The State of New York needs to create a permanent fund – The Empire Fund – to ensure the enduring prosperity of both the state and its citizens.
The state’s fiscal situation perennially threatens growth, innovation, and meaningful policy change. The country’s third largest economy needs to begin saving for the future. Nearly half of New York City’s households are considered poor; nearly three million state residents are below the poverty line. Throughout the COVID-19 pandemic, Albany has been forced to rely on federal aid to close massive budget shortfalls, to build hospitals, and to produce PPE, ventilators, and vaccines.
If implemented properly, a state-operated investment fund could radically transform New York’s finances. The Empire Fund would simultaneously serve as a sovereign wealth fund for the state government, a tax-advantaged mutual fund for residents, and a generational wealth vehicle for every New Yorker born in the coming decades. The state could develop a massive, perpetual revenue source, which could free it from federal entanglements and allow it to ease heavy taxation. State residents would gain access to tax-free savings and an investment opportunity in a fund that would rival the top private firms on Wall Street.
New York raises billions and spends them immediately. It’s time for the state to look past the current budgetary year and start investing in the future.
The New York State Budget is nearly $193 billion. Amid the pandemic, the state is facing a nearly $15 billion deficit. It will, without emergency federal funding, likely be forced to raise taxes and cut essential spending. While dire, these straits are nothing new. State governments are no strangers to acute fiscal pressure. Over the course of American history, the federalist system has evolved away from a true union of sovereigns and towards a system of state-federal symbiosis. States have become so reliant on federal money to fill any holes in their budgets that they are even willing to accept federal mandates so as not to lose funds, which is why the federal drinking age exists. For the most part, this dependence poses few issues, while allowing states to tax less and spend more. However, in times of crisis and volatility, states like New York can face gaping revenue shortfalls should Washington choose not to help.
When ordinary people make money, they are encouraged to take a fraction of their earnings and put it aside for later. They are encouraged to save, and they are also encouraged to invest. The average annual return of the S&P 500 is 8%; with a relatively low-risk investment, Americans can increase their wealth over time, so that when they lose their job or incur surprise expenses, they don’t have to sell their possessions or take out loans. If saving and investing is prudent financial advice for the regular citizen, why shouldn’t it hold true for states?
Countries like the UAE, Norway, and Kuwait have taken their excess oil revenues and established sovereign wealth funds worth hundreds of billions and even trillions of dollars. Some states have established similar funds, such as Alaska and Texas. While New York may not have abundant natural resources from which to draw principal, it does have a colossal tax base. With the reallocation of existing development spending, New York could gradually fund its own sovereign wealth fund. Although it would be a near-term sacrifice of current spending, over time the state’s investment in the Empire Fund would create a compounding source of revenue that could eventually free it from federal dependence, fund capital projects, expand safety net programs, and lower taxes.
As the state faces serious money problems, so too do many state residents. The pandemic has exacerbated pre-existing financial insecurities for millions of families. Direct monetary aid has been explored as a solution with the implementation of stimulus checks, but it has not been enough. In the near term, more aggressive stimulus will likely be necessary. However, the state of New York ought to be preparing for the long term. With the implementation of the Empire Fund, the state and its citizens can save and invest together. New York should be encouraging residents to build generational wealth through the market. Providing a tax-advantaged channel to the Fund gives many New Yorkers an opportunity they have never had before: access to a professionally managed fund with billions of assets under management. They will gain exposure to hedging strategies, Wall Street firms, and advanced risk mitigation, all by virtue of living in New York.
Lastly, as the state is facing down a financial crisis, its tax base is shrinking. New York’s population decreased by 126,555 people in 2020. Population decrease leads to lower tax revenue, lower economic activity, and a potential loss of Congressional representation. New York desperately needs to incentivize migration to the state if it hopes to retain its political and economic position, much less if it wants to expand its status as a technological and financial hub. Establishing a Baby Bond program for the Empire Fund not only rewards having children in New York but also sets those children up for future success. Baby Bonds create a whole new generation of stakeholders in the economy and in the general prosperity of the state.
Section I: The Fund
The State of New York would create a permanent fund, “The Empire Fund.” Over the course of ten years, the state would contribute two billion dollars annually. This money would come from dissolving the Empire State Development Corporation, which accounts for an estimated $1,897,705,000 in yearly spending. The Corporation’s outstanding debt would be combined with the state’s existing debt service obligations and spending.
The Fund would be managed by the Empire Fund Commission, a 7-member board appointed by the Governor to 5-year terms and confirmed by the State Senate. The Fund would be statutorily mandated to invest at least 25% of capital in companies or firms headquartered in New York State. The Commission would issue monthly reports of holdings to the Governor, Legislature, and all investors.
All funds not owned by NYS residents would be held by the state itself as a functional sovereign wealth fund. After an initial compounding period of five years, the state would be eligible to withdraw funds less than or equal to its returns for the year (e.g., if, after five years, the state has $5 billion invested, and the fund achieves a 6% return for the year, the state could withdraw $300 million). Such withdrawals would be subject to normal legislative vote thresholds. Any withdrawal of principal would require 2/3 of each house to propose and a majority vote in a statewide ballot question. Principal would compound; the state only has access to any given year’s returns.
