Gov. Phil Murphy unveiled his first step toward creating a state-owned bank since taking office – a promise he campaigned on – which he argues would help steer investment dollars into communities typically overlooked by financial institutions.
Under the proposal, the public bank would hold millions of taxpayer dollars, usually kept in commercial banks, and use them to finance local infrastructure, affordable housing, or student and business loans for lower-income residents who might not have access to that kind of capital.
Murphy has argued that much of that money has been deposited at large-scale Wall Street financial institutions or overseas, which in turn invest the money into projects or ventures that do not benefit the state.
Wednesday’s announcement – Executive Order 91 – which Murphy signed in Newark, creates the 14-member Public Bank Implementation Board, chaired by Marlene Caride, who heads the state’s Department of Banking Insurance. The board will have one year to gauge just how the state could actually roll out the bank.
Proponents of the bank argue it would open up opportunities to lower-income residents, particularly women, immigrants and people of color, so they have the capital to buy a house, start a business or finance student loans for college, which they might otherwise be unable to obtain.
Only one other state – North Dakota – has a public bank, which launched in 1919.
“Leveraging state resources to provide greater access to capital for our communities, small businesses, municipalities, and students is an important component of building a financially inclusive New Jersey,” Murphy said.
But at nearly two years into his term, Murphy admitted that the bank has “just been a lot harder to do than I thought from the outside.”
An October 2018 report by the progressive activist group New Jersey Citizen Action argued that the bank could benefit residents by financing public infrastructure, affordable housing and neighborhood redevelopment, by micro-lending to small businesses and by providing lower-interest and flexible loans to students.
But opponents worry that the bank could take away business from existing financial institutions, that it could be a prime target for corruption and misuse, and that the state would essentially be taking on bad debt by lending to borrowers with poor credit.
“The way that this has got to work is it’s got to be absent of political interest and… influence,” said Michael Affuso, director of government relations at NJBankers, a trade group that represents financial institutions in the state.
Affuso argued that the governor or state treasurer wield the authority to move taxpayer deposits out of foreign financial institutions and into in-state banks, which are already required by state and federal law to do business with people in the communities where they are based.
Moreover, a state bank would likely just be another layer of “bureaucracy,” he argued. In the case of North Dakota, the state did not have the population-levels for any banks to justify moving to the state, hence the need for such an institution.
“I would say the bank of North Dakota has morphed into something” similar to the Economic Development Authority, Affuso added.
“We already have that,” he said.
Indeed, the EDA already jointly runs similar programs, albeit on a much smaller scale.
On Thursday the board is set to approve a $1 million micro-business loan, which would effectively be a pilot program for the state bank, according to EDA Chief Executive Officer Tim Sullivan.
Sullivan acknowledged that there could be risk involved with lending to individuals that might typically have a hard time obtaining loans, but assured that the board would be in charge of coming up with the best approach to mitigate those risks.
“Any time you’re making loans… there’s a risk,” he told reporters. “That’s why putting together a plan like the governor’s directed the board to do is so important. And so, there’s a plan to understand how many loans you can make, what are the risks of those loans, what are the returns on those loan investments going to be, what the interest rates are.”
Editors note: This article has been updated to clarify comments from NJBankers Director of Government Reltions Michael Affuso regarding the power that the governor or state treasurer have to move taxpayer deposits.