OLYMPIA, Oct. 1.—You know the talk about a state bank is getting serious when the president of the state Labor Council challenges a skittish state treasurer to get behind the idea. In public. In front of a crowd. Last week Treasurer Jim McIntire, elected with strong labor support in 2008, looked Jeff Johnson in the eye and told him no.
It happened at a public forum on the state-bank plan, a favorite idea of those who say they want to break the power of big Wall Street banks. McIntire, who does business with those banks every day, faced a crowd of 150 activists, retirees and labor officials. He said the idea won’t work. Then state Labor Council president Johnson rose from his seat. He asked McIntire to help write a plan that does. “Will you help us?” he asked.
McIntire didn’t pussyfoot. Nope. He won’t. “I am not willing to take on that kind of risk in the treasury,” he said. “And I am not willing to build an institution that uses treasury funds to take on that kind of risk.”
Consider it a sign of the showdown to come, if labor interests and lawmakers of a progressive stripe can find the necessary oomph to get the bill out of committee. Next year they are planning to renew their push for a state bank for the fourth session in a row, part of a national movement they say is gathering steam in 18 states. The idea is that this state and others might take their billions of dollars in tax receipts and use the money to launch their own banks, rather than depositing it in commercial banks as they do presently. They could use the money to create their own loan programs, allowing state and local government to bypass the bond markets, keeping public money at home, beating commercial interest rates and cutting Wall Street out of the picture. Advocates say millions and even billions of dollars might be saved and reinvested in this state, generating tens of thousands of jobs.
Too good to be true? For those who work in public finance like McIntire, the talk is a little like nails on the chalkboard. It’s just not practical, he says.
Modeled After North Dakota
The state-bank idea originated in North Dakota, the only state in the union that operates its own bank. Launched some 93 years ago, the Bank of North Dakota serves as the depository for all state taxes and fees. It plows those deposits back into the state in the form of loans for public projects, commercial enterprises the state wishes to encourage, even student loans. Most lending is done in partnership with other banks. It also operates as a sort of central bank for the state, providing check clearing services, liquidity, bond accounting, and sometimes buying loans from banks that want to spread risk. The key point is it avoided subprime mortgage securities, derivatives, credit default swaps and all those other bad bets that brought the big banks to their knees. After the bubble burst, the Bank of North Dakota was recording record profits.
Since 2010 state Rep. Bob Hasegawa, D-Seattle, has been pressing for a Washington-state version. “It is about all the good things,” he said. “It is about good use of taxpayer dollars, consolidating and streamlining government. It is about generating revenue without raising taxes. All we have to do is to figure out how to do it.”
Every year the plan seems to get a bit narrower. Things keep getting in the way, like a constitution that prohibits the use of public money for private purposes – essentially taking commercial and personal loans off the table from the start. The latest thinking is that the bank, to be called the “Washington Investment Trust,” would deal only with public works projects like roads, sewers and schools, offering loans during the construction phase, perhaps over a term of three to five years. This year’s version would have deposited all state tax revenues in the bank; under next year’s plan proponents haven’t decided how the bank would be capitalized. But Hasegawa keeps plugging and says he is making incremental progress. On his third try he had 44 co-sponsors, six short of the number required for passage in the full House. But the bill was blocked in committee.
Captured Labor’s Imagination
Among those speaking at last week’s forum at Seattle’s Filipino Community Center was public finance consultant Darel Grothaus. The effort “is motivated by the righteous outrage generated by Wall Street banks’ sabotage of the economy,” he acknowledged, but he said there’s a business case to be made, too. Shave a point of interest from a $50 million sewer project and a municipal government ought to be able to save a half-million dollars in interest costs over two years, he said. They’d save bond-underwriting costs, too. Local governments would have plenty of reason to park their money in such a bank, he said, because they could obtain substantially higher rates of return. Loan payments could immediately be reinvested in new loans, rather than being swallowed by bank profits, thus leveraging more projects and more jobs.
