By Emily Hamann
The Bellingham Business Journal
Has the time come for a state bank? Not if Washington State Treasurer Duane Davidson has anything to say about it. The idea of publicly-run banks has been popular lately – the issue went before Los Angeles voters in November (they rejected it), and in Washington, state Senator Bob Hasegawa has tried to get the issue before the legislature multiple times. Hasegawa’s bill would create a new bank, run by the state, which would hold all state and local tax revenue. Proponents of the idea say it would help make money — as the state would keep the interest from investments, create jobs, and help the state and local governments pay for infrastructure projects. Proponents also have proven model. The state of North Dakota started a bank in 1919, to give assistance to remote farmers who didn’t have access to private banks. It has reported record profits over consecutive years, even during the recession.
Washington is currently looking into the idea — it commissioned a study from the University of Washington Evans School of Public Policy and Governance, which is in progress.
But the treasurer’s office has been doing its own research. Recently it released a report compiling data from 12 other states, territories and cities that looked into a publicly-run bank. All except one — American Samoa — ultimately decided against the idea. After looking at the study, Davidson is also warning against the idea of a state bank. On a recent trip to Bellingham, Davidson sat down with the BBJ to talk about his report.
Questions and responses have been edited for length and clarity.
How did the study come about?
In recent history this has been reviewed by a number of states, and it’s kind of insanity to do the same thing and expect different results. I said, why don’t we look at what has already been done?
So what we did is we assembled some of our team together that have some financial expertise and we developed some criteria to look at some of these studies — some by states and others by municipalities. From all of their evidence, none of them decided to do it. The state of Massachusetts had one of the most comprehensive that anybody could ask for, it was a good report, and they decided it wasn’t worthwhile and had actually negatives — a huge assumption of risk for the state, and other issues.
We came to the conclusion that this isn’t what we really need. I really have a lot of concerns about the formation of a state bank.
So let’s step back a little bit. What is a public bank? What are the different kinds?
What they point to a lot of times, is North Dakota as an example. It’s the only state bank we have. There’s another they created in the territory of American Samoa, too, but it’s really an anomaly, it’s very unique and serves a very small population.
The Bank of North Dakota, the concept is that the state would retain its funds and create its own depository bank. How far that goes in the scope of operations depends on who is advocating for it. Those folks that are really for a fully-fledged state bank, it would actually be in competition with the private banks. People could just go make a deposit there and have a savings account. The concept, the rally cry behind the people that want a state bank, is they say, banks make a lot of money — why don’t we retain that money for the state and use it ourselves.
To me the amount of risk that would be shifted over to the taxpayers then — the taxpayers would be on the hook for any bank default then that would happen. It’s just too risky.
So that North Dakota model — is that what public bank advocates want in Washington?
Yeah. But one of the things I want to point out, is they talk about the profitability of the bank in North Dakota, and North Dakota is profitable. It’s profitable because they have huge investments in coal and oil. There is not a tolerance in Washington state for that kind of investment. There’s folks that want us to divest in those kinds of holdings. They talk about the profitability of North Dakota, but I don’t think they would want to do what North Dakota does to be profitable. Fracking is involved.
What are the problems with our current system that could potentially be solved by a state bank?
That is actually a very good question. That is actually what I asked them — this is the solution, what’s the problem? And when I look at the amount of debt that has been issued out in the state, we’ve issued a lot of debt. I don’t see that borrowing has been much of an issue for our local governments and our state government. They seem to be doing it quite nicely.
The interest rate that is paid on those type of things, that doesn’t all go to some fat cat banker, some of those interest earnings comes back to bond holders — that could be retirement funds. There’s a circular effect to all of this.
I think our current system of banking is working just fine. I think what we ought to do is not find more effective ways to issue debt, but maybe issue less debt.
Public banking has been a popular topic as of late, all around the country. Los Angeles voters just rejected a proposal to create a city-run bank.
By pretty big margin. In a very Liberal city. Basically, creating a state bank is socializing an industry. It’s bringing it under government control. You would think that it would be a popular idea down there, but I think people can see through that, that this is solving a problem that doesn’t really exist.
And then the city of Seattle, they’re actually studying the idea of doing a public bank for the city and they just had a report issued. It was a good, detailed report, and it basically said this would be extremely difficult. There’s all sorts of hurdles — a very discouraging report.
