A Public Bank for the City of Seattle
A White Paper Written on Behalf of Senator Bob Hasegawa, Candidate for Mayor of Seattle
JULY 2017, by John Paul Comerford
In February of 2017, the City of Seattle decided to sever its $3 Billion annual banking relationship with Wells Fargo Bank beginning at the end of December 2018. The City took this action because of Wells Fargo’s involvement in the Dakota Pipeline Project as well as the Bank’s well documented predatory lending practices over the previous decade. In making this decision, the City Council was clear in its desire to replace Wells Fargo with a more socially responsible banking partner. A number of city councilors indicated their desire to explore a City or State owned bank. This White Paper examines how a City owned bank could be created and become operational by January 2019 within the Washington State Constitution and the Revised Code of Washington, providing both the banking services necessary for the City of Seattle and new community lending opportunities for Seattle.
The Public Banking Institute defines public banking as
“…distinguished from private banking in that its mandate begins with the public’s interest. Privately-owned banks, by contrast, have shareholders who generally seek short-term profits as their highest priority. Public banks are able to reduce taxes within their jurisdictions, because their profits are returned to the general fund of the public entity. The costs of public projects undertaken by governmental bodies are also greatly reduced,……the mission of public banks is to respond immediately to assure the long-term prosperity of the community”.
Public Banking is not a new concept. In 1836, the U.S. Congress did not renew the charter for the Second Bank of the United States, opening the door for states to start their own banks. Alabama, Kentucky, Illinois, Vermont, Georgia, Tennessee and South Carolina all created banks that were completely owned by the state government. Missouri, Indiana and Virginia had banks with the State holding a majority interest and a number of other states created banks with the State owning a minority interest. By 1900, only Virginia and Kentucky survived.
During the early 1900s, North Dakota’s economy was based on agriculture, specifically wheat. Frequent drought and harsh winters didn’t make it easy to earn a living. The arduous growing season was further complicated by grain dealers outside the state who suppressed grain prices, farm suppliers who increased their prices and banks in Minneapolis and Chicago that raised the interest rates on farm loans, sometimes as high as 12%.
North Dakotans were frustrated and attempts to legislate fairer business practices failed. The Non-Partisan League gained control of the Governor’s office, majority control of the House of Representatives and one-third of the seats in the Senate in 1918. Their platform included state ownership and control of marketing and credit agencies. In 1919, the state legislature established Bank of North Dakota (BND) and the North Dakota Mill and Elevator Association. BND opened July 28, 1919 with $2 million of capital.
Today, with total assets of over $7.3 Billion and capital of $876 Million, the Bank in partnership with more than 100 North Dakota based financial institutions fulfills its mission to promote the development of agriculture, commerce and industry in North Dakota.
The operating policy, established back in 1919, stated that the Bank shall be “helpful to and to assist in the development of state and national banks and other financial institutions and public corporations within the state and not, in any manner, to destroy or to be harmful to existing financial institutions.” The Bank’s operating policy continues to serve as a guiding principle for the Bank’s work today. In 2016, the Bank, still 100% owned by the State of North Dakota, had $136 Million in earnings. In fact, since 1971, the Bank has returned over 46% of its earnings to the State of North Dakota, including $100 Million this year. Standard & Poor’s, the major bank rating service, affirmed the Bank’s credit rating as “A+” and “A-1+” for long-term and short-term credit respectively in its 2016 annual review. Oddly enough, the size of North Dakota and its annual operating budget are almost equal to that of Seattle.
While North Dakota is the only U.S public entity to own a bank, the cities of San Francisco, California and Santa Fe, New Mexico are currently exploring the concept as are the states of Massachusetts, Vermont, California, Hawaii, Maine and New Mexico. The U.S. Farm Bank for Cooperatives has long been owned by its agricultural clients as has the National Cooperative Bank (commercial and housing clients), both started by the U.S. Government. Mutual bank ownership goes back several centuries in the United States to member owned savings and loan associations and later credit unions.
It is in the spirit of those North Dakota pioneers of almost 100 years ago who set out to control their own destiny that the City of Seattle will undertake the creation of a public bank: The Municipal Bank of Seattle.
To meet the banking needs of the City of Seattle as well as to support development and infrastructure lending for public housing, transportation projects, schools, energy efficiency, and other public purposes. The Bank would be a wholesale bank or ‘bankers bank’ and will generate new revenue for the city without raising taxes.
The Seattle Municipal Bank will be an agency of the City of Seattle with a Governing Board chaired by the Mayor with the City Council President serving as Vice Chair. The City Attorney will also serve on the Board. The Chief Financial Officer of the City or Seattle would serve as a non-voting member on the Governing Board.
The Board of Trustees, accountable to the Governing Board, will oversee the overall operations and functions of the Bank. The Mayor would appoint 7 Trustees and the City Council would appoint 6 additional trustees. This Board would appoint bank officers.