The idea has captured the imagination of organized labor, said the Labor Council’s Johnson. Maybe it goes without saying, but those public construction jobs would of course be union jobs. Johnson notes that Congress gave its blessing in its latest transportation bill, by saying states could use up to 10 percent of the proceeds to capitalize banks for public infrastructure development. “There are different types of return,” Johnson said. “The first is the monetary return, the interest you get back on the investment, but there’s also the return on creating the common good.”
And Now the Bad News
Just one problem with the idea, McIntire said. It won’t work. Maybe a state bank suits a state the size of North Dakota, but Washington has about 10 times the population and it has big financial needs. It takes a staff of six to monitor the flow in and out of the state’s account at the Bank of America. Whenever the money isn’t needed immediately McIntire’s office parks the money in U.S. treasury notes. The size of the state treasury is about $3.5 billion, equal to about one month’s tax revenue, but what concerns McIntire is cash flow. Like any checking account the balance dips up and down depending on expenditures that are presented and the tax payments coming in. Sometimes it can fluctuate by $600 to $800 million in a single day. At least twice a year McIntire said he needs every penny he can lay his hands on. As things stand right now, the treasurer can liquidate T-bills quickly and take care of short-term problems, and yet systemic problems still sometimes emerge. A couple of years ago, in the depths of the recession, as payments ran unexpectedly short, he had to warn the Legislature it was in danger of going into the overdraft zone – and in the case of the state, there’s no forgiveness. Lawmakers took care of that problem right quick.
So what does that have to do with a state bank? Just imagine what happens when a crunch hits and that money is tied up in construction loans, McIntire said. “There is not a market for infrastructure construction loans. Those are much more difficult to sell, and if you have to sell them quick, you lose money. I don’t want to lose money. This is taxpayer money.” Worse yet, if the bank focuses only on the first three to five years of a construction project, that is the riskiest portion of any project – when delays and cost overruns can turn deals sour. Taxpayers could be on the hook if something goes wrong.
How come North Dakota isn’t squeezed? That’s because it has more money to play with, relatively speaking, McIntire said – its treasury is about equal to 10 months’ expenditures. Washington would need a treasury of about $30 billion to equal that. “Now, I don’t know how many of you have dealt with the Legislature, but they are not likely to run that many surpluses over time in order to run up that kind of a balance,” McIntire said. “It wouldn’t work. I don’t see it happening in the short term.”
The sheer scope of the money involved is enormous, he said. During his four years McIntire has gone to the bond market to finance $8 billion in public debt. “I can’t bypass Wall Street,” he said. “I can’t sell $8 billion in bonds. $8 billion is a lot of money, and I cannot sell $8 billion of bonds without being able to sell them to institutional investors on the East Coast.”
There might be other ways to use the state’s existing public works loan programs more effectively, McIntire said, and he’ll have a proposal next session. But a state bank? Count him out.
Banking Biz Skeptical
Denny Eliason, speaking for the Washington Bankers Association, says the industry awaits the release of Hasegawa’s latest proposal. Big concerns are how a state bank would be capitalized and whether it would be subject to the same taxes and regulations as private lenders. Would it provide unfair competition? “The state actually has had a very good relationship with the financial institutions it has done business with,” he said. “We provide the services at extraordinarily reasonable rates, and the different entities that take advantage of our services appreciate the branching networks we provide them.”
The effort seems to be more about bank-bashing than any business case, said Brad Tower of the Community Bankers of Washington, which represents the state’s independent banks. “Support for the idea of a state bank is based in a political philosophy and a fashionable distaste for Wall Street banks, not a practical desire to achieve efficiencies in state government or to support lending of any particular kind,” he said. “If implemented, the effect would actually be more damaging to our local institutions than to the too-big-to-fail banks that the advocates have in their sights.”
A state bank focused on public infrastructure might not compete directly for the lending business, but it might deprive local banks of deposits, Tower said. It all depends on how tax dollars are used to capitalize the bank. “It is impossible to create an institution such as Rep. Hasegawa has envisioned without disturbing the economic waters, no matter how focused he intends the mission to be.”