1994 to 2002 the state made a 32 percent annual return on its investments – with total returns over $64 million. Successful ventures range from such companies as Visual Networks of Rockville, a network management and consulting firm, to Gene Logic of Gaithersburg, which specializes in “gene expression” technology – that is, examining tissues to determine whether particular genes are turned “on” or “off.”
Similar programs in Connecticut and Massachusetts also have achieved significant returns while at the same time helping create jobs in their respective states. Connecticut Innovations’ return on investment rose from 17.3 percent in 1998 to 20.8 percent in 1999 to 39.7 percent in 2000. In 2001, a tough year when many high-tech investors lost money, it still managed a positive return (2.5 percent); and although along with many funds it experienced significant losses in 2002, its cumulative return for 1998 to 2002 was a respectable 8.4 percent. The Massachusetts Technology Development Corporation has invested in early-stage technology firms for a substantial period. Between 1980 and 2002 it recorded a 17.9 percent rate of return on total investments of $62 million in 115 companies.
Assessments of such efforts are complicated by the fact that states commonly invest in ventures that one, have not already been selected as promising by private firms; and that two, offer the possibility of job creation and ancillary benefits of economic value to the state in question. Some state efforts have produced extremely positive results; others have achieved more modest gains, but in the process have contributed to larger state development goals.
At the federal level, public ownership of stock in specific corporations is also a long-established strategy. In the recent airline bailout, for instance, the Bush administration demanded a ten-year option to purchase a third of America West’s stock at $3 per share in exchange for federal guarantees that secured a $429 million loan. It granted a $900 million loan guarantee to US Airways – and received a 10 percent stake in the company in return.
Similarly, in 1980 as part of a $1.5 billion loan guarantee for the Chrysler Corporation, the government received 14.4 million warrants (representing 10 to 15 percent of Chrysler stock). Again, the government through the FDIC took a controlling ownership position (over 80 percent) in connection with the 1984 $8 billion bailout of the Continental Illinois Bank (at the time the seventh-largest U.S. bank). Numerous other precedents can be traced back to World War II.
We may add to this listing of Pluralist Commonwealth practices the long experience with public ownership of port authorities throughout the nation. By far the largest is the Port Authority of New York and New Jersey, which has approximately $16.9 billion in assets. The authority has planned, developed, and operated numerous enterprises that have been critical to the economic health of the region – including major airports and seaports, and the World Trade Center. In 2000 it paid $130 million in leases and payments in lieu of taxes to the cities of New York and Newark and to the states of New York and New Jersey. (Total payments were $96 and $140 million, even in the difficult years of 2001 and 2002.)
The Port of Los Angeles owns several retail properties -including Ports O’Call Village, a large retail shopping and dining complex that generates between $650,000 and $1.5 million annually, and another retail/restaurant complex, the West Channel development, which is expected to bring in $1.2 million in leases plus healthy percentages of gross receipts. In fiscal year 2002 the port generated $289.8 million in total operating revenue, with a net income of $96.9 million.
The Port of Seattle manages a cruise pier and several container ship loading facilities, the Seattle-Tacoma airport, and a number of additional operations that lease commercial office space. In 2003 the port’s operating revenues (from property rental, parking revenues, landing fees, etc.) were expected to exceed $375 million. When depreciation costs, accumulated tax income, and passenger facility charges are included, the port’s total excess revenue in 2002 was projected to be $64 million.
Such activity is not restricted to large cities: the Marine Administration of Portland, Maine, holds fifty leases -including a twelve-acre naval shipyard, an inter-island ferry system, and a pier – which together generate more than $2 million a year for the city.
The history and successful record of different forms of public pension funds offer additional Pluralist Commonwealth precedents. There are currently more than 2,200 public employee retirement system boards operating at the municipal, state, and federal levels. The boards manage roughly $3 trillion in assets and have for many decades demonstrated the feasibility of public investment strategies.
