STAB is the law of the land (plus ponies)

Politicians like to explain budgets as if governments are housewives checking the cookie jar and deciding whether Sunday dinner is going to be roast beef or Hamburger Helper. Aside from the obvious anachronisms—housewife? Sunday dinner?—governments aren’t households. We may get paid and then go grocery shopping, but governments don’t raise taxes and then call Raytheon to order a missile defense system. As economist Stephanie Kelton points out in this LA Times op-ed, they STAB—Spend, Tax, and then if spending outpaces tax revenue, swap the difference for government Bonds.

Consider the recent $700 billion defense authorization. Did we have $700 billion? Nope. “Without raising a dime from the rest of us, the Senate quietly approved an $80-billion annual increase, or more than enough money to make 4-year public colleges and universities tuition-free. And just where did the government get the money to do that? It authorized it into existence.”

Kelton was an economic adviser to the Bernie Sanders campaign. Sanders’ critics tried to boil his appeal down to “free stuff”—free health care, free college, and, in Hillary Clinton’s new book…

BERNIE: I think America should get a pony.

HILLARY: How will you pay for the pony?

The common sense approach is that goodies cost money that we don’t have. But the reality is that once we account for the internal limits of our economy “Congress can always afford the pony because it can always create the money to pay for it.”

The article is lively and fun and a good corrective to that housewife metaphor. But it’s only half right: when government spends more it has to borrow more or tax more, and if taxes stay flat, borrowing, mostly in the form of treasuries, takes money out of the economy just like taxes do. Eventually it comes back, and then some, in interest, but that takes time.

Increased spending can boost the economy and depending on what the money is spent on, can be a way of ensuring that more individuals and families share the wealth. That $700 billion that went to defense could have been much more of a prosperity multiplier if it went to education, infrastructure or human services—and in fact, a benefit of a Massachusetts public infrastructure bank is not just that it will make projects more affordable but that in building and repairing infrastructure we also create decent-paying jobs. In fact, military spending goes mostly to the already rich, where it sits in CD’s, treasuries, or brokerage accounts that don’t mix that much with the real economy, if it doesn’t leave the country altogether. Not to mention all the collateral damage the end product does. Come to think of it, that pony idea isn’t so bad…

Oakland calls for a public bank to save communities, lower costs

Why a public bank? When municipalities fund infrastructure through deals with investment banks, that means higher costs, which are passed on to residents and local business owners through usage fees or in the form of higher rents or prices. As Oakland CA public bank activists document, this can have a devastating effect when those fees make a basic human need–in this case, water–unaffordable.

California Treasurer John Chiang recently said that the state’s Cannabis Working Group will discuss public banking as a possible way of allowing licensed marijuana producers to access financial services for an industry that the federal government still considers illegal, though he has also said that he doesn’t support the idea of creating a state bank just for that purpose. It’s clear from this video, however, that regardless of how California establishes a public bank, there is a tremendous need for a more economical and flexible way of financing municipal infrastructure there.

Cities and states across the country are considering public banking

Hub Public Banking working group member Barbara Clancy submitted this statement at the recent hearing on H3543. You can read other statements here.

Massachusetts is in good company as it considers whether to establish a public bank. There has been steady growth in interest in public banking, spurred by the 2008 recession, by criticism of investment practices of some Wall Street banks, and, in some cities, by recent campaigns to divest from banks financing the Dakota Access Pipeline. In addition, cities, states, and taxpayers have concerns about the costs of bonds and borrowing, how to get the best return on banked or invested public money, and an interest in finding innovative ways to fund public spending without surrendering public control, as is often the case with public-private partnerships.

The Public Banking Institute, a national non-profit organization that supports state and local public banking initiatives through education and research, is in touch with some two-dozen citizen groups working to establish public banks at the city, regional, or state level. Some of these groups are small and focused on introducing the basics of public banking to potentially-supportive stakeholders, including community development organizations and elected officials. But others have made substantial gains in promoting public banks as a flexible, accountable and responsive way to respond to local funding and banking needs. Their proposals have won the support of state legislators and city councillors, and in some cases they have made public banking a campaign issue as well.

