Town Meeting State Bank Proposal Tests Voters' View Of Risk

Feb 27, 2014

Most Town Meeting resolutions concern issues or questions that are fairly easy to explain. Not so with the concept of a public bank. Yet, at least 20  communities will take up a Town Meeting resolution asking voters to support the creation of one.

The debate boils down to opportunity vs. risk. 

There’s a lot packed into the arguments made by both sides, but before debating them many people at town meeting will want to know what a public bank is.

It doesn’t have individual accounts or ATMs or a Christmas Club. It’s where the state puts its cash. 

Right now Vermont’s money is in large global banking institutions. Most of it is deposited with TD Bank. The state draws on those accounts to pay its bills.

When it wants to raise money to fix bridges or fund a variety of projects, the state sells bonds through large banks and investment firms.

“We give our money somewhere else so they can collect the interest on the deposits and then we have to borrow it from Wall Street to do our own improvements,” says Gwen Hallsmith, who organized the drive to bring a state bank resolution before voters at Town Meeting.

Instead of going to the bond market, the state would use a public bank to loan out money to finance projects. 

Hallsmith says a public bank would save the state money, create jobs and eventually generate revenue.

The case for a state bank is made in a recent study written by Gary Flomenhoft of the University of Vermont Gund Institute for Ecological Economics.

It was commissioned by public bank advocates and Flomenhoft himself supports the idea.

Flomenhoft’s study says seven states have had public banks.  Three failed and three others were liquidated. North Dakota is the only state currently with a public bank.

Flomenhoft says North Dakota might offer some lessons but it shouldn’t be the model for Vermont.

He suggests taking an existing public non-profit agency that is already making loans and turning it into a bank – an agency like the Vermont  Economic Development Authority.

“We’ve already got very successful financial lending agencies with a good track record. Why reinvent the wheel?  Just give them the ability to take deposits,” says Flomenhoft.

A bill currently in the Vermont Senate that would turn VEDA into a public bank.

"There are so many risks to a small little state like Vermont." - Cairn Cross of Fresh Tracks Capital

It would start by giving the agency a banking license, so it could accept deposits and then put 10 percent of the state’s funds into it.  Supporters say the ultimate goal is to put all state money into the public bank.

Granting VEDA banking powers is an important part of creating a public bank.

One reason is state cash on hand at any given time fluctuates from well over $300 million to as little as $20 million. When funds are low VEDA would need to borrow low-cost money to manage cash flow just as a bank does.

State Treasurer Beth Pearce says an agency like VEDA is very good at what it does, but taking on a host of banking functions isn’t workable.

“For us to provide those services, I don’t believe is cost effective.  And it’s certainly not an area that we have experience in,” she says.

Pearce says she is all for using more state money to finance important projects, but she opposes the idea of a state bank that would have control of all of it.

Unlike personal bank accounts, state deposits in the big banks are not insured by the FDIC, but Pearce says the money is safe in those institutions because they have huge assets.

She says if Vermont’s relatively small cash assets were in a state bank that money would be at greater risk; for example if loans go bad.

And if the big credit rating agencies see a public bank as risky, it jeopardizes Vermont’s bond rating.

Pearce says that’s important because a lower bond rating makes it more expensive for the state and lending agencies to borrow money.

A poor bond rating "turns around and affects every Vermonter." Pearce says. "Whether it’s affordable housing, whether it’s a college education for students, commercial development in the state, commercial energy improvements in the state. Those are the types of things that benefit from our bond rating. I don’t want to put that at risk.”

Public bank supporters say the risk is overstated. They point to VEDA’s success and its high loan repayment record. Gary Flomenhoft argues that state money in large institutions like TD Bank is also at risk.

"People are pretty angry at the banks and they want to do whatever they can to try to take away power from those 'too big to fail' banks." - Public bank advocate Gary Flomenhoft

“The risk issue is important and there’s a question of whether our money is more at risk at TD Bank than it would be in a public bank,” he says.

Flomenhoft’s study says a large share of TD Bank assets is in risky financial products.  

TD Bank is one of the largest banks in the world.

Cairn Cross, who co-founded Fresh Tracks Capital in Shelburne, spent 10 years as a commercial banker.  Cross says money would be less secure in a Vermont state bank. 

“You’ve got concentrated risk within a geographical area. There are so many risks to a small little state like Vermont. TD is a huge giant,” he says.

Several years ago Cross encouraged lawmakers to look into the idea of a public bank. Now he says he’s convinced that a public bank for Vermont simply wouldn’t work.

Cross says opponents of a state bank are going to have their work cut out for them at town meetings where the resolution is discussed.

“The arguments against it are not easily addressed in sound bites,” says Cross. “The arguments for it are easily addressed in sound bites through a lot of populist sentiment: Big banks are bad and we need more local autonomy over our money.”

As far as Gary Flomenhoft is concerned the behavior of big banks is a good argument for a public bank.

“People are pretty angry at the banks and they want to do whatever they can to try to take away power from those too-big-to-fail banks,” he says.