While a $500,00 state-funded study aims to create a proposal for a public state bank funded by taxes and fees, State Treasurer Duane Davidson has released a study of his own arguing against the idea. The new report analyzed the efforts in other states to create a public bank and the reasons why none of them decided to move forward with the idea.
For advocates of a public bank, it would allow the state to spend less on public infrastructure due to lower or no interest rates. Since 2009, State Rep. Bob Hasegawa (D-11) has repeatedly introduced legislation calling for the creation of a public bank, but none of the bills cleared the legislature. However, in 2017 lawmakers approved SB 5883 which among other things sets up the Infrastructure & Public Depository Task Force to examine the issue.
The task force’s December 2017 report noted that among its members “there was a consensus that many Washington governments need access to low cost financing for infrastructure projects.”
However, Davidson believes a public bank is not the answer, “because of the higher risk and lower return on investment compared to the current private banking system.”
Chief among his reasons is that if the bank goes belly up, taxpayers will likely foot the bill.
“Also, as guardian of Washington’s local government investment funds and Rainy-Day Fund, I have a deep-rooted interest in doing the right thing by protecting Washingtonians’ finances,” Davidson wrote in the study. “Using any of these resources to capitalize a bank would be reckless.”
In contrast, a 2010 analysis by the Center for State Innovation concluded a state bank could help create or retain small business jobs, boost lending activity and within three years generate return of equity (ROE).
Instead, Davidson says the legislature should improve the Public Works Assistance Account and fully fund the public works trust; similarly, the Infrastructure & Public Depository Task Force’s 2017 report recommended revitalizing and rebranding the Public Works Trust Program, a revolving loan program that helps local governments pay for infrastructure projects and is managed by a citizens’ board.
The only state in the U.S. to have a public bank is North Dakota. The bank was established in 1919 to help farmers who lacked access to private banking. There is also a public bank in American Samoa, an unincorporated U.S. territory. Puerto Rico Development Bank was created in 1942, but closed in 2017.
Davidson’s report reviewed studies conducted by states such as Maine, Vermont, and Hawaii, along with cities such as Los Angles and Santa Fe. Top among the reasons for considering a public bank was to aid infrastructure funding. However, “no study showed the exact market failure where a state bank could fill a need.”
Further, these previous studies also concluded that there would be an “enormous challenge” to preserve the political neutrality of a public bank; Massachusetts’ study noted a public bank could also lead to riskier lending practices. Adding to the risk would be the lack of FDIC insurance.
“In the end, if it fails, lawmakers may end up paying bailouts with taxpayer money,” Davidson’s report stated.
It might also require significant capital upfront just to get the bank off the ground; previous studies held varying estimates from $15 million to $3.6 billion. The Center for Innovation’s 2010 analysis estimated it would cost Washington $100 million in capital funding.
Washington would also likely require a constitutional amendment before it could set up a public bank due to prohibitions on lending to private groups.
As for public works projects, the report cites several state programs already available via the Public Works Assistance Account.
The Office of the State Treasurer manages the cash flow of the state’s major accounts. In fiscal year 2017, the office managed more than $246 billion in deposits, withdrawals and transfers.