By Holly Chisa, HPC Advocacy, UTA Washington State Lobbyist
Could Washington residents benefit from a state bank – and how would it interact with the FFA?
Over the past several years, Washington lawmakers have toyed with the idea of a state bank, currently referred to as the Washington State Investment Trust. This financial institution would borrow against the state’s reserves to establish a state lending institution. State and local governments, as well as public agencies, would be able to borrow funds for construction projects and other development. Deposits would be made by state agencies into the Trust, including tax payments from businesses and sale tax collection. The state would guarantee the deposits made, not the FDIC. These deposits would come from tax payments owed by businesses and individuals, and also interest payments made by borrowers (public agencies, schools, for example) that would borrow funds for school construction and other public works projects. The legislation establishes a Board to run the Trust, and that Board would determine if funds generated from interest charged could be returned to the state general fund as revenue.
There are states – well, STATE – that have discussed the establishment of a state bank. North Dakota has the oldest and only state bank, established back in 1919. Since then, no other state in the U.S. has established a state-run bank, and only Puerto Rico has a similar model. That doesn’t stop proponents in Washington from running legislation annually to either study or establish a state bank here. And, while considered a novel discussion a few years ago, the concept is gaining momentum in Washington. 11 Senate members signed on to a bill in 2018 to establish a long-term business plan for the Trust. 18 Members of the House signed on to the companion bill. A budget proviso passed in 2018 providing funding for the development of a business plan. The plan is to be completed by an independent party through a local university, and will be delivered to the Legislature by June 30, 2019.
Why should trustees care? Because the establishment of a state bank brings new entities into the room that can do lending, servicing, and other banking functions for business and consumers. The Bank of North Dakota (BND) provides mortgage servicing, and can either service a loan or originate that loan if referred by another lender. This would mean that a foreclosure, and the mediation program in Washington state, would have to include mediations with this new, state bank, if we adopt the same standards as North Dakota. According to the Institute for Local Self Reliance, an organization that supports the state bank concept, BND services over $650 million in residential loans. (July, 2015) Under the Washington FFA construct, BND would qualify as a servicer and be included in mediation.
Perhaps the most significant concern is the stability of a state bank concept. The capital required for the initial investment is massive – hundreds of millions of dollars from the state reserves would be needed for start up. There is often talk about the state issuing bonds to create this kind of cash flow, but Washington State Treasurers oppose this idea because of what it could do to the State’s bond rating. Additionally, the deposits made by taxpayers and others, as required by law in North Dakota, would be diverted from the general fund to this new trust, creating a significant budget shortfall.
So how realistic is the Washington State Investment Trust? In years’ past, there wasn’t significant support outside of the more progressive communities. In the past two years, however, there has been movement towards making this vision a reality. The Legislature has allocated funds for both a study, and also for the aforementioned development of a business plan. Democrats are expected to take large majorities in the House and Senate this fall during the November, 2018 elections. With a high enough vote count in the House and Senate, Democrats could pass foundational legislation to establish a state bank in Washington. The concept of a state bank is strongly supported by union groups including the SEIU and the Washington Education Association, our state teachers’ union. Additionally, the state bank policy goal is a part of the State Democratic Party platform.
As a sidewinder option, some local governments have also considered a state bank. King County studied the option in previous years, and a Seattle task force recommended the creation of a municipal bank for lending, and to handle eminent domain in lieu of property foreclosures, as a way to generate revenue to address homelessness. These options are more limited as our state constitution severely limits the abilities of local government to lend credit or gift public funds. Lending of credit, even from a municipal institution to a private homeowner, may be considered unconstitutional.
For trustees, the idea of negotiating with a government financial institution instead of a private entity during the foreclosure process opens a different set of issues. How does the trustee resolve out foreclosures when the financial institution negotiating with a borrower in mediation has a new fiduciary responsibility – to the tax payer?
This will likely be a significant issue in the 2019 legislative session, depending on the results of the elections in November. If the Democrats have strong majorities in the House and Senate, this will be an issue the Washington Legislature will take up.