Where are R.I. Revenues Being Invested? Not Locally

By KYLE HENCE/ecoRI News contributor

Dire economic times can mean funding cuts for programs that restore or protect our natural resources. In tough times, shortsighted thinking often displaces long-term sustainability planning. In turn, prospects for a restorative economy are dimmed.

A vital economy and a healthy environment are inextricably linked, just as economics and ecology share the same Greek root, oikos meaning “house, dwelling place, habitation.”

Rhode Island faces the most severe economic challenge since the Great Depression, one that makes implementation of new ideas and solutions imperative. Business as usual is not an option. Maintaining the status quo is untenable.

According to a December Treasury report (pdf), only 10 percent of Rhode Island’s short-term investments reside in truly local in-state banks, namely Washington Trust and BankRI. Meanwhile, 40 percent of these investments were placed with foreign-owned banks, including a British-government owned bank under investigation by the European Union.

Further, millions have been invested by Rhode Island in a fund created by a global buyout firm recently outed by ABC News for setting up special funds in a secretive Cayman Islands tax shelter.

Are Rhode Islanders and the state economy being served well here? Is it not time for the state to more fully invest directly in Rhode Island, either through local banks more deeply rooted in the community or through the creation of a new state-owned bank?

The underlying premise here is that it matters more than ever where and how the state Treasury invests Rhode Island dollars and which banks hold Rhode Island cash deposits.

One emerging solution being widely considered nationwide are state-owned or public banks. Since the onset of the economic collapse about five years ago, 16 states have studied or explored creating state-owned banks, according to a recent Associated Press report.

“The country’s smallest state has big problems. It was one of the first states to fall into the recession because of the housing crisis and may be one of the last to emerge,” The Pew Center on the States has written of Rhode Island.

North Dakota, by contrast, has maintained a thriving economy throughout the current recession. One of the reasons, some say, is the Bank of North Dakota, which was formed in 1919 and is the only state-owned or public bank in the United States. All state revenues flow into the Bank of North Dakota and back out into the state in the form of loans.

Since 2008, while servicing student, agricultural and energy— including wind — sector loans within North Dakota, every dollar of profit by the bank, which has added up to tens of millions, flows back into state coffers and directly supports the needs of the state in ways private banks do not. And the performance of the Bank of North Dakota is improving. Last month, Standard & Poor’s raised the bank’s ratings (pdf).

The Bank of North Dakota also had none of derivatives exposure that led to the collapse of Iceland’s government, Lehman Brothers and many U.S. banks, as well as insolvency of local governments, including here in Rhode Island.

Unlike big, private banks, the Bank of North Dakota didn’t need a federal bailout nor is it federally (FDIC) insured.

Local banking?
As of June 30, 2010, the Rhode Island Treasury maintained collateralized bank deposits in Citizens Bank, BankRI, Sovereign Bank, Washington Trust, Bank of America and Webster Bank, according to a fiscal 2010 report from the general treasurer (pdf).

In the report, the state Treasury calls each of these “local banks.” But are they really? Let’s take a look at three of these so-called local banks.

Citizens Bank started local as High Street Bank in Providence in 1828. In 1988, however, it was bought out by the Royal Bank of Scotland (RBS). Twenty-one years later, during the banking collapse, RBS — and thus Citizens Bank — was taken over by the British government.

As of June 30, 2010, 32 percent of Rhode Island’s short-term investments and 49 percent of its collateralized cash deposits were placed with Citizens Bank, a foreign state-owned bank. A December 2011 Treasury report (pdf) shows reduced Citizens Bank state deposits.

Sovereign Bank is owned the Santander Group. In 2010, 0.17 percent of Rhode Island’s short-term investments and 7 percent of collateralized deposits were trusted to Sovereign Bank, a bank chain owned by a multinational bank based in Spain. (Disclaimer: ecoRI Inc. currently banks with Sovereign.)

Both Citizens Bank and Sovereign Bank are only local in having Rhode Island branches and employees.

Additionally, 29 percent of collateralized deposits in June 2010 were held by Bank of America, which was bailed out by the federal government with $35 billion in 2008-09 and compelled by national protests to withdraw its $5 ATM fees in 2011.

