A Closer Look: The Benefits of a Public Bank

 

PBI's Santa Fe affiliate, the Brass Tax Team, uncovered information showing that Santa Fe spent $7 million in bond issuance costs and fiscal agent fees, and will pay $25 million in interest to Wall Street.

If Santa Fe had a public bank that refinanced that debt at 4 percent, its debt service costs would have been reduced by $282,425 and total debt by $52,439,584.

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A Closer Look: The Benefits of a Public Bank

Nichoe Lichen, Public Banking Institute

Santa Fe New Mexican, Dec. 24, 2016

A public bank task force resolution will come before the Santa Fe, New Mexico City Council in January (“What’s the fuss about a public bank in Santa Fe?” Dec. 11). The feasibility study completed by Building Solutions was a good economic development study, but failed to address crucial public bank questions that the volunteer task force can answer. That study also implied that a cash management system was a kind of public bank, which is not the case.

The city has begun careful, strategic financial planning — otherwise known as an internal cash management system. A good cash management system goes hand in hand with a public bank because it matters where our community’s cash is deposited. Instead of Wells Fargo and other private banks that work to fatten the pockets of private shareholders, the city could deposit our community’s cash in our own public bank, which could then lend to the city for important public projects and save the city money. A share of bank profit earned from those loans could be returned to the city to benefit the public good.

Unlike a cash management system, a chartered public bank does not lend out its deposits or financial assets, but instead leverages its core capital up to at least eight times to issue bank credit (loans). The power to lend that comes with a bank charter far surpasses the capacity of an in-house cash management system.

An internal cash management system is managed by city staff. A chartered public bank would be managed by professional bank staff. Day-to-day bank decisions would be made independently of the city and special interests, and be governed by a publicly established mission and oversight. The process to establish transparency and accountability to the public (governance) has been clearly defined in the public bank task force resolution. The governance model that is developed might also serve as an example for transparency and accountability for the city’s internal cash management system.

Unlike the city’s other projects, startup capital for a public bank would not be an expense but rather an investment. The city could transfer a small fraction of its current investment portfolio to be invested in startup capital for a public bank. This long-term investment could provide an immediate reduction in costs and debt to the city.

Any municipality has long-term liabilities in the form of loans and bonds. A well-designed cash management system, such as the one the city Finance Department is implementing, will not end the need for long-term financing that a public bank can provide. The city’s lack of long-term financial planning has brought Santa Fe to its current crisis. Its interest payments on long-term financing will only increase over time.

 

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Brass Tacks Team learned from Santa Fe’s 2011-15 Comprehensive Annual Financial Reports and debt service documents that Santa Fe spent $7 million in bond issuance costs and fiscal agent fees, and will pay $25 million in interest to Wall Street. If Santa Fe had had a public bank that refinanced that debt at 4 percent, its debt service costs would have been reduced by $282,425 and total debt by $52,439,584.

Though a public bank’s mission can expand over time, the immediate need is for financing (or refinancing) public projects. This is a much simpler, lower risk model than the partnership model described in the Building Solutions study. A public bank that finances infrastructure can support economic development, substantially lower city costs and debt, and return a share of profit from those loans to the city.

Check out the “Five Year Model” (www.BrassTacksTeam.org) for starting a small chartered public bank that funds public projects. Learn why we call it a “Debt Reduction, Budget Easing, Income Generating Strategy for the City of Santa Fe.”

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Nichoe Lichen has been engaged in community causes in Santa Fe for more than 40 years. During the past four years, she has spoken to the potential of establishing a public bank for Santa Fe. She is a member of the independent research and education collective known as the “Brass Tacks Team” (Public Banking Facts that Stick) and serves on the national board of the Public Banking Institute.


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