Making bank

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Gov. Phil Murphy has for years called for the creation of a “state bank” that would steer financing to small businesses and underserved communities across New Jersey. Such a bank would hold millions of taxpayer dollars, usually kept in commercial banks, and use the funds to finance local infrastructure, municipal and county projects, affordable housing, or student and business loans for lower-income residents who might not have access to that kind of capital. The governor has said that much of that money has been deposited at Wall Street financial institutions or overseas and is invested in projects or ventures that do not benefit the state.

Only one state – North Dakota – operates a public bank, and Murphy has frequently cited it as an example for New Jersey. Officials at that institution –  the Bank of North Dakota – declined comment for this story.

The idea has, like many other government efforts, been pushed to the sidelines during COVID-19. But proponents suggest Murphy could revisit the bank proposal during his second term.

“I think you’re going to see real progress on that front,” Murphy said during his COVID-19 briefing on Jan. 3, the first of 2022. “The pandemic and the challenges that individuals, families, businesses, municipalities, particularly students with college loans – I think it has sharpened the need for this as opposed to lessened the need for it.”

In November 2019, just months before the onset of the COVID-19 pandemic, Murphy signed an order creating a 14-member Public Bank Implementation Board, chaired by the commissioner of the Department of Banking and Insurance. The board had until November 2020 to draw up a plan for creating a state bank, but that deadline has been pushed back. Joan Bartl, a public member of the board and longtime finance executive in New Jersey, said COVID-19 caused the delay.

The board met virtually in 2020 and 2021 to hear ideas and proposals, according to Bartl. Under Murphy’s order, the bank would need to focus on four areas: small businesses, students, local infrastructure and affordable housing.

“It would not be a retail bank where you and I can go get a car loan or mortgage. But if you’re a small business … you need $10 million … but the community bank says ‘I can’t give you $10 million, I can give you $5 million.’ … The public bank would partner with that community bank and put up the other $5 million,” said Bartl, a director at Banking on New Jersey, a nonprofit advocate for the proposal.

Bartl said the plan is for the state to issue a request for proposals in January. Murphy’s office did not indicate what would be in the RFP. A public hearing is scheduled for Jan. 24 and is being hosted virtually by the state’s Work Environment Council.

In the short-term, the state would undertake a “transition period” while the bank’s charter process is underway, which could take as long as two years, according to Walk McCree, another director of Banking on New Jersey.

“A bank-like ‘bridge’ lending program can be begun which redeploys under-utilized or idle state funds to provide low-cost capital for state/municipal purposes,” he said in an email.

McCree added that the public bank would be better than government agencies that provided COVID-19 relief and other economic subsidies to businesses, because they’re typically limited by legislative appropriations.

New Jersey businesses have received tens of billions of dollars in state and federal relief during pandemic closures and restrictions. The New Jersey Economic Development Authority for example, distributed hundreds of millions of dollars in grants, low-interest loans and loan guarantees. The U.S. Small Business Administration approved more than 310,000 loans totaling nearly $26 billion under the Paycheck Protection Program.

But public bank proponents argue that it would have greater flexibility because its coffers would not be tied to politics. “If the legislature were to give the state bank $5 million in capital … the bank could theoretically lend $50 million into the economy for bank-mission purposes,” McCree said. “The bank would simply need to be able to cover the liquidity issues for satisfying its lending obligations.”

Michael Affuso, executive vice president and director of government relations at the New Jersey Bankers Association, questioned whether a state like New Jersey could handle such an undertaking. “What makes you think they were going to [be able] to execute on this? Think about the fiasco of people receiving or attempting to receive unemployment,” he said in an interview.

Retail and commercial banks, Affuso said, operate more efficiently than state or federal agencies. The pandemic loan programs operated smoothly, Affuso suggested, because government worked with dozens of New Jersey banks and financial technology companies.

“It was a lot better than the unemployment system,” he said. “The difference was it was done through a more diffuse system of getting money out the door … If somebody had a problem, they could get [it] fixed. How many legislators called the Department of Labor, and they couldn’t?”

A Viable Model?

North Dakota’s state bank was founded in 1919 to promote the state’s agriculture sector and surrounding economy. BND officials have said it helped the state ride out some of the worst economic downturns of the past century, including a drought at the time of its founding, and the Great Depression.

