A newly introduced Senate bill would set up a state bank to meet demand for local infrastructure funding, despite warnings from the Washington state Treasurer’s Office about the financial risks and the number of existing programs.
SB 5949, sponsored by Majority Caucus Vice Chair Bob Hasegawa (D-11), would create a state investment trust and a commission to oversee it; among the options provided in the bill to fund the bank are assets managed by the state investment board, such as the $114.6 billion worth of public pension funds.
However, State Treasurer Duane Davidson told Lens that “a full-fledged state bank in my opinion is overkill, and just assumes all sorts of risk.” That was the conclusion of a 2018 study of the studies conducted by Davidson’s office looking at prior research conducted by other states also examining the possibility of a public bank. Currently, the only public bank in the U.S. is the Bank of North Dakota, which opened in 1919.
Advocates say that a public bank enables the state to provide low-interest-rate loans, which in turn means lower project costs. SB 5949 notes the “significant public infrastructure and program needs of the state that are unmet,” which it attributes in part to the state’s debt ceiling and declining per capita revenue. There are currently $881 million worth of unfunded local government infrastructure projects in the state.
Typically, these projects would receive funding from an existing low-interest-rate revolving loan program known as the Public Works Trust Fund, run by the Public Works Board. However, the state legislature has repeatedly raided the account since 2013 to pay for new basic education spending, to the tune of more than $400 million.
“We need to have a dedicated revenue back to that,” Davidson said, a recommendation also made in the Infrastructure & Public Depository Task Force’s 2017 report.
Davidson added that the poor financial condition of the Public Works Trust is a harbinger of what could happen to a public bank. The commission set up to manage the bank would consist of five statewide elected officials: the treasurer, the attorney general, the lieutenant governor and the state auditor.
“When it’s all said and done, it is going to be under the control…of the political influence,” he said. “Why would a state bank not succumb to the same things that happened in the Public Works Board? That’s what happens to public entities.”
One provision of the bill says that the intent of the bank is also to “pursue other opportunities in furtherance of its mission as directed by the people through initiative, or by act of the legislature with the concurrence of the commission” (page 3).
Davidson also points to more than 80 existing infrastructure funding programs tracked by the nonprofit Infrastructure Assistance Coordinating Council (IACC). “With a full-fledged depository public bank taking on all sorts of infrastructure costs and risks – quite frankly we really don’t need to get into (that). Why build more bureaucracy when we can basically help facilitate people being able to get to the programs?”
Proponents of a public bank point to North Dakota, where the state bank has reported profits every year since at least 1971. In 2017, the bank’s annual income grew from $136.2 million to $145.3 million.
However, Davison says “this is a real apples-to-oranges comparison. What they envisioned for their state bank concept (in Washington) is not what they developed in North Dakota.”
A 2011 study for the state of Massachusetts came to a similar conclusion when looking at the possibility of a public bank. The commission that authored the study noted “vast differences in the banking industries and economies” between Massachusetts and North Dakota.
A 2018 study conducted for the city of Seattle noted that a public bank “would be highly challenging in the current regulatory environment” and “likely to have lower-than-average returns and higher-than average costs for capital, meaning that the City would likely need to subsidize it in some way.”
Another challenge for public banks highlighted in the 2011 Massachusetts study is that the bank would “require significant initial capital investment,” and Washington would be no different. The estimate ranges widely, while the Center for Innovation’s 2010 analysis estimated it would cost $100 million. A few potential options are unlikely; bonding might have run afoul of constitutional restraints, while the $10-16 billion located in the local government investment pool would not be viable for long-term loans.
Under SB 5949, capital funding options would include:
- Federal transportation funding;
- Taft-Hartley trust funds;
- State health care unemployment reserves, and;
- Consolidating the state revolving loan accounts.
Another option would be the state investment board, which manages 34 separate funds including 17 retirement plans that make up the bulk of assets.
Lastly, there must be the political capital. In November, Los Angeles voters overwhelming rejected Charter Amendment B creating a public bank. Davidson noted: “If you can’t sell progressive ideas in the city of Los Angeles, I don’t think it’s a very good idea.”
SB 5949 is scheduled for a Feb. 21 public hearing in the Senate Committee on Financial Institutions, Economic Development & Trade.