State withdrawals could be used for any budgetary expenditure, at the discretion of the legislative process.
Section II: Baby Bonds
The state would issue every eligible child born in the New York a $500 investment (Baby Bond) in the Fund and a state investment account at the time of their birth. Each investment would be managed by the Fund and would be inaccessible for withdrawal until their holder’s eighteenth birthday. Children are eligible for Baby Bonds if they are New York State residents at birth.
Parents of minors with state accounts could contribute $1200 annually to each of their children’s Fund investment. All capital gains that accrue from such contributions and the initial $500 would be exempt from all state taxes. Additionally, children would incur no state tax liability from any principal, gains, or losses from their investment.
Baby Bonds would be funded by annual state contributions sourced from dissolving the Empire State Development Corporation. All funding not used for Baby Bonds would be owned by the state and would constitute New York’s investment in the Fund.
Should minors with Baby Bonds cease to be New York residents, they would still receive access to their investment at eighteen, but parents would no longer be able to make annual contributions. The minor would have one year from their eighteenth birthday to claim their funds; after one year, the total of the account would be forfeited to the State of New York and added to the state’s share of the Fund. New York would also not be able to provide protection from tax liability in the minor’s new state of residency.
Section III: Resident Investment
All New York State residents would be issued with a state investment account. These accounts would be the default method for disbursement of monetary payments from the government to citizens, though recipients could choose to use another account. Additionally, every resident would be eligible to invest up to $6,000 per year in the Empire Fund from their state accounts. Such investments would be deductible from state taxes and all capital gains would be exempt from state taxation.
State accounts could be used as checking accounts to ensure that all New Yorkers have banking services; however, the state would not offer interest on cash held in state accounts.
Investments in the Fund would be held for a minimum of five years. After five years, investors could make withdrawals at set monthly intervals. Withdrawal requests would need to be submitted at least ten days before the withdrawal date.
Conceivably, there could be a way to combine the functions of the state account with the functions of an IRA. The state would likely need to liaise with the IRS, and any potential solution could involve federal legislation or changing parts of the state’s tax structure.
Section I: Funding
Funding is likely to be the greatest challenge in the implementation of this proposal. States like New York are already financially stressed, and it can be difficult to pitch sacrificing near-term spending for long term revenue. We propose eliminating the Empire State Development Corporation, which is the primary economic development arm of the state. It accounts for an estimated $1,897,705,000 in yearly spending. This is not necessarily where the money must come from, but since the Empire Fund and the ESDC share similar goals, it makes sense to simply shift the programs. We recognize that the ESDC is important to the state, but we believe that in the long term the Fund will prove more beneficial.
Over the course of five years, the state would invest $9,385,250,000 into the Fund. There were 228,501 live births in New York State in 2017. Although birth rates in the country continue to decline, to be conservative we will assume that the rate remains steady. Therefore, over five years, the state will allocate $1,142,505,000 to the Baby Bonds program, leaving $8,242,745,000 as the state’s investment. Of course, these numbers could shift as the budget is negotiated each year.
Section II: Potential Return (State)
In order to project potential returns, we must assume an average rate of return. The California Employee’s Retirement System (CalPERS), the largest US public pension fund, recently set their assumed rate to 7.0%. The Alaska State Permanent Fund has posted a 6.44% return over the past five years. Using these two examples, we will set our rate at 6.5%, but calculate for ± 2%. We will also assume that the annual state investment remains constant. Below is chart of the projected total value of the Fund over a five-year period. By subtracting the Baby Bonds program, we can also project the growth of the state’s investment.
Section III: Potential Return (Individual)
We can also calculate the projected growth for Baby Bond accounts from the time of birth until the minor turns eighteen. Annual parental contribution has a colossal impact due to compounding returns. We will again assume a 6.5% rate of return.
Lastly, we can calculate the growth of a non-Baby Bond New York State resident’s investment in the Fund. We will assess over a longer period of time, since it is likely that most residents will treat the Fund as a retirement investment. Again, growth will depend heavily on the size of annual contributions. The effect of compounding returns is more pronounced over the long term.
Section IV: Analysis
It is important to note that the projections above make use of significant assumptions. It is entirely possible that the Fund would either underperform or overperform expectations. Even so, the projections are useful to illustrate how the proposal would create wealth over the long term. By putting aside a small fraction of the state’s annual revenue, after only five years of compounding, returns alone could fund the entire yearly Baby Bond program. Of course, the longer the state waits to begin withdrawing from the Fund, the larger its investment grows. Conceivably, it could become large enough to fund major portions of the annual budget or significant tax cuts.
