Report - 2021 02 09 A28531 D227253 Bill Report 5188 Sbr Bfst Ta 21

Summary

A Washington Senate Bill Report on SB 5188, concerning the creation of the Washington state public bank, as of January 28, 2021, prepared for the Senate Committee on Business, Financial Services & Trade. The background section describes the Bank of North Dakota, state lending programs for local governments, and a business plan transmitted to the Legislature in May 2020. The bill summary describes a public bank that would lend to state, local and tribal governmental entities, issue debt in its own name, and be governed by a nine-member operating board with the state finance committee as oversight board. It lists the bank's powers and limits, a goal of 35 percent of annual lending for housing in low to moderate-income areas, and disclosure exemptions. The report closes with a staff summary of pro, con and other public testimony and lists those who testified.

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                            SENATE BILL REPORT
                                  SB 5188

                                      As of January 28, 2021

Title: An act relating to the creation of the Washington state public bank.

Brief Description: Concerning the creation of the Washington state public bank.

Sponsors: Senators Kuderer, Nguyen, Conway, Darneille, Das, Dhingra, Hasegawa, Hunt,
    Liias, Lovelett, Stanford, Van De Wege, Wellman and Wilson, C..

Brief History:
     Committee Activity: Business, Financial Services & Trade: 1/28/21.


                                     Brief Summary of Bill
           • Activates a public bank as a cooperative membership organization to
             lend to state, local, and tribal governmental entities.
           • Establishes the public bank to issue debt in the name of the bank rather
             than the state of Washington.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES & TRADE

     Staff: Clinton McCarthy (786-7319)

     Background: Public Banking in the United States. A public bank is a bank, a financial
     institution, in which a state, municipality, or public actors are the owners. As of 2021, the
     Bank Of North Dakota is the only state public bank in the United States. Under North
     Dakota State law, the bank is the State of North Dakota doing business as the Bank of North
     Dakota. The bank is the only legal depository for all state funds. The state and its agencies
     are required to place their funds in the bank, but local governments are not required to do
     so. Profits from the bank are either deposited in North Dakota's general fund, or are used to
     support economic development in the state. The bank is permitted to
     collateralize government deposits.




     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

Senate Bill Report                              -1-                                             SB 5188
     State Lending Programs for Local Governments. Washington has more than 80 programs
     and subprograms administered by 12 agencies that provide financial support to local
     governments in the state. Some of the larger examples include:
         • Public Works Trust Program—provides planning, pre-construction, construction and
           emergency loans for local infrastructure improvements;
         • Water Pollution Control Revolving Loan Program—provides low-interest loans for
           planning, design, acquisition and construction of water pollution control facilities
           and nonpoint source pollution control activities;
         • The Drinking Water State Revolving Fund —provides low-interest loans for public
           water systems to publicly owned—municipal—and privately owned drinking water
           systems statewide;
         • The Community Economic Revitalization Board—provides loans and grants to
           finance public infrastructure improvements that encourage new business development
           and expansion in areas seeking economic growth; and
         • The Housing Trust Fund—provides loans and grants for construction, acquisition and
           rehabilitation of low-income multi-family and single-family housing.

     Two programs provide local governments with access to capital via the municipal bond
     market through programs administered by the Office of the State Treasurer. The LOCAL
     Program allows Washington municipalities to finance essential real estate and equipment as
     either a financing contract or lease, also known as certificate of participation). While these
     certificates are issued by the state, the state’s obligation is limited to the extent that the state
     is an obligor in the certificates; otherwise local governments participating in a specific
     contract are named as the obligor. The School Bond Guarantee Program was established in
     1999, following a voter-approved constitutional amendment. School districts must apply to
     the State Treasurer’s Office and demonstrate that their general obligation bonds were
     approved by voters. The program provides a backup general obligation pledge to school
     district’s bonds, providing a lower interest rate to the borrowing district.

     Washington State Bank Business Plan. In the 2018 supplemental budget, the Legislature
     included a proviso for the Washington State Office of Financial Management to contract
     with an entity or entities with expertise in public finance, and commercial and public
     banking to evaluate the benefits and risks of establishing the bank, and to develop a
     business plan for its creation and launch. This report was transmitted to the Legislature in
     May 2020.