Bank of America is a multinational bank with headquarters in Charlotte, N.C. No matter who manages local branches, these banks are owned primarily by outside interests, even outside the country as with the case of Sovereign Bank and Citizens Bank. The mandate of their boards is to deliver a profit to their international shareholders, and their investments are far-flung. It’s a big money game, and the scale is large and outside of Rhode Island.

Thus, loyalty and faith of big banks and equity fund managers is not to Rhode Island or Rhode Islanders. Yet despite this lack of vested loyalty, each bank profits from holding or investing Rhode Island cash deposits or investment dollars.

The mandate of a Rhode Island-owned bank, however, would be to serve Rhode Islanders, and its profits would flow into state coffers, not to foreign or outside shareholders.

The idea is pretty simple and effective. Keep more dollars in Rhode Island and the economic engine known as the “multiplier” clicks into higher gear, boosting the local economy with local dollars.

Now, let’s take a quick snapshot of Rhode Island private-equity fund investments. Beyond simple interest bearing certificates of deposit (CDs), the state Treasury also invests state funds — accrued through various in-state revenues — in dozens of private equity, money market and buyout funds.

A cursory review of the Treasury’s 2010 Annual Report (pdf) by ecoRI News revealed a $9.3 million investment by the state in Bain Capital Fund X, one focused on corporate buyouts. From 2008 to mid-2010, the fund lost 10 percent of its value — more than $2 million.

Out of 100 private equity funds managed by the Investments and Finance Division of the general treasurer, only nine had performed worse than the Bain Capital Fund X, according to the 2010 Treasury Report. The most recent investor relations report (pdf) showed the state had invested an additional $9 million in the Bain fund since June 2010, toward a full commitment of $25 million.

Even more concerning is what was uncovered last week by ABC News. “Official documents reviewed by ABC News show that Bain Capital, the private equity partnership (Presidential candidate Mitt) Romney once ran, has set up some 138 secretive offshore funds in the Caymans.”

So whereas it’s clear where all profits from state-owned Bank of North Dakota go — back into the state of North Dakota — it’s not at all clear what happens to Bain Capital profits.

Three of four of Rhode Island’s representatives in Washington, D.C., count Bain Capital amongst their top 25 political campaign donors, namely Senators Sheldon Whitehouse and Jack Reed, and Rep. David Cicilline, according to opensecrets.org. None of them are involved in making Rhode Island investment or banking decisions.

Early in her career, Treasurer Gina Raimondo worked for start-up funder Village Ventures, backed in part by Bain Capital. Raimondo left Village Ventures to found Point Judith Capital with seed money and partners from her former firm, where she remained until elected to office.

The general treasurer’s office didn’t respond to request for comment regarding Bain Capital and whether the department had considered, or was planning to study, a state-owned bank option. Phone calls and e-mails to the Speaker of the House’s office also were not returned, and the governor’s office didn’t issue a formal statement.

The status quo
Most conversations about how best to respond to the state’s current economic crisis are confined within the same old box: rewarding failure, moving Rhode Island money out of the state, and continuing relationships with troubled banks and troubling investments.

Now is the time for the state to tear out of that box and find ways to more prudently invest and bank with local institutions. Certainly, an independent audit of current investments and a study of local investment options would be a timely and appropriate first step. A state-owned bank should be studied as a viable outside-the-box option.

If Rhode Island is to emerge from this current crisis and create a sustainable “buy and invest locally” driven economy as the basis for healthier and stronger home state, business as usual is clearly not an option.

“It’s time for us to begin investing in things that we understand, near where we live, things that bring immediate value to our communities and our families,” Marco Vangelisti, who formerly worked for international money manager Grantham, Mayo & Van Otterloo, told those gathered at last year’s Slow Money National Gathering in San Francisco. “I'm so happy to see Slow Money’s mission spreading across the country. It is connecting a lot of us who know in our hearts that something is fundamentally broken in our financial system.”

In Davos, Switzerland, recently this very sentiment was being echoed by an elite circle of world leaders and economists gathered there to address the growing crisis.

“We have a general morality gap, we are over-leveraged, we have neglected to invest in the future, we have undermined social coherence, and we are in danger of completely losing the confidence of future generations,” Klaus Schwab told those gathered at the World Economic Forum. “Solving problems in the context of outdated and crumbling models will only dig us deeper into the hole.”