ORIGINALLY PUBLISHED ON NJ SPOTLIGHT
JOHN REITMEYER | AUGUST 3, 2015
After state provides start-up capital, new financial institution would then provide low-interest loans for infrastructure, new schools and other projects
As New Jersey’s economy continues to struggle to recover from the last recession, there’s growing support for making a concept known as public banking a part of the long-term solution.
Though not well-known, the public-banking model is pretty simple.
Instead of depositing public funds in commercial banks, municipal governments, school boards and even the state could use their accounts to capitalize a taxpayer-owned institution. That institution, the public bank, would then leverage that capital through loans to encourage public-policy goals instead of simply maximizing profits.
With no shareholders to serve or exorbitant bonuses to pay its executives, the public bank could charge nominal interest on its loans in support of projects like new schools or infrastructure repairs that benefit taxpayers.
“The idea is to keep our money at home,” said Walt McRee, national chairman for the nonprofit Public Banking Institute). “The money stays at home and revolves and revolves.”
And the government entities would save money for taxpayers by not having to turn to Wall Street, with its high fees and interest rates, each time they need capital.
“Supporting families, supporting businesses, supporting jobs,” said Joan Bartl, a Princeton resident who serves as the institute’s state coordinator in New Jersey.
Officials in cities like Santa Fe, San Francisco, Seattle and Philadelphia are all already at various stages of pursuing the public-banking idea, McRee said. But the example that public-banking advocates point to most often is the Bank of North Dakota, a public bank that’s been operating successfully for nearly 100 years.
Established by the North Dakota Legislature in 1919 in response to the rising interest rates that commercial banks were charging for agricultural loans, the public bank was seeded with $2 million in capital. Now, the bank has over $270 million in capital and 168 employees, and has returned hundreds of millions of dollars in profits to the state’s general fund.
The public bank’s deposit base, per North Dakota law, is state funds and accounts of state institutions. But its mission is not to compete with commercial banks when it comes to making loans. Instead, the public bank regularly works with community banks, with the local banks often originating the loans since they know their communities best. The public bank can share in the risk, buy down interest rates, and provide liquidity.
That structure has helped the bank get through major economic downturns like the last recession, while also being able to do things like backing student loans and helping flood victims.
“It is money as a utility instead of a commodity,” McRee said.
In New Jersey, McRee and Bartl envision the public-banking model being used in a number of ways, including to help fund transportation-infrastructure improvements. Right now, state leaders are trying to identify a new source of revenue for road, bridge and rail projects, and the likely solution for solving the transportation funding problem is increasing the state’s gas tax.
But public-banking advocates believe their model could ultimately head off tax hikes and instead produce tax relief down the road.
And New Jersey, with its 565 municipal governments and hundreds of school boards, could be a perfect place to try the public-banking model, Bartl and McRee argue.
With the recent controversy over high fees the state’s public-employee pension system has paid out to private Wall Street fund managers — $600 million during the 2014 fiscal year alone, counting carried interest — it could also be a good option for investing a portion of the overall $80 billion in pension-system assets, they said.
“You have a powerful nest egg for investing in yourself,” McRee said. “And, of course, you don’t have the fees.”
A spokesman for the state Department of Treasury, which oversees the Division of Investment, the agency that manages the pension system on a daily basis, declined comment when asked about public banking on Friday.
While North Dakota has a history of honest public banking, New Jersey has become well-known for its political corruption, cronyism and patronage, which could make implementing a public bank here more challenging.
New Jersey’s brand of politics has inspired movies like “American Hustle” and the HBO series “Boardwalk Empire.” Prominent state lawmakers and mayors have also been found guilty of corruption in more recent years, and U.S. Sen. Robert Menendez (D-NJ) is currently facing a federal bribery indictment, though he has strongly denied the charges.
So while its advocates see opportunities for more investment and tax relief, without the proper safeguards a public bank could also become the next big thing that political bosses here seize upon for abuse.
Still, McRee thinks establishing a public bank that would be free from political interference is possible given the right “architecture and management.”
In North Dakota, there is a “two arms-length distance” between the politicians and the banking professionals. The elected officials choose members of the bank’s advisory board and those officials, who serve staggered terms, then hire the banking professionals who make the day-to-day financial decisions.
In addition, McRee said, North Dakota’s public bank is run in a very transparent manner.
“Transparency and accountability,” McRee said. “With appropriate review, there can be safeguards built in.” Bartl, a veteran of the credit-card processing-services industry, said she already is seeing the public-banking movement pick up steam in New Jersey.
“We have an array of volunteers who are so excited and turned on by this,” Bartl said.
Bartl believes the issue is one of simple fairness, as commercial banks have begun to dominate so much of the financial sector.
“The banks are just making a fortune and there’s no other place to go,” Bartl said. “It’s just resonated with me. It’s not fair.”
McRee, the founder and chief executive officer of the Alliance for Public Broadcasting, said his involvement in public banking stems from a broad “social interest.”
“I’m concerned about people,” McRee said. Public banking, he explained, is “the most strategic thing I could do to take a stand for the welfare of my fellow citizens.”
“Politics follows the money,” he said. “If the people have the money, maybe the politics will start to reflect some of those values.”
And McRee said he also sees public banking as a “game changer.”
“I really think people are overly ready for a huge change,” he said.
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