     Summary of Bill: Establishment and Activation of a State Bank. A public bank (bank) is
     established as a public body corporate and politic, and as an instrumentality of the state of
     Washington. The bank may be activated under the following conditions:
         • an appropriation is provided from the state that is sufficient to allow the state to issue
            debt with a competitive rating; and
         • articles of activation are completed in a format approved by the State Finance
            Committee and filed with the Secretary of State.


Senate Bill Report                                -2-                                           SB 5188
     Local banks are permitted to invest in the bank, and the articles of activation must be
     approved by each, the member local, or tribal governments, that become a member. The
     State Finance Committee is directed to approve an amount for an initial contribution by
     local and tribal governments. Five years after activation, the bank shall have a goal of
     providing 35 percent of the amount it lends on an annual basis to support housing in low to
     moderate-income areas. The state treasurer is authorized to reinvest balances that are more
     than sufficient to meet the current expenditures into a public bank.

     Operating Board Membership. The operating board consists of nine members including:
        • five member appointed directors selected by a majority of the members of the bank;
        • three of the members appointed by the Governor and confirmed by the Senate; and
        • the state treasurer serving as an ex-officio member.

     One of the three public members appointed by the Governor shall be appointed as the chair
     of the board and serve at the pleasure of the Governor, with the initial chair having to serve
     a full four-year term. The state treasurer may designate an employee to act on their behalf.
     A majority of directors constitutes a quorum. Directors of the bank serve without
     compensation, but are entitled to reimbursement from the funds of the bank.

     Powers of the Operating Board. The board has the authority to hire and fire an executive
     director. The board must approve the budget of the public bank on an annual basis. The
     board is directed to establish an internal audit committee.

     Employees of the Washington State Housing Finance Commission (WSHFC) will
     administer and operate the bank. The executive director is funded through the WSHFC
     budget. The bank may consult with other state agencies at its discretion and without the
     approval of the WSHFC.

     State Oversight of the Public Bank. The state finance committee serves as the oversight
     board of the bank. The state finance committee may require independent audits, and is
     subject to audits by the state auditor. The Department of Financial Institutions (DFI) may
     review the deposits and transactions of the bank.

     Powers and Limitations on the Public Bank. The bank is authorized to:
        • sue and be sued in its own name;
        • adopt and alter an official seal;
        • establish rules to conduct its business;
        • engage independent experts and enter into contracts that the bank may find necessary
          to conduct its business;
        • receive deposits from state, local or tribal governments and invest the deposits in
          lawful funds;
        • open and maintain accounts in qualified public depositaries in the Federal Reserve
          Bank of San Francisco, the National Cooperative Bank, a federal home loan bank, or


Senate Bill Report                             -3-                                         SB 5188
           any other federal financing entity;
         • procure insurance;
         • apply for and accept grants, loans, advances, and from any source of money, property,
           labor, or other things of value;
         • borrow money and issue its bonds consistent and provide for and secure their
           payment;
         • develop and conduct a program to make loans to borrowers for project costs of
           infrastructure and economic development projects;
         • establish, revise, and collect member contributions and fees as the bank deems
           necessary;
         • charge for its costs and services in review or consideration of a proposed loan to a
           state, local, or tribal government regardless of whether a loan is made;
         • make expenditures as are appropriate for paying administrative expenses;
         • establish reserve funds;
         • provide financial assistance and other forms of assistance to state, local, or tribal
           governments;
         • make distributions to members of amounts that the board deems surplus to the needs
           of the bank, subject to a two-thirds majority of the board; and
         • engage outside legal counsel.

     The bank must not:
        • constitute a bank or trust company within the jurisdiction under the control of DFI,
          the controller of the currency of the United States of America, or the United States
          Department of the Treasury; and
        • constitute a bank, broker, or dealer in securities.

     Financing Powers of the Public Bank. Bonds issued by the bank are not obligations of the
     state of Washington, and are only obligations of the bank. Such funds are not public
     moneys or funds of the state and at all times must be kept segregated and set apart from
     other funds. Obligations of the bank are not obligations of the state of Washington.

     Bonds of the bank are subject to such terms, conditions, covenants, and protective
     provisions as are found necessary or desirable by the bank. Any bonds issued by the bank
     may be secured by a financing document between the bank and the purchasers or owners of
     the bonds. The bank may purchase its bonds with any of its funds available for purchase,
     and purchase its bonds in the open market. Any issuance of bonds requires advance notice
     to the chair of the state finance committee.

