Public Banking: Is It Time for Arizona to Move Its Money?

1. Public Banking: Is It Time for Arizona to Move Its Money? James P. Hannley Pamela Powers Hannley PDA Tucson General Membership Meeting January 23, 2013

2. The Budget Problem • “We don’t have the money!” • Governmental solutions have been limited to: • Cut spending • Raise taxes • Sell off public assets • No federal rescue for Main Street • But now, there’s a new option:Invest in our own citizensThe public can own its own bank!

3. It’s Time to Take Control of Our Money • http://www.youtube.com/watch?v=IvTDTL55K1U

4. A Bank Is a Bank? • What is a “public bank”? • How is a public bank different from a commercial bank or credit union? • What are the common misperceptions about public banks?

5. Commercial Banks: Big Banks & Community Banks • Create Credit • Beholden only to shareholders1 share = 1 vote • Mission is to maximize profits • Originate their own loans • Lending and loan qualifications are discretionary • Regulated by the government • Insured by the FDIC

6. Credit Unions • Governed by board of directors • Beholden to their members1 member = 1 vote • Regulated by the government • Restricted from some commercial banking activities • Operate within commercial banking system • Insured by FDIC

7. Public Banks • Create credit • Owned by the commonwealth • Operated by board of directors (not state gov) • Mission is to serve to public interest and grow the economy • Non-agency and infrastructure financing loans originate at community banks • Not required to be insured by the FDIC

8. Commercial & Public Banks Complement Each Others’ Services • Commercial banks offer: • Personal checking and savings accounts • Credit cards • Mortgage and car loans • Business loans • Other individual banking products • Public banks can: • Fund state/city/county infrastructure projects, disaster relief, and other programs for public good • Guarantee business, student, and farm loans offered by other banks • Buy up debt and excuse or restructure • Use taxpayer funds to build the economy, create jobs, and strengthen the state

9. Why Create a Public Bank? • Keep lending control in the public domain • State and local governments have billions of dollars sitting idle in “rainy day” funds • Public banks benefit the public good and boost the economy by putting taxpayer funds to work: • building infrastructure projects, • backing entrepreneurs, farmers, and others • reducing citizen debt • Investing in Main Street, not Wall Street

10. Why a Bank? New option: Create a state-owned bank North Dakota has had its own bank since 1919 and thereby creates its own credit. As a result, North Dakota’s options are to: • Expand public services • Lower taxes • Increase their bank’s capital, to make even more credit available to the people of North Dakota

11. North Dakota Balance Sheet 2012 • US Government Bonds $1,010,000,000 • Objective: Provide Liquidity • Loans $3,274,000,000 • Student Loans: $1,064,000,000 • Commercial Loans: $1,273,000,000 • Residential Loans: $594,000,000 • Agricultural Loans: $343,000,000 • State Institutions Loans: $38,213,000 • Deposits (CD’s) $2,551,247,000

