Questions & Answers about establishing a Public Bank in Washington State

Senate Bill 6093 provides a billion dollars in funding per year to capitalize the creation of a public bank here in Washington state. These funds would result from repealing a tax exemption currently being used by billionaires in order to avoid paying their fair share of state taxes. The primary purpose of this public bank is to finance the construction of 1000 urgently needed public schools. Currently the health and safety of one million students in our state are at risk due to the fact that half of the schools in our state are more than 50 years old and do not meet health codes or earthquake codes. The total cost of replacing these 1,000 crumbling schools is about $30 billion to $50 billion. Our State Constitution places the burden of providing schools on the State legislature – not on the backs of local homeowners. Currently school construction projects in our state are forced to pay about 5% interest to private Wall Street banks - which doubles the cost of school construction. A public bank would cut the cost of building these schools in half because the public bank could finance the construction of these schools at an extremely low interest rate.

Question #1: If the Bank of North Dakota, the nation's only public bank, returns a profit to their State legislature every year, why do we need to provide any money at all to our Public bank?
While the Public Bank of North Dakota currently creates a profit of hundreds of millions of dollars, when it started in 1919, it was started by selling some bonds. We do not want to use that option, selling bonds, in our state because our state is already near the state debt limit imposed by our state constitution. Instead, we want a source of funding that does not increase our state's debt.

It is true that over time a public bank creates money rather than costing money. Studies have indicated that we could set up a sound public bank for under $100 million in start up costs and that this entire initial investment could be returned to the state within 10 years. There are, however, three key reasons to provide a billion dollars per year to start a public bank.

First, we have an urgent need to build billions of dollars in public schools. The health and safety of one million students is currently at risk. The only way we can address this problem is with the creation of a large enough public bank to immediately tackle this problem. Our plan is to build $5 billion in new schools every year for the next 6 to 10 years. This could be done with a bank capitalized at $1 billion per year but not with a bank capitalized at $100 million per year.

Second, many in the state legislature are worried about the financial soundness of a public bank – even though the Bank of North Dakota is the safest bank in the entire United States. Providing our public bank with a massive independent source of revenue will reassure legislators that the public bank will have the capital it needs to carry out its mission of financing the construction of 1000 new schools.

Third, there are questions about whether the public bank might create a problem with the state debt limit. The transportation budget gets around the problem of the debt limit by having its own independent source of funding (the gas tax). Having an adequate and independent source of funding for our public bank would address this the debt limit problem as well as several other constitutional concerns raised by our State Treasurer.

Specifically, in the past, we had proposed using about one billion dollars in float funds that the State Treasurer keeps in reserve as the seed capital for a public bank. The State Treasurer objected that these funds were needed for other purposes and were not available to finance a public bank. While we disagree with the State Treasurer about his constitutional objections, allowing him to keep his billion dollars and providing an alternative source of funding will hopefully address at least some of his concerns and objections.

Question #2: How would a public bank affect school districts like Seattle who already have billions of dollars in school construction projects financed by their own local bonds?
The answer to this question would ultimately be determined by the five member Commission that is in charge of the public bank. This commission consists of seven Statewide publicly elected officials: the governor, the lieutenant governor, the secretary of state, the attorney general, the superintendent of public instruction, the commissioner of public lands and the state treasurer.

But given the emergency need to replace as many older crumbling schools as possible, we assume that an objective decision making model would be provided similar to the decision making model in British Columbia (where they face a similar problem with half of the schools not passing the health codes and earth quake codes). In British Columbia, every public school in the province was evaluated for safety and assigned points based on how old the school was and how likely the school was to collapse in a mega earth quake and how many students attended the school. The schools at the greatest risk of collapse are being replaced first.

If we used a similar process in our state, school districts would be free to do whatever they want with their local schools. So Seattle school construction projects would not be affected at all by a public bank. They could still be financed through private banks as they are right now. It would be entirely up to the local school board and local voters as it is right now.

We are not certain how many schools in Seattle would qualify be old enough to be near the top of the list for replacement. Seattle is lucky to have a very high amount of commercial property per student. So they have more money to build schools than other school districts. We believe the school districts that would be near the top of the list would be the poorest school districts in the state – school districts that have not been able to pass a school construction bond in more than 20 years. These are school districts whose schools have mold problems and have schools that should have been replaced 20 years ago. One example is the Highline School district – where both Highline High School and Evergreen High school and many other schools are in urgent need of replacement. We will call the first five years of the public bank the “emergency phase” as its primary focus must be to replace the oldest and most dangerous school buildings.

However, over a 5 to 10 year period of time, the public bank would be able to grow and address the needs of more school districts. Eventually, every school district in the state would be able to finance building schools at an extremely low interest cost through the Washington Public Bank – just as school districts in North Dakota finance their school construction projects through the public bank of North Dakota. Because the cost of building schools would be cut in half, local homeowners would eventually see a reduction in their local property taxes.

