New Tool That Adds But Does Not Subtract From Taxpayers

Like local and state governments across the nation, both Bucks and Montgomery counties have limited tools to balance their annual budgets: cut services, lay off employees, raise taxes, take on more debt or ask for employee givebacks. This year, the Montgomery County Commissioners raised taxes. It was the same in next door Philadelphia, where a so-called “soda tax” was introduced, leaving some Philly residents to wonder, what’s next? A tax on soft pretzels, cheese steaks?

But in municipalities large and small a new tool is being fashioned for the municipal finance tool kit, one that adds to and does not subtract from the taxpayers or the local economy: a public bank.

Modeled on the hugely successful Bank of North Dakota (BND), a public bank is not a retail, commercial bank. It does not compete with the local community banks and credit unions for deposits or borrowers, but instead partners with these financial institutions; “buying down” interest rates to allow more borrowers to qualify or participating in loans that would otherwise be too large for local banks and lost to the mega banks.

The president of the North Dakota Bankers Association reports that the state’s local banking industry has grown stronger because of the BND, and says, “The bank (BND) is a very good partner for our banks in the state… a very useful tool.” A Montgomery or Bucks County public bank can be expected to have the same effect on our local community banks and credit unions, now under siege by the mega banks and Dodd Frank regulation compliance costs.

Because it is not a retail bank, a public bank has no branches, tellers, ATMs or retail advertising. It provides no incentive in the form of bonuses and commissions for risk taking. This low cost business model is profitable.

The profits — at the BND, tens of millions of dollars a year, well over $400 million in the last decade — return each year to the general fund as non-tax revenue, or can be reinvested in the loan portfolio, or both.

That in a state with a population smaller than Montgomery County and not much larger than Bucks County.

This public bank also makes direct low interest loans to school districts, invests with other public agencies and authorities in infrastructure and consolidates student loans at below market rates.

Right now the BND is making $250 million available to local school districts for construction, at an interest rate of less than 2 percent — a huge savings over financing from the bond market, which will lower the debt service portion of school district budgets. And instead of exporting taxpayer money to Wall Street, it is captured and recycled locally.

And a public bank can take the place of the set aside, “rainy day” funds held by most local governments, which earn negligible interest and remove funds from productive purposes. In the budget just approved by the Montgomery County Commissioners, another $6 million was added to the set aside.

Lastly, the public bank will hold the county deposits safely away from the risk ridden, failure prone mega banks, while providing municipal banking services at lower cost. Security and savings.

A review of the latest Comprehensive Annual Financial Reports (CAFR) indicates that both Bucks and Montgomery counties have ample investments and funds, some portion of which can be redirected to capitalize a public bank. Last year the BND generated returns on equity (ROE) at about 18.1 percent. Current Bucks and Montgomery County investments don’t produce even half that return.

Small wonder an ever growing number of both local and state governments coast to coast are exploring how they can form a public bank, and are addressing the key issues common to all: mission, capitalization, deposit base, governance, management and projected benefits.

Studies have already been completed indicating the feasibility and benefits of public banks. The Bucks and Montgomery County commissioners might want to explore the possibilities and put their counties at the forefront of a long overdue revolution in municipal finance — or settle for more of the same in years ahead: more taxes, more debt, job cuts, reduced services or employee givebacks.

The president of the North Dakota Bankers Association reports that the state’s local banking industry has grown stronger because of the BND, and says, “The bank (BND) is a very good partner for our banks in the state… a very useful tool.” A Montgomery or Bucks County public bank can be expected to have the same effect on our local community banks and credit unions, now under siege by the mega banks and Dodd Frank regulation compliance costs.

Because it is not a retail bank, a public bank has no branches, tellers, ATMs or retail advertising. It provides no incentive in the form of bonuses and commissions for risk taking. This low cost business model is profitable.

The profits — at the BND, tens of millions of dollars a year, well over $400 million in the last decade — return each year to the general fund as non-tax revenue, or can be reinvested in the loan portfolio, or both.

That in a state with a population smaller than Montgomery County and not much larger than Bucks County.

This public bank also makes direct low interest loans to school districts, invests with other public agencies and authorities in infrastructure and consolidates student loans at below market rates.

Right now the BND is making $250 million available to local school districts for construction, at an interest rate of less than 2 percent — a huge savings over financing from the bond market, which will lower the debt service portion of school district budgets. And instead of exporting taxpayer money to Wall Street, it is captured and recycled locally.

And a public bank can take the place of the set aside, “rainy day” funds held by most local governments, which earn negligible interest and remove funds from productive purposes. In the budget just approved by the Montgomery County Commissioners, another $6 million was added to the set aside.

Lastly, the public bank will hold the county deposits safely away from the risk ridden, failure prone mega banks, while providing municipal banking services at lower cost. Security and savings.

A review of the latest Comprehensive Annual Financial Reports (CAFR) indicates that both Bucks and Montgomery counties have ample investments and funds, some portion of which can be redirected to capitalize a public bank. Last year the BND generated returns on equity (ROE) at about 18.1 percent. Current Bucks and Montgomery County investments don’t produce even half that return.

Small wonder an ever growing number of both local and state governments coast to coast are exploring how they can form a public bank, and are addressing the key issues common to all: mission, capitalization, deposit base, governance, management and projected benefits.

Studies have already been completed indicating the feasibility and benefits of public banks. The Bucks and Montgomery County commissioners might want to explore the possibilities and put their counties at the forefront of a long overdue revolution in municipal finance — or settle for more of the same in years ahead: more taxes, more debt, job cuts, reduced services or employee givebacks.

Mike Krauss – Point Pleasant, PA