Proponents of a state-owned “public bank” want policymakers to consider alternatives to depositing taxpayer funds with out-of-state shareholders. The renewed call coincides with a $53 million civil penalty settlement by TD Bank, the state’s primary depository.
The state of Vermont kept an average end-of-day balance upwards of $236 million with TD Bank in fiscal year 2013. The American subsidiary of Canadian banking giant Toronto-Dominion Bank held about two-thirds of all the state’s unrestricted funds and earned about $787,000 for its services, according to a July memo from State Treasurer Beth Pearce to state Sen. Anthony Pollina, P-Middlesex.
Pollina, who is co-chair of the Senate Government Operations Committee, asked how much TD Bank held because he wants to know what would happen if that money never left Vermont.
It’s an intriguing question, Secretary of Administration Jeb Spaulding said, and one that’s been asked before. Spaulding, who previously served as state treasurer from 2003 to 2010, said the case has never been made that a state-owned bank is more advantageous than commercial banking.
“Another study wouldn’t be high on our list,” Spaulding said.
A formal study is just what Pollina is aiming for.
“Right now, we pay our taxes, the money’s deposited primarily into TD Bank, they take our money, and they lend it out any way they want, not necessarily prioritizing Vermont,” Pollina said. “They lend from to New Jersey to China. They make a profit off our money and that goes into the pockets of shareholders.”
Pollina argues that state government could save on the interest and fees if, instead of depositing money with and then borrowing from corporate banks, “we had the potential to use our own money and essentially borrow from ourselves.”
To help test the theory, Pollina also asked Pearce about 10 years’ worth of bonding the state had sold (almost $300 million in new general obligations), projected bonding in the coming years (more than $80 million annually through fiscal year 2015), the amount of interest paid on said bonds (close to $225 million in the last 10 years) and the cost of bonding through management fees, commissions and other related costs (about $4 million since 2004).
Pearce, who was attending a conference Monday, was unable to comment for this article. In her summer memo, she said the state had chosen to place the majority of its unrestricted funds with TD Bank because it gets the best interest rate there. She added that the lockbox services the bank provides — essentially, handing physical checks — would be too cumbersome and costly an enterprise for the state to undertake on its own.
And that’s an important consideration for Rep. Cynthia Browning, D-Arlington. She said she’s reluctant to see the state take on any function that may be provided better by private industry, but she wants to understand more about why state funds are deposited the way they are.
Recent law enforcement actions against TD Bank particularly piqued Browning’s interest. Facing the first civil penalty of its kind leveled by the U.S. Treasury’s new Financial Crimes Enforcement Network, TD Bank has agreed to pay $52.5 million to settle charges that it failed to report suspicious activity related to a $1.2 billion Ponzi scheme based in Florida.
“I’m not saying we should only be investing in Vermont banks,” Browning said, acknowledging her preference to shop around for the best prices and returns on investment. “But I really question rewarding banks that are part of this kind of misbehavior, or at least that are this sloppy with … deposits.”
TD Bank could not be reached for comment before publication.
Alleged misbehavior aside, some public banking advocates feel the private banking sector has thwarted the state’s study of public banking options.
The specific structure of a state bank in Vermont, much less how it would be regulated, are far from answered, admits Gwen Hallsmith. As founder of consulting firm Global Community Initiatives, she’s working with Vermonters for a New Economy, a group that’s pressing the public banking issue. Hallsmith emphasized that her discussion of public banking stems solely from her role as a private citizen, not in relation to her work as director of planning and community development for the City of Montpelier.
“If the bill to study the idea of a public bank and its economic impact were actually done, instead of being blocked by the bank lobby, then we could answer those questions,” Hallsmith said. “I don’t think we’re ready to (start one) tomorrow.”
How a public bank may work
One of the central questions about public banks is whether they would compete with private banks for business.
To some extent, Vermont already handles certain lending on its own: The Vermont Economic Development Authority provides business loans, the Vermont Housing Finance Agency finances affordable housing, the Vermont Student Assistance Corp. assists Vermonters seeking post-secondary education, and the Vermont Municipal Bond Bank facilitates loans for capital projects in cities and towns.
The first task on the agenda for Pollina’s proposed study committee, if it’s approved in the 2014 legislative session, would be to evaluate the possibility of consolidating those operations into one state agency. The potential is not without complications, according to a brief 2010 report by the Legislature’s Joint Fiscal Office, which took a preliminary peek at how North Dakota’s success with public banking may or may not translate to Vermont.
The proposed study’s second goal would be to look at moving the state’s deposits out of private banks and into a public institution. The state bank wouldn’t accept deposits from individuals or private entities; it would just manage the state government’s own money. Yet here is where potential competition with private industry may come into play.
The JFO authors noted in 2010 that the entities currently holding the state’s cash deposits “would be adversely affected if they were all directed toward a state bank.”
Worry about cutting into the record profits of multinational banks may not keep everyone up at night, but a state bank’s impact on smaller community banks is another matter — and stakeholders appear unclear on how that prospect may affect Vermont-chartered institutions.
“Everything sounds good,” Spaulding said. “We like co-ops, I like co-ops, and a public bank sounds great.” But the advantages may unintentionally undermine other assets, he warned. “We don’t want to do anything to undermine community banks and their relationships with local communities.”
Pollina and Hallsmith say state bank could help community banks stay afloat in an increasingly consolidated market, they argue.
Banks collateralize the deposits they hold, so smaller banks are by nature limited in the amount they’re able to manage, Hallsmith said. By serving as a back-stop or capital lender for local entities, a state bank may help community banks both manage more money and extend more funds through retail loans, she suggested.
Pollina said that’s what’s transpired in North Dakota, which started its own state bank in 1919.
“The banks there love the North Dakota state bank. Because when they need more money, they don’t turn to Wall Street to borrow. They turn to their own state bank to borrow,” he said. “A lot of the lending that takes place would still happen through the local banks.”
But it may happen with a lower interest rate, he said, because the state may be able to afford charging less. Shareholders wouldn’t be clamoring for profits, and the nature of lending to “neighbors” may keep prices down, he said.
A state bank’s sustainability and profitability would be hard to predict, however. The JFO report questions the amount and sources of capital it would require to launch, how a state bank would be regulated and what a realistic profit expectation may be.
Pollina said the Government Operations Committee held onto S.55, which would create a study committee, until the next legislative session out of concern that pending amendments from other senators would dilute and divert its mission. He intends to revisit the proposal in 2014 and draft new legislation related to public banking this fall.
In the meantime, Hallsmith said, a private study of a state bank’s economic impacts is forthcoming. After a prior bill to create a study committee failed in the Legislature, she worked to commission one by the Gund Institute for Ecological Economics at University of Vermont and the Political Economy Research Institute at the University of Massachusetts, with funding from the Donella Meadows Institute, where she holds a seat on the board.