12. Arizona Investment Policy Statute START_STATUTE35-313.  Investment of trust and treasury monies; loan of securities A.  The state treasurer shall invest and reinvest trust and treasury monies in any of the following items: 1.  Obligations issued or guaranteed by the United States or any of its agencies, sponsored agencies, corporations, sponsored corporations or instrumentalities. 2.  Collateralized repurchase agreements purchased from securities dealers that make markets in those securities listed in paragraph 1 of this subsection. 3.  Bonds or other evidences of indebtedness of this state or any of the counties or incorporated cities, towns or duly organized school districts. 4.  Commercial paper whose issuer is rated in one of the two highest rating categories for short‑term obligations by any two nationally recognized statistical rating organizations. 5.  Bills of exchange or time drafts known as bankers acceptances that are drawn on and accepted by a commercial bank. 6.  Negotiable certificates of deposit issued by a nationally or state chartered bank or savings and loan association. 7.  Bonds, debentures, notes or other evidences of indebtedness that are denominated in United States dollars and that carry as a minimum one of the Baa ratings of Moody's investors service or one of the BBB ratings of Standard and Poor's rating service or their successors. 8.  Securities of or any other interests in any open‑end or closed‑end management type investment company or investment trust, including exchange traded funds whose underlying investments are invested in securities allowed by state law, registered under the investment company act of 1940 (54 Stat. 789; 15 United States Code sections 80a‑1 through 80a‑64), as amended. For any treasurer investment pool that seeks to maintain a constant share price, both of the following apply: (a)  The investment company or investment trust takes delivery of the collateral for any repurchase agreement either directly or through an authorized custodian. (b)  The investment policy of the investment company or investment trust includes seeking to maintain a constant share price. 9.  Certificates of deferred property taxes as provided by section 42‑17309. 10.  Treasurer's warrant notes issued pursuant to section 35‑185.01 or registered warrants of a county issued pursuant to section 11‑605, if the yield is equal to or greater than yields on eligible investment instruments of comparable maturities. 11.  Shares in the treasurer's local government investment pools pursuant to section 35‑326 provided that investment policies of the pool seek to maintain a constant share price. 12.  Shares in the treasurer's long‑term local government investment pools, which terms are determined by the state board of investment, pursuant to section 35‑326.01. 13.  Subject to subsection D of this section, state transportation board funding obligations delivered pursuant to section 28‑7678. 14.  Deposits placed in accordance with the procedures prescribed in section 35‑323.01. B.  In case of default or failure to honor a county treasurer's warrant, the state treasurer may withhold the first state shared revenues that would otherwise be distributed to the defaulting county in the amount necessary to honor the note, including accrued interest to and beyond the date of default. C.  The state treasurer may contract to loan securities owned by the trust funds and operating monies deposited in the investment pools pursuant to section 35‑316, subsection B to the financial or dealer community through one or more of the entities listed in section 35‑317, subsection A, or authorized by the board of investment pursuant to section 35‑311, subsection E, if the borrower transfers collateral to the state treasurer or acting agent of the state in the form of cash or securities specified in subsection A of this section.  Collateral posted in the form of cash shall be in an amount equal to at least one hundred per cent of the market value of the loaned securities as agreed.  Collateral posted in the form of securities shall be in an amount of no more than one hundred ten per cent of the market value of the loaned securities as established from time to time by the board of investment.  The loaned securities shall be valued as to market value daily, and, if necessary, the borrower shall post additional collateral, as agreed, to ensure that the required margin is maintained.  The state treasurer may collect from the borrower all dividends, interest, premiums, rights and other distributions to which the lender of securities would otherwise be entitled.  The state treasurer may terminate the contract on not less than five business days' notice, as agreed, and the borrower may terminate the contract on not less than two business days' notice, as agreed. D.  The state treasurer shall invest operating monies in state transportation board funding obligations delivered pursuant to section 28‑7678 pursuant to the following: 1.  The state treasurer shall liquidate investments of operating monies if necessary in order to invest in state transportation board funding obligations, except that if operating monies in the state general fund fall below an eight hundred million dollar average over the previous twelve consecutive months, the state treasurer is not required to purchase state transportation board funding obligations pursuant to this subsection. 2.  Each series of state transportation board funding obligations shall bear interest at a fixed interest rate equal to the mean bid‑ask price of the United States treasury obligation with a maturity date closest to the maturity date of the state transportation board funding obligation as published most recently in the Wall Street Journal before the date the state treasurer receives a certificate from the state transportation board that states the board's determination to deliver an obligation to the state treasurer and the anticipated delivery date of the obligation.  The delivery date shall be between fifteen and sixty days after the day the state treasurer receives the certificate. 3.  The state treasurer shall provide written notice to the state transportation board and the director of the department of transportation when the operating monies fall below four hundred million dollars. If operating monies fall below two hundred million dollars, the state treasurer may call the investment in the state transportation board funding obligations in twenty‑five million dollar increments up to the amount that the operating monies are below two hundred million dollars.  The state treasurer shall give the state transportation board and the director of the department of transportation at least fifteen days' notice of the call. END_STATUTE

13. Tale of Two States Arizona North Dakota State budget surpluses 2008-2013.2012 Surplus: $1.6B 2013 Surplus: $1.24B Unemployment Q3 2013: 2.9%, lowest in US Lowest foreclosure rate in US Most local banks per capita (88 f/I Q3 2013) No bank failures in over 10 years* Bank of North Dakota has been operating since 1919 • 2009 State Operating Loss: $480,713,000 (realized) Projected Deficit 2014: $610M-$1.2B • Non-General Fund State Debt as of 2013: $5.1B • Annual interest on debt: $511M • Unemployment Q3 2013: 8.2% • One of top 10 states for home foreclosures (2013) • 49.6% of mortgages underwater as of July 2011 • 10 Community banks closed from 2010-13

14. Where Do States Invest?Wall Street vs Main Street Arizona North Dakota North Dakota Students North Dakota Farmers North Dakota Businesses North Dakota Entrepreneurs North Dakota State Agencies • US Government Bonds • Corporate Bonds • Exchange Listed Stocks • Exchange listed Money Markets

15. Arizona “Servicing Bank” Statute STATUTE35-315.  Servicing banks; qualifications; proposals A.  Any bank eligible to become an eligible depository having a total capital structure of ten million dollars or more and assets of two hundred million dollars or more and being otherwise in a sound condition is eligible to be the servicing bank for the state. B.  On the first Monday in March of each year of award, the state board of investment shall provide for public notice to the banks qualified to be a servicing bank of the time and place at which servicing proposals will be received. Requests for proposals shall clearly specify all services required to be performed by the servicing bank.  The servicing proposal submitted shall be the compensation for which the qualified bank will agree to perform the required services as a servicing bank for the ensuing period of designation as established by the board of investment.  The award shall be made for a period not to exceed five years and may be paid from general fund interest earnings according to rules adopted by the board of investment. C.  On the fourth Monday in April of the year of the award, the state treasurer shall receive the servicing proposals in writing.  Only those proposals that conform to the specifications set forth in the request for proposals shall be considered.  The qualified bank submitting the proposal with the highest value to this state, as determined by the state treasurer and the board of investment, shall be designated as the servicing bank.  Designations shall be evidenced by the signing of the final proposal by the state treasurer, the board of investment and the designee bank.  The state treasurer may maintain a bank account in conjunction with the servicing bank account, which must have on deposit at all times a sum of money approximating the average dollar value of daily warrants paid by the bank the previous month. D.  The state treasurer may request and qualified banks may submit proposals for any or all of the services required.  The state treasurer may specify differing contract periods for any or all of the services required. E.  The state treasurer or servicing bank may terminate a servicing bank contract at any time after sixty days' prior written notice is given. F.  In addition to the services required of the servicing bank, the state treasurer shall contract for all other banking services required by any state agency.  No state agency shall contract for banking services except with the written permission of the state treasurer. G.  This section does not require the state treasurer to utilize a servicing bank. H.  This section or the specifications set forth in the request for proposals shall not be construed to require the servicing bank to purchase warrants. I.  Deposits and withdrawals of monies shall be made by the state treasurer on the servicing bank.