     The bank, the members, the directors or agents, nor bank employees are personally liable on
     bonds or subject to any personal liability or accountability. Any owner of bonds issued by
     the bank may become a purchaser at any foreclosure sale if the person is the highest bidder.

     Depending on the contracts between the bank and its borrowers, the bank may modify the
     rate of interest, time, and payment of installment of principal.


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     Exemption from Disclosure. The following are exempt from disclosure:
        • financial and commercial information supplied by businesses or individuals during
          the application for loans or program services and records; and
        • examination reports and information obtained by DFI from banks, savings and loans,
          and credit unions.

     Appropriation: None.

     Fiscal Note: Requested on January 14, 2021.

     Creates Committee/Commission/Task Force that includes Legislative members: No.

     Effective Date: Ninety days after adjournment of session in which bill is passed.

     Staff Summary of Public Testimony: PRO: The idea for a public bank has been around
     for a decade. The idea has evolved and the work that has come out of the task force is a
     professional business plan, that created the structure for this bill. This will provide an
     additional option for governments to finance needed improvements. Banks are accountable
     to their shareholders. This bank would be accountable to the taxpayers. A public
     cooperative bank can partner with other state programs to fill the gaps. The state would
     share in profits that would be returned to the community. Members pay themselves back,
     and the profits work for the people. This bill would provide more options to help connect
     last mile projects like connecting broadband networks to small communities. This will be
     an independent bank run by banking officials, and be accountable to the public. The public
     cooperative bank will not be susceptible to fund sweeps because it will be an independent
     entity. It is a bank of the people for the people. An additional lending authority for
     communities fighting issues like gentrification and redlining. This is good public policy.
     Operations would be lower because they would not have branches. There would be more
     public oversight and transparency because it would be accountable to our elected officials.
     Counties need reliable resource for investment—private banks are reluctant to invest. This
     would take the middleman out of what the government takes through taxes and what it pays
     for with respect to public improvements.

     CON: This is a risky use of taxpayer funds and will be more expensive to use than what is
     currently available. There are examples of governmental entities going into default and
     having to be bailed out by counties, and the fear is that this could happen on a broader scale
     if we had a state bank. Only two public banks, North Dakota and American Samoa, are
     open while many others have failed. Many programs exist to assist rural counties. Many
     jurisdictions have studied to start a public bank, and no new banks were adopted as a result
     of those studies. There could conceivably be capital calls to members, and members might
     not have reserves to pay for those capital calls. The name bank and trust should not be used
     to describe this entity if you go forward. The public deposit board does not meet frequently
     enough for oversight. This structure mimics a credit union. This is not a public bank.


Senate Bill Report                             -5-                                         SB 5188
     Oversight is by elected officials, which makes it political. This is an intrusion by the
     government.

     OTHER: Some cities find this concept intriguing. There are questions related to how this
     feels needed. Cities want grants for projects to keep utilities low. A lot of time cities have
     no payback options to pay for loans. They need to have very low interest rates. Smaller
     jurisdictions do not have reserve dollars necessary to fund this. This needs to be additive
     and not supplant programs. There are a lot of programs out there that need to be
     maintained. The Housing Commission is supportive of the underlying goals. The Board of
     Commissioners have not had a chance to meet and determine a position for the board.
     There is a concern that supporting the bank my detract from the Commission's mission to
     prevent homelessness and affordable housing.

     Persons Testifying: PRO: Senator Patty Kuderer, Prime Sponsor; Cynthia Stewart, League
     of Women Voters of Washington; Ruth Fruland, citizen; Stoney Bird, citizen; Toyoko
     Tsukuda, League of Women Voters of Washington; John Comerford, RetireCorp, SPC;
     John Holdsclaw, National Cooperative Bank; Dennis Ortblad, citizen; Paula Sardinas,
     Washington Build Back Black Alliance.

     CON: Jeff Pack, citizen; Meredith Green, Kitsap County/Washington State Association of
     County Treasurers; Brad Tower, Community Bankers of Washington.

     OTHER: Candice Bock, Association of Washington Cities; Steve Lindstrom, Sno-King
     Water District Coalition; Steve Walker, Washington State Housing Finance Commission.

     Persons Signed In To Testify But Not Testifying: No one.




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