State Treasurer Beth Pearce isn’t keen on setting up a public bank in Vermont.
“The presumption that a state bank is the solution to something is premature,” she said.
Pearce would rather utilize existing finance structures in new ways to address the state’s unfunded capital needs. The sentiment surfaces as advocates for public banking have renewed their call for a new financing paradigm.
Currently, several quasi-public agencies sell bonds, then loan that borrowed money to private businesses, nonprofits and individuals: The Vermont Economic Development Authority provides business loans, the Vermont Housing Finance Agency supports affordable housing development and upgrades, the Vermont Student Assistance Corp. helps Vermonters pay for post-secondary education, and the Vermont Municipal Bond Bank facilitates loans for capital projects in cities and towns.
Those agencies could be consolidated within a state-run bank, some advocates for banking reform suggest. Sen. Anthony Pollina, P/D-Washington, for one, wants to study the feasibility to moving the state’s financial assets out of private institutions, such as TD Bank. The public bank would loan money to state-based initiatives, as opposed to a private bank’s pooling of state and other deposits to be distributed around the world. The public banking movement has gained traction this fall with a grassroots effort to place discussion of the topic on town meeting agendas.
Pearce says she understands the sentiment, but disagrees with the strategy.
“I share people’s concerns and, frankly, the anger (about) Wall Street with the recession,” she said. “But I think to jump to the conclusion that we need to replace a system as opposed to maximize the use of our existing resource … is the wrong way to go.”
Local investment committee
To that end, Pearce is working with an ad-hoc group of state financing authorities to address capital needs not being met by the private market. In addition to borrowing through the sale of bonds, agencies such as VHFA and NeighborWorks of Western Vermont can borrow a limited amount of money from the state.
VEDA was the first agency to benefit from the Local Investment Working Group. In June, Gov. Peter Shumlin signed H.395 into law, creating the Vermont Sustainable Energy Loan Fund with $10 million to help finance sustainable energy projects for Vermont businesses and agricultural concerns.
The bill also authorized Pearce’s office to create two “short-term credit facilities,” through which the state can loan money for similar energy projects. The housing finance agency is currently negotiating a $2.8 million loan, and NeighborWorks of Western Vermont has secured $2 million. About $2 million more is left to be allocated.
Pearce underscores that the treasurer was not given appropriations authority, but rather the ability to loan certain funds to specific entities. The money will be paid back with interest — low enough for the loan to be attractive to the agencies, and high enough to yield more than a typical bank account might afford.
“More energy efficiency capital gets out there,” she said. “And we’re creating more efficient delivery of those services.”
Agencies can and do still borrow private funds, and they now can supplement that with what the Vermont treasurer makes available. Pearce conceded that state financing has replaced some of what VEDA would have borrowed at a higher cost from private institutions. But on the whole, she says, she likes this system because it adds to existing borrowing power. The opposite is true of public banking, she said.
“It’s replacing one form of capital for another,” she said. “To me, a solution needs to be additive.”
Public banking proponents suggest that keeping all the state’s deposits in a state bank would save money now spent on fees and services. That would free up funds to increase financing for agencies like VEDA and VHFA, the argument goes.
Long-term lending
Along with Pearce, VHFA director Sarah Carpenter is not convinced about the merits of public banking.
“I’m a little perplexed about how that group thinks they’re going to get the capital,” Carpenter said. “Most of the money comes in as taxes and goes out as paying bills. So I’m not sure how they would have access to long-term capital, which is critical to most lending activities.”
VHFA, in particular, requires long-term loans to fund construction and upgrades to multi-family homes around the state. In fact, regarding the pending $2.8 million Treasury loan, the time frame for repayment is part of what the agency is now negotiating with Pearce’s office.
Carpenter understands that the state is reluctant to make loans for longer than 10 years at a time due to concerns about “liquidity” — or having money on-hand when the state needs it.
“But in the housing world, that (10 years) is short,” Carpenter said.
This aspect of the deal returns the situation to the crux of the original problem the working group is trying to solve. VHFA is not having too hard a time getting short-term loans on the private market. It’s long-term loans that a hard to come by, and the state is trying to help. But long-term loans are hard for the state to offer, too.
Cost of borrowing
Scott Giles, president and CEO of VSAC, says his organization’s financing is more secure in the private market. His stake in state financing is therefore lower — whether through the working group or from a potential state bank. But he follows both discussions with interest.
“As a citizen, it makes sense to explore any options that might provide us the opportunity to … generate wealth and capital within the state,” Giles said. “The proponents of the state bank have done an excellent job of trying to articulate why they think a state bank is a good idea.”
As the head of VSAC, however, it’s more a theoretical inquiry for Giles at this point. Due to regulatory changes in 2011, the vast majority of student loans are now in the hands of the federal government. VSAC had been the primary lender for Vermonters pursuing higher education, and got involved in the working group when the organization’s needs were greater.
But now, the lending arm of the organization only gives out about $25 million per year in the state — compared to an estimated $350 million provided by the federal government.
Giles said VSAC’s remaining capital needs are more than met by the private market. He’s looking into creating a loan product directed more toward parents of students than students themselves, in which case lending potentially could double. But even still, Giles feels that need could be entirely satisfied by the private bond market.
With its capital needs met, Giles said, VSAC is “agnostic” on the concept of a public bank. Right now there is no problem with student loans, he said, so from the perspective of VSAC’s mission, there is no problem a public bank could solve.
“That having been said, if the treasurer finds a way we can do this less expensively, we’d be interested,” he said, because it would mean VSAC might be able to offer lower-priced loans to students and families.