It was the windswept dust bowl in one of the most rural states in the country that forged America’s one and only public bank.
The North Dakota public bank was launched in 1919 after farmers and ranchers, burdened with credit and harsh weather, saw land repossessed by private banks, many from out of state. “At the time, farmers were utterly dependent on out-of-state grain milling companies, national railroads, and Minneapolis banks, all of which had been gouging farmers,” according to a history of the bank published by the Institute for Local Self Reliance, a national nonprofit that advocates for local communities to solve their own problems rather than turning to national providers.
The bank today has $4 billion in loans, and North Dakota has one of the lowest foreclosure rates in the country. Its public bank is among the healthiest compared with private banks nationwide in terms of profit largely because of lower operating costs, according to The Wall Street Journal. “It looks like socialism,” Ellen Brown, founder of the Public Banking Institute, said in a recent lecture, “but North Dakota is a very conservative state. It also looks like state sovereignty.”
Propelled not by the scarcity of capital but excess, the city of Santa Fe today finds itself at the fore of a new public banking movement. As money has moved across state lines and government bonds remain in demand by retirees and mutual funds, easy borrowing is costing taxpayers millions of dollars in the form of additional fees.
And with that money comes distrust and the desire to keep profits local. Santa Fe City Councilor Renee Villarreal, sponsor of a public bank resolution before the Santa Fe City Council, said the issue has surfaced since the financial meltdown put big banking under the microscope, offering an unflattering view.
“It’s our money. It should benefit us,” said Nichoe Lichen, part of the group Banking on New Mexico, which is leading the effort in Santa Fe to create a public bank.
Though the city of Santa Fe is the only local or state government that has so far completed a feasibility analysis for a public bank, others, including Philadelphia and Oakland, are moving forward with discussions, as well as the states of New Hampshire, Massachusetts, Vermont, California, Washington and Alaska.
Walt McRee, chairman of the Public Banking Institute, said efforts are drawing support from fiscal conservatives. “Several of the state bills are being driven by tea party Republicans,” he said.
Villarreal’s measure does not create a public bank in city government. It establishes a task force that would take public input, conduct research and present options to the City Council on what a bank’s policies and governance would look like. She introduced the measure last month, but pulled it back for more study.
She is ready to move forward again in January.
Still, even that small step brought pushback from those who either don’t trust the city or see a public bank as another bureaucracy.
James Lodes, a retired senior bank loan officer in Ohio, recently wrote a letter to the The New Mexican saying the city can do a lot of other things to better manage cash without establishing a bank and spending $1 million a year for operations.
“If you’re fortunate to have $200 million in public dollars to invest, figure out the best thing to do with it, don’t automatically choose choice A, a public bank,” he said.
He added the first chore is to segregate funds and find out what money is obligated. Some dollars might be federal grant money, other dollars might be paid by water users. Once the city knows what money is available long term, it might be able to “just write a check” to finance some of its borrowing.
Christopher Erickson, an economics professor at New Mexico State University who helped with the feasibility analysis for a public bank in Santa Fe, said even with the success in North Dakota, there might be a systemic reason there is still just one public bank in the United States.
“It’s not consistent with the tradition of the United States to have the government compete with the private sector,” he said.
Lichen argues that doesn’t mean taxpayers are obligated to enrich the shareholders of private banks. She also acknowledged there needs to be more public outreach and education in the community about the idea, and that will begin in January.
The North Dakota model is far different from what is envisioned in Santa Fe.
For one, the state of North Dakota requires all public money to be deposited in its bank. That enables the bank to finance public projects as well as write loans to business owners, and underwrite student loans and home mortgages.
It also partners with private banks on larger development projects as a way to share risk.
Any public bank in Santa Fe would initially fund just the borrowing of the city, and then perhaps the county and school district. It would not accept individual deposits, and would not compete with private banks for other types of small business loans, according to those backing the effort.
“A public bank would have just one depositor,” Lichen said. “It’s really a simple idea, but people are not used to thinking about public funds, community funds being used for the public.”
Eventually, the bank might obtain a charter and expand with some lending for targeted economic development projects, but that effort would be years away.
To highlight the savings to taxpayers, it must first be noted that any public project such as a school or road or water system that relies on bond money costs 30 percent to 50 percent more because of financing fees and interest payments. Homeowners who pay a mortgage understand this concept, as do new-car buyers — higher interest rates increase the cost of these items, even if their sticker price stays the same.
