A Public Bank for Seattle?
Our October meeting featured State Senator Bob Hasegawa talking about the reasons for establishing a state bank. It was difficult to take coherent notes in the atmosphere of questioning and we have taken the liberty of printing the white paper, which lays ii out in a more logical manner. Left out is the history of other states, the longest publicly held bank is in North Dakota and it is highly successful. It gives student loans and their college graduates are not burdened with years and years of onerous debt.
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.”
1. Purpose 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.
2. Governance 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 seven Trustees and the City Council would appoint six additional trustees. This Board would appoint bank officers.
3. Capitalization and 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 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.
4. 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.
5. Operations 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.
6. Oversight 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.
7. Growth 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.
8. Earnings 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.
9. Perceived Obstacles (We have left out the “Perceived Obstacles” which details how the Supreme Court of Washington could find a public bank constitutional. This may be read by finding Hasegawa’s Public Bank through Google.)
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.
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 Bank Corp. 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 firsthand 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.