Banking On Our Country

Frank Sanitate’s Opinion piece in the Santa Barbara News-Press was met with strong, public support, including some elected officials. Public Bank advocates are ready to help Santa Barbara County take a deeper look at the Public Banking Solution. Officials are eager to find a realistic way to deal with their budget short-fall. Others are curious about what kind of non-taxed-based revenue a public bank could generate that might be used to pay for crucial public services, and things like affordable housing so that their teachers, law enforcement officers, fire fighters and other key employees can live closer to where they work.

Currently our County Board of Supervisors is trying to resolve an anticipated $30 million budget shortfall. They – and virtually all other city, county, state and national governments -- continue to try to resolve the problem in the same old boring ways. They cut services and jobs, or increase taxes. But there is a better way to solve the problem, one that’s been around for almost 100 years, but virtually unknown – increase revenues through creating a “public bank”.

We need to create a Public Bank of Santa Barbara County. That is, use our considerable revenue and assets as capital to start a bank owned by the people of Santa Barbara County. The bank would make loans to the people of the county, with interest coming back to help fund the county budget.

The primary benefit of establishing a public bank for the county is that it would enjoy the benefits of being a bank. That is, through fractional reserves, we could loan out nine times the amount of our initial capital and collect interest on it, which is what commercial banks do.

One possible source to get the initial capital to start the fund might be to use a portion of the county pension funds which are held and managed by SB County Employees Retirement System. County pension funds account for approximately 92% of the money they manage. Based on their annual report for 2016, their investments earned $31.6 million on capital of $2.56 billion. That is a return of 1.35%. Let’s say we used 10% of the capital as start-up capital for the Public Bank of Santa Barbara County. That capital of $256 million could be leveraged 9 times (which is what banks do) to $2.3 billion. But the loans would not be risky big bank loans. Rather, they would have to be loans made right here in Santa Barbara – commercial, residential, student, agricultural, school districts, etc. At a modest return of only 2% on these loans, we would make $45 million on our money annually. That would not only erase this year’s $30 million shortfall, but would give us $15 million extra, and another $45 million to the good the next year, and on and on. Remember, I started out with a return rate of 2%. Average return on equity of U.S. banks is 8 ½%. The initial capital from the pension fund would not be used or lent out, but would remain safe on deposit in the bank as required initial capital to make the loans.

Does this sound too good to be true? Actually, we already have a model for a public bank - the Bank of North Dakota. It is, in fact, not a new way to manage and expand the money, but a tried and true way. The BND is coming up to its one hundredth year of successful operation! It is an excellent example of the advantages of a public bank in creating a strong and stable economy, serving the needs of the community, creating revenue and lowering taxes.

Here are a few of its many achievements:

  • The bank has had substantial and increasing income every year for many years. Its return on equity for 2016 was 16.6%percent. The average return for U.S. banks was approximately 8.5%. In the example above, I used a hypothetical rate of return of only 2%.

  • It is the only state that had no budget deficit in 2008 or after, following the 2008 crash. Instead it has had record income each successive year.

  • North Dakota has had one of the lowest home foreclosure rates in the country for many years, and has had the lowest credit card default and lowest student loan default rate in the country.

  • In case you might be worried about what would happen to local banks if we started a public bank, the BND lends in partnership with private community banks, and helps those banks to comply with increasingly complex banking regulations. As a result, North Dakota has had no bank failures for many years, and has more private community banks per capita than any other state!

  • It limits loans to in-state purposes, so it offers lower interest loans to students and start-up businesses, and it buys down interest on home mortgage loans. It also gives grants for programs that serve the community like Building Blocks Learning Centers.

  • It enabled North Dakota to reduce its taxes by $400 million in 2009, and $500 million in 2011, while maintaining or expanding public services. It regularly contributes to the state’s general fund.

  • Thanks in large part to the BND, North Dakota unemployment has dropped to 2.7% in April, 2016, second lowest in the country.

With the County Board of Supervisors scheduled to set next year’s budget on June 16, it is too late to consider this solution for the coming year. But what if the Board commissioned a study on creating the first county public bank in the United States? Never mind the glory. Consider lower interest loans for the needs of Santa Barbara county businesses, agriculture, home-owners and students. Consider adding new county services, while helping local commercial banks, lowering county taxes, and – no more budget deficits! We have a good board of supervisors. Fire their imaginations and let them  know you want them to explore creating a public bank for Santa Barbara County!

Frank Sanitate is the author of Money – Vital Unasked Questions and the Critical Answers Everyone Needs


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