Connecting state and local government leaders

Considering a State Bank for Local Governments

The Washington state capitol building in Olympia.

The Washington state capitol building in Olympia. Shutterstock

 

Connecting state and local government leaders

Proponents say it could help with infrastructure financing, particularly for smaller jurisdictions. Bankers are skeptical.

OLYMPIA, Wash. — Lawmakers and researchers have been taking a fresh look here at creating a public bank, specifically to provide state agencies and local governments with improved access to infrastructure financing and other financial services.

The type of “state-chartered, public cooperative bank” under consideration would not be open to consumers or businesses.

But depending on how the bank were to take shape—if it ever takes shape at all—it’s possible that its scope and offerings would be broader than state “infrastructure banks” that typically offer low interest loans and other financing assistance for transportation projects.

As imagined, “members” of the bank would include public entities in Washington, like cities, counties, and utilities and the three main activities it could possibly engage in would include accepting deposits, managing investments, and providing loans.

“I don’t see how you can come to any other conclusion but that a public bank is the better way to go than the system we’re using now,” state Sen. Bob Hasegawa, a Seattle-area Democrat who has been pushing the concept for about a decade, said during a recent interview.

But many in Washington’s banking industry have come to another conclusion. “I think we’re just skeptical at this point that a state bank is the panacea that some of the advocates make it out to be,” says Glen Simecek, president and CEO of the Washington Bankers Association.

He said he believes promises about the savings the bank could provide for taxpayers and the money it could make available for infrastructure have been over-inflated. 

“If the private sector already offers these services at an attractive price,” he added, “is it really the business of government?”

Simecek pushes back on the notion that the industry frowns on the idea of the public bank mainly because they see it as a threat to their profits. He says that while working with government clients is part of what banks in the state do it’s not their most lucrative business line.

The state's elected treasurer, Duane Davidson, who was previously a county treasurer, is also opposed to public banking, citing higher risks and lower returns on investments compared to the private sector. His office issued a review last year of previous studies on the topic.

"My hope is in the future we can put an end to studying this idea," he said in a letter attached to that report.

Hasegawa is familiar with the criticism. “The banks don’t like it. The big banks never will like it,” he said. But he has his own qualms over the current state of infrastructure financing in the U.S., which he thinks the state bank could help to address.

“We’re just going back to Wall Street to borrow back the use of what already should be our own tax revenues,” he said. “In the United States, our financing strategy has not been through public banking, but commercial banking, and that’s what’s bleeding our capacity to be able to finance our infrastructure.”

The state senator said he does not expect significant legislation related to the bank during the current legislative session, scheduled to end in April. Earlier public bank measures have attracted cosponsors, and the backing of leaders in the House and Senate, Hasegawa notes. But they have repeatedly failed to win passage in the legislature.

A budget proviso last year did authorize research into the possibility of creating the bank and University of Washington researchers in January presented lawmakers with the first part of that study. A second part, featuring a “business plan” for the bank is due in June.

“I think our results support the idea that there is an unmet need that this entity could address either entirely or in part,” said Justin Marlowe, a professor at the Daniel J. Evans School of Public Policy and Governance and one of the people leading the research.

“There’s lots of different ways to structure something like this that wouldn’t necessarily require a big outlay of state money,” he added.

The UW report describes how the state already has over 80 programs designed to help local governments and agencies fund and finance infrastructure projects. Marlowe says the number and breadth of the programs leads to an interesting public finance question.

“Are they missing out on economies of scale?” he said.

“Maybe there’s an opportunity there, not just for this state, but for other states, to kind of consider having something like a bank that would allow them to bring a lot of these otherwise uncoordinated programs under one umbrella,” Marlowe added.

Survey Finds Mixed Interest

The 80-page report the University of Washington researchers delivered to lawmakers includes results from a survey of officials around the state, capturing some of their views about the bank. Replies from 100 jurisdictions and agencies suggest there’s uncertainty about the idea.

In response to a question about whether their jurisdiction or agency would have an interest in becoming a member of the public cooperative bank, 32 percent of survey respondents said “yes,” 22 percent said “no” and another 46 percent said they were unsure.