The concept was radical at the time, having been backed by A.C. Townley, a political organizer in North Dakota, after he failed to win the backing of the state’s socialist party, according to the BND website. Townley founded the bank under the Nonpartisan League, which gained control of North Dakota government in the early 1900s and pushed through many populist policies – like the state bank – for a state whose economy is heavily dependent on agriculture. With over $7.7 billion of assets as of 2020, the BND has taken on a quasi-central banking function for the state.

Affuso maintained that the needs of a rural state like North Dakota justified the creation of such an institution. But New Jersey has different needs.

“North Dakota is a gigantic state with relatively few people,” said Doug Offerman, an analyst with Fitch Ratings on Wall Street. New Jersey has a dense network of banks, and proximity to large financial institutions in New York City and Philadelphia, he noted.

More recently, the BND has received considerable praise for how it operated during the Great Recession in 2007 and 2008, and the COVID-19 recession.

In 2011, the Federal Reserve Bank of Boston reported that community banks, in partnership with the BND, were able to expand their reach and impact far beyond what would have been possible without the state bank. Without the presence of the BND many of these banks – with assets typically less than half a billion dollars – would not have been able to issue loans to small businesses.

During the COVID-19 recession, state officials and North Dakota business leaders credited the bank with helping many businesses in securing PPP loans at a much higher rate than other states, according to a May 15, 2020, analysis by the Washington Post.

“Early in the pandemic, the Bank embraced the important role of connecting lenders with [SBA] officials and our congressional delegation to understand the intricacies of the [PPP],” BND President and Chief Executive Officer Eric Hardmeyer said in the bank’s 2020 annual report.

Weekly webinars with participation from hundreds of lenders helped 20,000 North Dakota businesses secure $1.7 billion in PPP loans, Hardmeyer said. And that doesn’t include the pandemic-relief programs created by the bank itself.

Assessing Risks

Critics suggest that the state might lean on a public bank to plug holes in the budget. The Boston Fed report notes that North Dakota has resorted to this practice in the past, during economic downturns that deplete a state’s treasury.

But doing so could mean that the bank “would likely fall short on its basic mission to provide credit to qualified borrowers to promote economic development,” which is “especially pertinent in times of economic difficulty,” the Boston Fed warned.

“A state bank would have to serve the competing goals of stabilizing state budgets and providing credit to a sluggish economy,” the report said.

McCree said that for a state to use funds from the state bank to pay for budget shortfalls is not entirely out of the question and should be anticipated, but “only in exceptional cases since the bank’s budgetary obligations should be covered by planning, not emergencies.”

“BND’s remarkable growth comes from plowing the profits of the bank (from lending) back into its capital base, making the bank stronger and more able to expand investment into the state economy,” he said in an email. “The bank should be isolated from the state’s fiduciary operations.”

A Murphy administration official said that “[a]ny future state bank will be designed to comply with best fiscal practices.”

Affuso also suggested that a public bank might cater to risky borrowers. “Just because somebody wants a loan does not mean they’re credit-worthy,” he said. “I would question as a taxpayer if we’re going to create this bank that becomes a lender of last resort.”

To be that “lender of last resort,” the state would need to offset that risk by charging “ridiculously high interest rates,” Affuso said. “And I doubt the state is willing to do that.”

But the needs of potential borrowers are far more nuanced, suggested Phyliss Salowe-Kaye, a member of the implementation board and outgoing executive director of New Jersey Citizen Action, a progressive advocacy group. “Long before the pandemic, the excessive cost of capital needed to build more affordable housing, start and operate small businesses, fund public infrastructure projects and provide less costly student loans has been detrimental to the state’s economy,” she said in an email.

A 2011 a state commission in Massachusetts recommended against establishing a public bank in the state. The commission cited the need for a “significant initial capital investment “and questioned whether the spending would be justified. “The only existing model of a state-owned bank is that of North Dakota which is inadequate given the vast differences in the banking industries and economies of North Dakota and Massachusetts,” the report said.

A 2018 report from the Washington State Treasurer found that a public bank there would need up to $300 million to get started and would be a risky endeavor. “There would need to be an assessment of public bank integrity on multiple factors including political influences in lending decisions, self-dealings, and corruption considerations,” the report reads.

But a report that same year by the University of Washington found that a government agency could indeed structure a state bank “in a way that presents minimal risk to the state’s credit rating and overall financial health.”[/vc_column_text][/vc_column][/vc_row]