- Capitalizationand Liabilities
There are several options available to capitalize the Bank. The most desirable option would involve redirecting $100 Million of the City’s current $1.437 Billion (2015) treasury investment for the purpose of capitalizing the Bank. City officials have taken the position that all of the funds within the treasury investment pool have been committed to other sources, but these officials have advised that with the approval of the Mayor and the City Council a portion of these funds could be directed towards Bank capitalization. The Bank plans to leverage this capitalization with municipal cash flow, fixed rate loan advances from the Federal Home Loan Bank of Seattle (of which the Bank can become a member) and other funding so that loans can be made below current retail market pricing. An important function for the Bank will be the specialized technical assistance in marketing and underwriting loan assets.
- Assets(Loans and Investments)
The Bank’s assets will include loans made for local infrastructure projects and participation interests in loans made by local and regional banks and credit unions along with more liquid investment grade assets. In keeping with internationally accepted bank regulatory policy, assets could total up to $1 billion for every $100 million of capitalization. We plan to syndicate the Bank’s portion of the loans in order to increase lending capacity and reduce both interest rate and timing risk. This syndication may include the sale of individual loans, pools of loans or securities backed by these loans. Buyers may include socially responsible and program related investors and investors looking for tax-exempt income through the securitization of individual or pooled loans. Such securitization can be accomplished through existing State of Washington programs such as the Washington Economic Development Finance Authority (economic development), the Washington Housing Finance Corporation (housing) and the Washington Education Facilities Authority (non-profit education).
The Bank would be responsible for servicing all loans, both retained and sold, initially through a third party administrator.
The major Bank functions would be: Executive Office, Underwriting, Risk Management, Technical assistance, Finance, Accounting, Audit, Loan servicing. The Bank staff would be supported by current employees of various City of Seattle operating departments as the Bank increases its lending and operational capabilities and hires permanent staff.
Oversight would come from the Washington State Auditor, who could call upon the Washington Department of Financial Institutions for their expertise. Audits would be conducted annually. The expectation is that the Seattle City Council will also have oversight authority. An outside audit would also be conducted annually.
The Seattle Municipal Bank would grow conservatively and capitalization is assumed over several years as demand allows for increased profitable lending. Growing from an initial 20 employees, the Bank is projected to have about 50-75 employees when it reaches $1 billion in assets.
Income earned by the Seattle Municipal Bank would be used to: 1. Fund a loan loss reserve equal to at least 2.5% of outstanding collateralized loans and 5% of non-collateralized loans. The actual reserve would be established for each loan based upon a number of factors. 2. Used to increase Bank capitalization and allow for additional lending and investments. 3. Pay dividends to the City of Seattle.
- Perceived Obstacles
Historically, opponents of public banking claim that there is a State Constitutional prohibition that Washington and/or any of its political subdivisions may not establish a public bank.
Article 8, § 7, of the Washington State Constitution provides:
“No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation.”
However, over the years both the Legislature and Washington Supreme Count have allowed the State and its political subdivisions to engage in economic development, infrastructure and educational lending through revisions to the Revised Code of Washington and Supreme Court Decisions.
As stated in a Seattle University Law Review Article by Davis Martin:
“Over the last thirty years, however, the Washington State Supreme Court has broadened these formerly narrow exceptions to the point that few transactions are found unconstitutional. The court currently reviews a challenged gift transaction by asking whether the government expenditures carry out a fundamental governmental purpose, or whether they were made under the government’s proprietary authority-as if it were a private entity.” If the governmental expenditures carry out a fundamental governmental purpose, no unconstitutional gifting occurs and the review ends. But if the court finds that expenditures are pursuant to the government’s proprietary authority, the court examines a transaction for donative intent by the government and for consideration. If donative intent is found, the adequacy of the consideration exchanged is closely scrutinized. If no donative intent is found, then the adequacy of consideration is not closely scrutinized, but is merely assessed under contract law for legal sufficiency. The Washington State Supreme Court has never found donative intent and, thus, has never scrutinized the adequacy of the consideration ex- changed. The result is that only the most unbalanced of transactions are prohibited.”
There appears to be no legal or other impediment to the City of Seattle establishing a public bank. Assuming approval by the City Council, the Municipal Bank of Seattle could be up and operating by the start of 2019, providing both the banking services necessary for the City of Seattle operations as well as the beginning of a community bank lending program.
Note of Appreciation
In developing this White Paper, the following individuals were kind enough to spend time with me discussing the creation of a municipal bank in Seattle:
Glen Lee – Finance Director and Chief Economist for the City of Seattle
Hugh Spitizer – Professor of Law at the University of Washington and Member of Pepper-Foster PLLC. Experienced bank council for both the City of Seattle and State of Washington.
Tim Porter – Chief Financial Officer of the Bank of North Dakota.
Rodney Wendt – Executive Director of the Washington Economic Development Finance Authority.
The Public Banking Institute
About the Author
John Paul Comerford is a fiduciary consultant in Seattle. In 1978, he was appointed by President Jimmy Carter to shepherd the National Consumer Cooperative Bank through the U.S. Congress and to begin operations of the Bank in 1979 as its first President. John later chaired an investment group in acquiring the Old Stone Banking Company and through state legislation turned it into a community bank and trust company, the Bank of Massachusetts, now part of Century BankCorp. More recently, John served as the founding President and CEO of Prime Bank, a community bank that is now part of the SunTrust Banking System. John has learned first hand how shareholders want to capitalize on their growing bank equity through the sale of these community banks to larger regional banks, something that would never happen with public banks.