Question #3: The Bank of North Dakota receives all of the funds of the State of North Dakota. This Washington State Public Bank bill does not receive the funds of the State of Washington. If there a reason for this? Why not put all State funds in the State Public bank?
We believe the wisest course of action would be to place all state funds in our State Public Bank just as North Dakota does. The Bank of North Dakota returns a profit of over 15% to the state of North Dakota without taking substantial risks while our State Treasurer returns an average profit of only 5% per year for state public funds he invests in stocks and Wall Street banks. However, our State Treasurer is not yet a supporter of a Public Bank. We therefore have created a system where initially the public bank would be funded an operated outside of the Treasurer's current investment system. Hopefully, over time the existing state treasurer or a new state treasurer would see the benefit of gradually transferring all state funds over to our state public bank. But whether he did or did not, we could still use the public bank to lower the cost of building 1000 urgently needed public schools.

Question #4: Couldn't we just build public schools the way we always have with financing from Wall Street Banks?
We could. But the interest cost would be billions of dollars more. To be more precise, if the cost of building 1000 schools was $30 billion and Wall Street banks charged 5% interest, the interest cost on $30 billion would be $1.5 billion per year. If we had a public bank, we could essentially borrow the money from ourselves without debt as, like private banks, the public bank would create an asset of $30 billion in terms of the schools and a liability of $30 billion in terms of the construction loan on the schools. The net effect on the state account would be zero and the loan would be paid off over time either from the billion dollar per year income of the public bank or through some other combination of funding sources.

Question #5: One of your articles mentions investing our state's $80 billion in pension funds in our public bank. If the rate of return was low, wouldn't this violate the condition that pension funds be invested for the “highest possible rate of return.”
First, the Bank of North Dakota has a much higher rate of return than any Wall Street bank or any investment that the Washington State Treasurer currently invests State Pension funds with. But the reason we advocated that pension funds be invested here in Washington state rather than in Wall Street stocks and banks is that we believe that Wall street stocks and banks are unregulated at the moment due to the repeal of Glass Steagall Banking regulations in 1999. This makes the private Wall Street banks and stocks extremely risky. Our concern is that the State Treasurer is risking the loss of as much as half the value of our state pension funds by gambling them with Wall Street banks and Wall Street stocks. We are also concerned that there pension funds could be subject to confiscation under new FDIC rules. But ultimately it is up to the State Treasurer to decide where to invest our state's $80 billion in pension funds. Our hope is that after the Washington State Public Bank was operating for a few years, the current or future state treasurer would realize that our state pension funds would be much safer invested here in Washington state rather than on Wall Street.

Question #6: Some say that Wall Street banks make very little by financing municipal debt. Most of the money goes to the bond holders with the Wall Street banks charging a one percent financing fee. How can a public bank make cost so much less than a Wall Street bank?
A public bank makes more money first because it does not have to pay massive bank bonuses. Nor does it have to pay bond holders. There is a common misconception about Wall Street banks that the money they lend must first be taken in from bond holders. In fact, Wall Street banks have the power to create money out of thin air simply be creating two entry ledgers on their books - an asset and a debt – that balance each other out. The fractional reserve system of banking limits the amount of debt supposedly to 10 times the assets of the bank. For example, a bank with one billion in assets should not be loaning out more than $10 billion in loans. However, the only bank in the US currently complying this conservative policy is the public Bank of North Dakota. Many Wall Street banks have $20 to $40 in debt for every $1 in assets. The bond holders are one way of backstopping this very risky business. A public bank replaces this high cost high risk model with a low cost low risk model. This is why the State of North Dakota has virtually no debt. It is because it is using a low cost low risk model.

In addition, the cost of Wall Street banks is not merely the one percent they charge as a financing fee. The real cost of the Wall Street banks has been the trillions of dollars in bailouts required to keep them afloat PLUS the trillions of dollars in excess fees paid by cities, states and school districts due to the LIBOR rate rigging scandal PLUS the trillions of dollars robbed from the tax payers by big banks buying elections and changing laws to help them rob from school districts, cities and states.

We think that public banking is the only hope we have of restoring a stable economy to Washington state as well as reducing the fraud and corruption of Wall Street banks by breaking the big bank monopoly and allowing more people to see the benefits of public banking.

Isn't there any other alternative to build 1000 schools besides starting a public bank?
We do not think so. Those who oppose creation of a public bank owe it to our state's one million school children and their parents to explain to them how they will build and pay for one thousand urgently needed schools without a public bank.

Our thanks to those who asked these questions. If you have a question, fill out the Contact Us form at the top of this page. We will do our best to answer your question and post it on this website.

David Spring & Elizabeth Hanson
Washington Public Bank Coalition