On the individual level, the upside of a Fund investment is abundantly clear. With maximum parental contributions, children born in New York could receive a $43,000 account when they become an adult. Even with lower contribution levels, Baby Bond accounts still set children up for success, with end values beginning at $1433. Naturally, annual contributions are very important, but ultimately, as with the state’s investment, the longer individuals leave their money in the Fund, the faster it grows. Similarly, for non-Baby Bond accounts with a retirement timeline, a $6,000 contribution each year could turn into $2 million around retirement age, free from state taxation. Even at only half the maximum annual contribution, investing in the Fund over a 50-year period could still make New Yorkers into millionaires.
Section I: Financial Independence
The primary benefit of the Empire Fund to the State of New York is revenue. Investing allows New York to develop a perpetual, ever-increasing source of revenue that does not rely on taxation. Although it requires some initial sacrifice of spending, saving for the future would radically transform the state’s budgetary process. The Empire Fund would allow the state to consider major capital projects, expansion of social services, and tax cuts. Furthermore, over the long term, the state could begin to wean itself off federal dependence. Just as financial independence is important for individuals, so too is it for states. With a robust source of revenue, New York would gain a powerful weapon in negotiations with Washington: the ability to walk away. The state could pursue its legislative agenda with no fear of disrupting federal aid. If New York no longer needs the federal government, the federal government loses coercive power.
Section II: State Development
A secondary benefit to the state is that the Empire Fund would end up assuming much of the developmental mission of the dissolved Empire State Development Corporation. In addition to creating funds for capital projects, the Fund’s in-state investment mandate would direct billions of dollars to companies based in New York. As more individuals choose to invest in the Fund, the in-state investment increases. New York would then have an investment vehicle with tens of billions of assets under management with which to develop businesses in the state. Naturally, the main charge of the Fund is to generate a return for investors, but it would help grow many New York companies along the way.
Section III: Individual Prosperity
Of course, this proposal is not designed only for the state itself. It is also aimed at generating prosperity and wealth for every single New Yorker. By issuing every resident with an account, this proposal eliminates the large portion of New Yorkers who do not have access to essential services due to their lack of banking details. It also provides residents incentives to save for retirement, through the twin powers of compounding and tax exemptions. The Empire Fund would create generational wealth for millions of households and increase the financial literacy of millions more. It would also begin to combat New York’s population problem by encouraging families to move to the state, have children, and create families. With the Baby Bond program, the state is investing in its children. It is making a commitment to parents that their kids will have a bright future in New York. Of course, Baby Bonds also would allow more residents to pursue higher education, support their families, or advance their careers. They would teach young New Yorkers the value of saving and investing while also setting them up financially for the road ahead.
Section I: Fiscal Responsibility
The most likely objections raised to this proposal will undoubtedly concern the financial impact on New York State. $1.8 billion per year is a significant sum, not to mention the lost tax revenue from Fund investment deductions. Furthermore, the Empire State Development Corporation does important work and provides a great deal of value to the state. Challenges will certainly be raised questioning the opportunity cost of this proposal. Is the Empire Fund a better use of state revenue than the ESDC?
We believe so. While many useful programs will have to be sacrificed to implement this proposal, it is absolutely worth it. It is always difficult to look five to ten years into the future, but we are confident that over time, the Empire Fund will more than pay for itself. Creating a perpetual source of revenue is immensely valuable. It will take time and sacrifice, but when the Fund has grown to hundreds of billions AUM, New York will be able to pay for major programs off returns alone.
Additionally, the benefits to individual New York residents and to New York companies are conceivably worth the cost even without the consideration of the sovereign wealth aspect. New Yorkers deserve a financially secure future, and the Empire Fund allows that future to be realized.
Section II: Effectiveness
Another legitimate objection will likely be raised concerning this proposal’s effectiveness. Given that it has never been implemented before, there is always a possibility that the benefits we anticipate are not actually realized in practice.
We recognize this concern, but we believe that most of the proposal’s components have been proven successful. Permanent funds, tax-advantaged investment accounts, and Baby Bonds have all been tried in the past. They have all worked. The Empire Fund merely combines them into one program. Of course, we cannot guarantee efficacy, but we believe that the benefits we have outlined would indeed come to pass were this proposal implemented in the State of New York.
APPLICABILITY TO OTHER JURISDICTIONS
Although this proposal was designed for New York, it could easily be adapted to almost any other state. Different states have different budgetary concerns, tax structures, and economies, but there is no reason that the concept of a “state investment fund” with Baby Bonds and optional individual investment could not work in the rest of the United States.
It also could conceivably be adapted to the federal or local levels, but to do so would likely require significant tweaks to the proposal. Many of the components would certainly prove to be good policy, but to implement the proposal as-is in a non-state jurisdiction would be impossible without adjustment.
As states continue to search for policies that create wealth for their residents, they should consider the principal of investing for the future. Even if this specific proposal is never adopted, every government in the Union ought to debate whether the power of compounding could benefit them and their residents. We believe that a policy like the Empire Fund is simultaneously beneficial for both the people and the state. By saving a small fraction of the trillions raised in taxes each year in the United States, jurisdictions all across the nation could begin a journey of exponential financial growth, sow the seeds of generational wealth, and bring prosperity to their citizens.