For instance, the DC Public Banking Center, a local citizen-led campaign, has been working since 2013 to promote a public bank for Washington DC. They introduced the concept to city government and won support from local community groups, small businesses, labor, and the public, successfully making the case for further inquiry by the city. As a result, Washington’s fiscal year 2018 budget includes $200,000 in funding for a feasibility study for a city-owned bank.

A public banking campaign in Oakland, California is moving forward with great vigor and interest. The city’s finance committee recently approved a request for $100,000 to fund a feasibility study, which will now go to the City Council for a full vote. Nearby, Richmond, California is also considering a public bank, and other grassroots efforts in California are looking at what can be done under existing county charters to pursue public bank initiatives.

The city of Santa Fe, New Mexico, has established a task force to consider a public bank for that city. A feasibility study completed in 2016 found that a public bank could have a $24 million positive impact on the city in its first seven years. Philadelphia is holding city council hearings on public banking, and advocates there are working with the city treasurer to identify city funds that could be used to capitalize it.

Advocates in Portland, Oregon, were able to raise the profile of a public bank as part of a strong and successful local campaign to divest from Wells Fargo, in protest of its financial involvement in the Dakota Access Pipeline. Several candidates for city council came out in favor of the public banking concept, and the local Portland Public Banking Alliance continues to work on building more stakeholder support.

Most notably, the Democratic candidate for Governor of New Jersey, Phil Murphy, a former investment manager and senior director of Goldman Sachs, has made public banking a centerpiece of his proposed economic program, citing in particular the need for lower cost student loan and small business funding.

Surrounding states have established agencies that draw on some of the capabilites of a public bank. The Rhode Island Infrastructure Bank has been described in testimony by Tom Sgouros. Connecticut’s Green Bank is a widely praised program, and a public bank campaign in Vermont fell short of establishing a true public bank but led to the establishment of a loan program, funded through state reserves, for energy investments, weatherization, and other local projects. Clearly all these initiatives have demonstrated a need for funding that has not been adquately met through existing channels.

Massachusetts’s 2010-2011 public banking study commission determined that there was insufficient unmet financial need to establish a public bank in Massachusetts. This is a conclusion with which we disagree, and testimony today has, in fact, identified areas where existing state programs and available bank financing fall short. A growing number of states and cities recognize the advantages of public banking. Passage of H3543 would make Massachusetts a leader in a new model of public finance which flexible, accountable, and economical.

Barbara Clancy is national campaigns coordinator for Alliance for Democracy, which is the fiscal sponsor of Hub Public Banking and the DC Public Banking Center. These statements were made as a volunteer member of the Hub Public Banking working group.

Testimony from our hearing: Tom Sgouros on lesson learned from the Rhode Island Infrastructure Bank

Over the next few weeks we’ll be posting testimony submitted to the Joint Committee on Community Development and Small Businesses June hearing on H 3543. Here Tom Sgouros outlines some new ideas for public finance policy, drawn from his experiences with the Rhode Island Infrastructure Bank, and praises the concept of a true public bank as the most powerful way to use state money to benefit its citizens. You can read other statements here.

During 2015 and 2016, I served as Senior Policy Advisor to Rhode Island General Treasurer Seth Magaziner. One of the primary projects I took on was to help design and write legislation for the new Rhode Island Infrastructure Bank (RIIB). The legislation passed in 2015, and it has already become a vital institution and is poised to grow and do things we did not imagine. Its benefit to the state, in terms of roads (re)built and clean energy projects underway, is already substantial and in the future it will only grow.

With your indulgence, I would like to share a couple of lessons learned along the way. To be clear, but these are my observations, and not the Treasurer’s.

To create RIIB, we built on a small finance agency focused on water projects, so essentially the task was only to add some more flexible lending programs to an already-existing, well-run, agency. The old Clean Water Finance Agency was well used to doing bond finance, and bond finance was envisioned for the new programs. There was substantial demand from the state’s municipalities for the new programs, for roads and bridges, and for energy finance. In fact, the demand was far greater than the capacity from the beginning.

Sole reliance on the bond market was problematic for a few reasons. The first is that trying to corral a dozen municipal projects into a bond issue is a long and tedious process. More than a few of the projects could have been completed months, possibly years, sooner but for financing delays caused by wrangling all the other municipalities into the same pool. Second, because we sought a rating for the bond, not the lending program or the institution, we were unable to concentrate the lending in the communities that need it the most. The logic of sharing risk as expressed in bond documents meant that our bonds would involve lending in rich communities, as well as poor ones. This is not a bad thing in some respects—rich communities have legitimate need for attention from the state, too—but the aid we can get this way is out of proportion to the needs.