Another idea that’s gaining traction is, New York Senator Kirsten Gillibrand, for example, has been promoting the idea of making post offices double as banks — That’s another form of public banking, right?
Right. I think that’s popular in England if I remember right. That’s banking of the standpoint of, you can cash checks there. I don’t really know what that’s doing. Does that provide a huge amount of infrastructure of financing capability? I don’t think so. I don’t quite understand what that does. I don’t know if they feel like there are people that aren’t able to get banking. Banks have consolidated. And I think that some people feel that they are too large. I personally don’t like the fact that there isn’t more competition at the big banking level. I think everything is always better when you have some competition, I think it keeps everybody more efficient. But I do believe that credit unions fill in some of that gap. You’ll find credit unions practically everywhere and I think they fill in the some of the gap of consumer needs. Plus banking is becoming more and more something that you can do online. You can scan your checks in on your phone now. We’re talking about solutions, like the post office, that’s like a hundred-year old solution to a contemporary problem. That’s not really what the people want when we can, literally, bank by phone.
If a public bank works for North Dakota, why don’t you think it would work for Washington?
I would debate about whether North Dakota really needs one. It’s not really what the people originally envisioned. There are banks in North Dakota now.
I think that things that can be done in the private sector well ought to stay in the private sector. To automatically assume that anything that’s in the government is exempted from misappropriation or fraud or misuse is kind of a fallacy right there. And I think that’s one of the things that’s automatically assumed, is people say, oh we need to take this away from greedy bankers and into a public bank where everything will be peaceful and rosy.
Take a look around the country — there’s been a lot of fraud and misappropriation and debacles done at the public level, and public agencies also. I think a large state bank could be subject to those same type of things.
There are some who make the argument that North Dakota was able to get through the recession better than a lot of other states, and that was because of their public bank.
I think it was because they have a lot of energy resources and energy dollars. I don’t think the state bank had any to do with that at all. It was that their economy was less subject to those economic downturns.
What changes could we make to our existing system, in your view, to better solve the issues that proponents of a public bank bring up? Specifically, funding infrastructure projects?
The public works assistance account. It has a long history, and I know that the public works assistance account has a long history of helping state and local governments being able to do financing. Especially for some of the smaller projects, they’re able to decrease a lot of issuance costs, the underwriting costs that you need to get for a loan, like attorney fees, and those types of things. At some time, some the the REET taxes, which is real estate excise tax, were going into the public works account, and then it had a large cash balance and it was swept. It’s been actually swept a couple times by the legislature to try to balance the budget. And what we need to do is let them be more self-standing, and meet some of our infrastructure needs with the help of mechanisms like that, which I think work, and have actually, a proven track record of working in the state.
When was it that the legislature took that money out of the account?
It’s almost like when haven’t they in recent years. They’ve done it repeatedly.
We talked about economic downturn, and we do have a recession coming — I don’t know when it is, but there’s always a recession coming, right? It’s just a matter of when. And I think that one of the things we need to do is, we have a rainy day fund, the budget stabilization account. We have a long track record of being able to use that and sustain that and have that help sustain us, like it did in the last downturn that we had.
I think that we need to make sure that our rainy day fund, in times where we’re having economic surpluses like we are right now, we need to be making sure that that is a robust balance, so that we’re prepared for the next budget deficit when it occurs, so that is an important issue.
Another one of the arguments for a public bank is to offer financial services to groups of people or businesses that can’t easily access private banks.
I think that everybody should always have choices. But when it comes to this, I think that one of the things they may be looking for could be just as bolstered by the credit unions. Because credit unions are member-owned. And that’s the beauty is we’ve got community banks, we’ve got the big banks, we’ve got credit unions. There are a lot of options now. I think lack of choices or lack of availability is not something that people are really faced with.
Do you think one of the reasons public banking is coming up now is because of scandals at Wells Fargo or some of the other big banks?
Yes, definitely I think that has led to some of this talk. But the concept of a state bank has been around for some time. I think when people really dive into it and take a look at it, they’ll see that the risk associated with it does not stand up, overwhelms the gains. I think that’s what the people who were hired to do the study for the city of Seattle saw. I think that’s what the citizens of Los Angeles saw.