Marlowe said informal follow-up phone calls with people who replied saying that they were unsure about whether their jurisdiction would use a public bank revealed that some of these respondents didn’t know much about the concept and were interested in learning more about it.

Drilling down further in the survey results shows a consistent group of small and rural local governments would like better access to certain infrastructure financing programs.

Meanwhile, 28 percent of jurisdictions of all sizes were interested in financial and technical advisory services. And about one-quarter said they’d like better investment options, such as pooled investments in money market funds and high interest savings accounts.

Questions About the Structure

If a public bank proposal does move forward, there are a number of significant decisions lawmakers would have to make about its operations and scope.

For instance: would membership be voluntary or mandatory for agencies and local governments across the state?

Requiring governments to join would help the bank to achieve a critical mass of members, spread risk more broadly, and help to ensure that that the bank didn’t end up with an overabundance of members that are smaller-sized, or that have anemic finances.

But mandatory membership could also force some jurisdictions and agencies into an arrangement that provides them few or no benefits.

Hasegawa believes governments should have a choice. “I believe in local control,” he said.

Another big question has to do with how the bank would be “capitalized.”

It would need money at the outset to hire staff and for other expenses. Plus, it would need enough funding to extend credit if that’s part of the business plan and to deal with any losses if borrowers were to default.

One option here would be for the state to loan funds to the bank, which would be paid back using earnings or member contributions.

Depending on the bank's model, it could resemble a credit union, where members’ investments, deposits and earnings provide key funding sources. The report notes that member deposits on their own are likely to fall short of what’s needed to satisfy demand for credit.

If this is the case, the bank could expand its capacity to lend by borrowing. This is similar to how Federal Home Loan Banks are structured, the report says, accepting deposits that are small compared to the demand for loans, and then issuing bonds.

Another possibility is more of a “bond bank” model, that would enable municipal borrowers to “pool” their bond issues into larger ones. Bond pooling and bond banks are not new and exist in states around the U.S.

William Longbrake, one of the report’s co-authors, noted when presenting the research to lawmakers that pooling would likely help lower borrowing costs for smaller bond issuers, but would probably matter less for larger local governments.

A banker himself for over two decades, Longbrake also cautioned lawmakers that “depository services”—like check clearing and electronic transfers—tend to be “resource intensive,” expensive and would likely grow the scope of the bank “by a quantum measure.”

Banking Industry Concerns

Simecek gives the UW researchers credit for the thoroughness of the report and for the time they spent getting feedback from the banking sector. But he’s quick to offer up a list of reasons why he and others believe the state should avoid getting into the banking business.

For starters: “it doesn’t really solve paying for infrastructure.”

“If what we’re talking about here is a shortfall of tax revenues," Simecek said, "I’m not sure how a state bank solves that problem."

The UW report notes that in recent years certain state infrastructure funding has eroded with revenues diverted to other parts of the budget. And while some financing programs are underused, others have demands that far exceed available funds.

Simecek sees opportunities to look at consolidating or simplifying some of these programs. He also doesn't rule out that a state bond bank, or bond pooling, is something that could warrant consideration.

But when it comes to the more elaborate options for a state bank, he says he’s troubled by the idea that politics could override the discipline seen in the private banking sector and that lawmakers may promote projects that are not in the interest of the bank or taxpayers.

And while current discussions are focused on infrastructure financing, he worries that if the bank is formed, it could sprawl into other areas—for instance small business, renewable energy, or the marijuana industry. “Politically fashionable” activities, as Simecek puts it.  

Bankers have also raised concerns about issues like whether the bank could have problems during a recession if local governments are running lower than usual bank balances. There are other considerations as well, like cybersecurity and attracting qualified staff.

“At the end of the day,” Simecek said, “I guess I’m skeptical about the government’s ability to build this infrastructure and run the bank cheaper than it can be done in the private sector.”

This story was updated to note opposition to public banking from the state treasurer.

Bill Lucia is a Senior Reporter for Route Fifty and is based in Olympia, Washington.

NEXT STORY: How Counties Are Addressing Their Digital Divides