One of the most conservative of all public agencies at the national level – the Federal Reserve Board – has had an employee pension and retirement fund in operation since 1934. It manages roughly $8.2 billion in assets. Investments, as in most pension funds, are overseen by external fund managers. Again, the Federal Thrift Savings Plan, established in 1987, involves some 2.4 million federal employees in a similar plan; it has roughly $100 billion in assets.
In Part I we noted that a number of state pension funds have begun to explore new forms of public oversight to make corporations more accountable. Additional possibilities are suggested by other aspects of the experience of California Public Employees’ Retirement System (CalPERS) and by Retirement Systems of Alabama.
CalPERS (in operation now for more than sixty-five years) oversees more than $137 billion in pension funds for 1.4 million plan members (employees, retirees, and survivors). In addition to previously discussed innovations, CalPERS maintains a domestic portfolio “focus list” that singles out poorly performing companies and companies with poor governance practices. The results are illuminating. Companies that have been singled out in a particular year regularly outperform the S&P 500 by roughly 14 percent in the five years after CalPERS draws attention to their failings. CalPERS also places a great deal of emphasis on information disclosure and the independence of boards of directors. As noted, CalPERS is also beginning to enforce transparency, environmental performance and other standards in its international investments.
Alabama – a conservative state in which fiscal pressures are particularly intense and in which traditional tax proposals are commonly blocked – is also actively pursuing Pluralist Commonwealth-related strategies. Retirement Systems of Alabama, which manages pension investments for state employees and teachers, has been in operation for more than sixty years. Under the direction of CEO David Bronner, it has aggressively invested in numerous local Alabama industries, in some cases also using its assets to help create worker-owned firms. Investments range from aerospace to tourism development and include, among others, $100 million in the Alabama Pine Pulp Company; $60 million in a statewide golf course network, the Robert Trent Jones Golf Trail (maintaining a 33 percent ownership stake); and $250 million in Alabama-backed Ginnie Mae mortgages.
Retirement Systems of Alabama has a total of $22 billion under management. It also has invested in office buildings in such cities as Montgomery and has helped form two media conglomerates involving hundreds of local newspapers and thirty-six television and radio stations. Stock in these is jointly owned by Retirement Systems and the employees of the companies.
Even more interesting politically – and suggestive of possible other larger-scale future strategies – in 2002 Retirement Systems purchased a 36.6 percent controlling share of US Airways, in part to bring more jobs to the state.
A somewhat different but even more suggestive effort is that of the Alaska Permanent Fund. The Alaska state constitution directs that a significant portion of revenues derived from oil development be allocated to the fund for further investment on behalf of citizens of the state. Earnings are used to increase the size of the principal, offset the impact of inflation on long-run returns – and most important, provide annual dividends to the residents of the state. In 2000, a high-payout year, each individual state resident, as a matter of right, received dividends of just under $2,000 (almost $10,000 for a couple with three children).
Permanent Fund operations have been efficient and economically successful. Competitively hired external managers invest roughly $25 billion in assets. In 2000 the fund earned an overall 9.18 percent rate of return, a figure well above expected benchmarks for its diversified low-risk portfolio. Operating costs were a low 1.83 percent (leaving a 98 percent profit margin). By way of comparison, the S&P 500 ended 2000 up 7.24 percent. During the stock market collapse of 2001 and 2002, the Permanent Fund outperformed its benchmark investments and also had operating costs below those of comparable large funds.
Income inequality in Alaska is lower than most other states, and – unlike every other state and the nation as a whole – Alaska registered a decline in income inequality during the 1980s and 1990s. Research by University of Alaska economist Scott Goldsmith indicates that Permanent Fund operations played an important role in producing the recorded gains.
CalPERS, Retirement Systems of Alabama, and similar efforts offer precedents for using investment strategies to achieve greater public oversight of corporate practices and to help achieve state and community economic goals. The Alaska Permanent Fund takes us one step further. It is an on-the-ground operating system that demonstrates the feasibility of the kinds of far-reaching proposals offered by Roemer, Meade, and Kelso – and of the Public Trust concept of the Pluralist Commonwealth. Although each approach differs in specifics, all are based on the principle that capital can and should be accumulated and managed in ways that provide individual citizens with an income stream from publicly backed investments.
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