16. Cash Flow Arizona Tax Revenue $100 State Treasury State of Arizona Acct. $100 + 1% Jane Doe loan $900 + 18% Servicing Bank TUSD Duffy Elementary $90

17. Why a Public Bank?Profit for the People • The Bank of North Dakota (BND) in 2012earned 13.25% return on equity by investing within the state • BND’s dividends ($300M over 10 years) go to the state treasury, reducing tax burdens while supporting public services. • ND budgeted $60M in revenue from BND for 2011-2013 biennium. 2012 Profit: $81.6M • Why are Arizona’s tax dollars supporting Wall Street? • Why not invest in-state? For education? Higher education? Renewable energy? Tech startups?

18. Why a Public Bank?To Invest in Our Citizens • Public pension funds in most states have lost hundreds of millions of dollars. • In 2012, the Arizona Pension Plan recognized an investment loss of $524 Million • What if these funds were used to own a state bank? • And invested in their own citizens, as North Dakota does?

20. Why a Public Bank?To Free Up Funds • Banks have unlimited low-interest credit lines with the Fed and federal government • States and municipal governments have no credit line with the Fed. . . • States must create large “rainy day funds”— public money that sits, earning little interest.

21. Why a Public Bank?To Level the Playing Field • Federal law and the banking system give banks huge advantages and place states at a financial disadvantage. • Banks borrow at rates as low as 0.2% (over-night Fed funds rate) to 1.27% (6-month CD) • States borrow at much higher rates • The JP Morgan Arizona Municipal Bond Fund alone has net assets of $79,772,202 at an average interest rate of 5% (total return “A” Shrs @NAV YTD 3.24%)

22. Why a Public Bank?To Control Rising Credit Costs • States are now hit with lower credit ratings, making borrowing even more expensive • A year ago, California was rated BBB, barely higher than bankrupt Greece • Arizona has the nation’s 3rd lowest credit rating in the nation (Arizona Public Media, Jan. 21, 2014)

23. Why a Public Bank?To Provide Affordable Credit • County and Municipal governments must borrow funds by issuing bonds • Yes, at “market rates”—but these rates are being driven up, increasing the cost of money. • The issue is not just available credit, but affordable credit. • In 2012 the City of Tucson passed a $100 Million transportation bond with an authorized interest rate of 8%

24. What Can Be Done

25. What Can Be Done Today, our state and local governments are: • investing our capital (pension funds), and • depositing our tax revenues (our money!) on Wall Street Translation: We are handing over our huge credit generating power to the same big banks that got us into this mess in the first place. We are investing in Wall Street, not Main Street. Does this make sense to you?

26. What Can Be Done Banking in the Public Interest Deposits begin the creation of credit in a bank. This credit is an asset of the bank. If Arizona deposits funds in a Wall Street bank, it is giving away its power to create credit credit. This credit rightfully belongs to the public, not to private banks. Our state and cities should be managing that credit in a public bank—serving the public interest by investing in our own Main Street.

27. What Can Be Done Invest in Main Street Through a Public Bank • Keeps our tax money working within the state • Keeps our credit from leaving the state • Strengthens our community banks • Demonstrates that our elected officials are working for us and not for Wall Street • Helps our communities return to prosperity in a nonpartisan way

28. Recap: Solution Choices • Raise taxes • Cut services • Sell assets • Invest in our own citizens by creating a public bank There are no other choices. Will we continue having our tax payments sent to Wall Street banks? What Can Be Done

29. What Can Be Done • Next Steps • Refine and pass a resolution: “Return to prosperity by forming a state-owned bank.” • Tell your state representative that keeping tax revenues in our state is vital—anurgent need. • Educate legislators about the value of a public bank • Find “natural allies” to speak with one voice for public banking in the public interest. • Network with activists in other states who are working on public banking

30. Natural Allies • Community leaders whose budgets are being gutted by the state, enlightened legislators • Public employees and unions faced with state and city budget cuts: teachers, firefighters, etc. • Community bankers wanting to originate loans • Unemployed and under-employed people • Small business owners burdened by high credit card APRs to pay for inventory What Can Be Done

31. This is only the beginning. Help us make it happen. Arizona Public Banking Coalition http://arizonapublicbanking.org