State Treasurer “does not support public banking,” cites higher risk, lower return on investment than private banking.

State Treasure Duane Davidson has released a “study of the studies” of state, municipal, and other public banks. His takeaway:

“The Office of the State Treasurer supports building upon Washington’s existing structure of banking and does not support public banking because of the higher risk and lower return on investment compared to the current private banking system.”

The report is presented as a series of slides. It’s a thorough review, one that strongly supports Davidson’s conclusion. We’ll not go into detail here; the study is clear and accessible.

In some respects, this may seem like an arcane review of a policy objective that has gained little traction in Washington. The treasurer’s report finds,

Not many state banks exist today for a number of reasons. Here are some examples:

• Bank of North Dakota – Established in 1919, and operates with one office in Bismarck, North Dakota. It was originally established to help area farmers have access to banks when private banks were too few in the area.

• Puerto Rico Development Bank (FAILED) – It was established 1942 and liquidated in the Summer of 2017.

• Delaware Farm Bank – The state owned 49 percent of the bank from 1800s to 1975. In 1976, the state increased ownership to 80 percent. On verge of failure in 1981, it
was purchased by a private Pennsylvania Bank.

• American Samoa – This unincorporated territory of the United States has a state bank that opened its doors in 2016.

END NOTE: Only two of these public banks still exist today.

Yet, the report serves a timely purpose. In 2017, a state bank study was included in the budget.

A proviso that was included in the state operating budget and was proposed by Sen. Bob Hasegawa, D-Seattle, funds an interim task force to look at creating a publicly-owned state bank, and make recommendations for the 2018 Legislature to take action on.

“With the state bank, we would keep our tax dollars in Washington and working for the people of Washington, not Wall Street,” Hasegawa said. “A state bank could provide huge financing capacity to fund critical infrastructure like clean water systems, schools and roads, without having to sell bonds through Wall Street brokers. We simply don’t have enough money to keep going into debt to Wall Street to fund the infrastructure that every Washingtonian relies on.”

The final report of the task force, released in December 2017 showed the group failed to reach consensus.

Task Force members had many opinions regarding the helpfulness of establishing a depository institution for infrastructure funding. Some members thought that numerous studies have already been conducted in other states – and the variety of issues raised in these studies has resulted in no state depository institutions being established since the Bank of North Dakota a century ago.

Some other Task Force members are supportive of doing additional study about establishing a state- owned depository institution but acknowledge that this study would need professional experts to be hired.

If the Legislature does want to further consider the issues surrounding the establishment of a state depository institution, much more work needs to be done. Topics that would need to be addressed include the legality/constitutionality, capitalization, governance, business plan, structure, and level of interest/need for such an institution from local governments.

Michael Waite, who lost the treasurer’s race to Davidson in 2016, had a January 1, 2017 op-ed in the Seattle Times arguing against public banks. At that time, the focus was a Seattle city bank. He wrote,

Recently, two members of the Seattle Public Banking Coalition sent a letter to the City Council suggesting that the city should create its own bank, rather than utilize existing private-sector institutions for banking. Such a public-finance approach is a concept that has also been pushed at the state level by such officials as Sen. Bob Hasegawa, D-Seattle…

His argument addresses some of the same concerns raised in the study of studies: potential conflicts of interest, administrative mistakes, and bad debts. 

It’s not clear that the state bank will again appear on the 2019 legislative agenda. If it should, Treasurer Davidson’s report should be a must-read for lawmakers.