A better example of what a public bank might look like here is the New Mexico State Board of Finance, which has an independent board that makes decisions on loan requests from local governments for capital public projects, such as water and sewer work and public buildings.
The board meets monthly in open session and keeps its own minutes, and members are appointed by both parties of the Legislature, the state treasurer and the governor.
But even the Board of Finance borrows money from private markets and pays the prevailing interest rate. A public bank in Santa Fe would use existing taxpayer money for its loans back to the city, and set interest rates, but it would be more akin to borrowing from one’s self.
The deposits would come from a portion of the $222 million in balances now in various city bank accounts. That amount is unspent revenue from taxes and fees, and money set aside by the city for future projects or obligations, according to financial reports.
Of that money, at the end of 2015, $87 million was at Wells Fargo Bank, with the remainder at First National Santa Fe or community banks and credit unions.
Lichen points out that all those tax dollars are being loaned out by those banks for a profit, “probably not in New Mexico.”
Advocates are suggesting a public bank in the city start with just $10 million of the city’s existing money.
But details on specific restrictions and limitations on a public bank would have to be resolved by the Santa Fe City Council. An estimate by Public Banking New Mexico shows a bank in Santa Fe would operate at a surplus and be able to return money back to the city, as much as $5 million in five years after expenses.
The group estimates the city of Santa Fe spent more than $7 million for bond issuance and fiscal management fees over the past five years and has committed more than $25 million in interest to large investment firms and mutual funds for bond payments over the next three decades.
As far as debt that is already issued, a public bank would have lowered the city’s annual debt service costs by more than $282,000 and reduced its total debt by $52 million by refinancing debt and adjusting the terms when beneficial, according to an analysis by Banking on New Mexico, a working group composed of Lichen, Elizabeth Dwyer, Dan Metzger and Mary Schruben.
NMSU professor Erickson, whose own analysis estimated the bank could have a total economic impact in the city of $24 million in its first seven years, doesn’t doubt the numbers. He said the bonding laws for the state of New Mexico are very inefficient, with Santa Fe borrowing money before it’s spent.
“The big gain is in better management of funds,” he said. “Right now what we do is go out and borrow the funds and pay interest on it, and the funds sit around.”
In Santa Fe, no city official understands the cost of borrowing more than Councilor Joseph Maestas. As the former mayor of the city of Española, he used to sign bond documents that committed taxpayers to borrow and pay back millions for public road and sewer projects.
He said using a bank-like structure to finance the city’s own needs is a pretty simple first step.
“I know for a fact there are exorbitant fees associated with bonding. If we can reduce or eliminate some of those fees, that would be a plus for the city,” he said.
Many residents, however, feel the city has other priorities and don’t see a public bank as one of those. What Maestas tells them is that spending less on borrowing and financing means more money for law enforcement and parks.
“That cost savings is something we really need to consider,” he said.
Villarreal said public banking advocates have also said the city needs to move first with more transparency on where it gets its money and how those dollars are spent. Much of that work has been done, and will continue.
Still, one reason she held back the resolution was to make sure it included input from professional bankers and financial experts, as well as the city’s financial staff.
It has been a year since the bank feasibility study was completed. “Part of the reason we’re taking our time is that we want to make sure it’s correct and we get all the important input necessary,” Villarreal said.
Maestas agrees there is still a widespread misunderstanding about the idea and that advocates need to do a better job educating the public about public banking.
He remains committed to the concept but wants to see more consensus in how the bank would be managed. As an engineer, he also wants a more quantitative measure on whether the bank would accomplish its goals.
“The advocates for public banking I don’t believe have achieved consensus on how to go about creating and managing a public bank,” he said. “When it comes to making decisions about spending taxpayer money, the public expects sound, prudent financial decisions.”
Contact Bruce Krasnow at brucek@sfnewmexican.com.
More about public banking
- For more information on the proposals for a public bank, visit Banking on New Mexico online at bankingonnewmexico.organd the Public Banking Institute at www.publicbankinginstitute.org.
- Letters for and against the bank have been published in The New Mexican. To read them, visit our website at www.santafenewmexican.com, and click on “Opinion,” or do a general search for “public bank.”