The bond market is also inflexible. Programs must be envisioned completely enough to be thoroughly described in bond documents. A thorough airing of public policies is always a good thing, but it is not unknown for conditions to change. Once a bond is sold, the terms are immutable, and this can deprive the institution of adapting to unforeseen market developments and municipal needs.

The other important issue is that the state has many more loanable resources available to it than precedent would seem to allow. For example, National Grid collects about $100 million annually from the systems benefits charge on consumer electric bills, to be used for clean energy and conservation projects, as in Massachusetts. At any one time, there are between $4 and $10 million in collected, but unspent, funds. National Grid’s bank is reaping the benefit of the “float” on that account, not the ratepayers. Why not let the state use that? It could be a useful component of the liquidity of a more agile and powerful green infrastructure bank.

In a similar vein, the cash management operation at Treasury was contenting itself with investing in short-term CDs and notes at about 30–40 basis points of interest. Meanwhile RIIB was selling short-term bond-anticipation notes at 2–2.5%. Why, the RIIB CFO asked, can’t we sell our notes to Treasury at 1%? Both of us would come out ahead. A quick analysis I completed showed there is easily enough cash on deposit or invested short like this around our state to safely double the capacity of the infrastructure bank, possibly more.

I’m pleased to report that the early success of the RIIB programs, and the appointment of a more ambitious board chair have led to several of these ideas being reconsidered as the institution seeks to expand its capacity and flexibility. But that very progress has also made it clear that opportunities were missed at the design stage that would have made RIIB more effective at helping our municipalities with their needs, and that’s the important bottom line.

The lesson of our experience are that one should create an institution strong enough to be rated on its own. This would have allowed us to steer aid to the communities that need it the most, rather than always averaging their needs with those of more affluent communities. This means capitalizing it and providing it with access to liquidity reserves of some kind. One way to accomplish that is to give it the flexibility to do some of the state’s own cash management needs.

There are a couple of useful models to be found in other states that already incorporate some of these lessons. The state-owned bank in North Dakota is a good example of an institution with the flexibility and financial strength to do a tremendous amount of good on behalf of that state’s economy. It manages the state’s cash and thereby has the financial capacity to fulfill a lot of the state’s borrowing needs, as well as the flexibility to create programs on the fly, such as providing emergency credit to rebuild ravaged communities after the disastrous floods of 2011 in Minot and Bismarck or 1997 in Grand Forks.

Closer to home, the state of Vermont developed an internal investment program in 2014 that allows the state’s cash balance to be invested safely on the short term to provide loanable funds for affordable housing, green energy projects, and economic development. While somewhat short of being a bank, the program nevertheless demonstrates that such rearrangements of financial precedent are not that difficult, and can have a great benefit to the state while at the same time tightly controlling risk.

I have reviewed some of the legislation before this committee. HB1763 seems to me comparable to the RIIB enabling legislation we developed in 2015. I would strongly endorse this legislation, but only as a first step in growing a strong new lending institution to take on these important needs. In contrast, HB3543 seems already to have incorporated the lessons we learned in Rhode Island. Creating a green infrastructure bank for the state of Massachusetts that is powerful and secure—and able to use the state’s own financial strength on behalf of its citizens—would have far-reaching benefits to the state.


Tom Sgouros

Tom Sgouros is an engineer and policy analyst. He has consulted to dozens of elected officials, candidates, and activists, in Rhode Island, Pennsylvania, California, Vermont, and elsewhere around the country, about public finance, banking, tax policy, and sustainable economic development. Tom is a contributor to the RIFuture blog, and the author of Ten Things You Don’t Know About Rhode Island, about public policy in Rhode Island, and “Checking the Banks: The Nuts and Bolts of Banking for People Who Want to Fix It”  from Light Publications

H 3543 gets its first State House hearing


Public Bank bill panel at Thursday’s State House hearing, with Charles Grigsby, Barbara Clancy, Rep. Mike Connolly, Richard Krushnic, Steve Snyder, Mel King and Rep. Byron Rushing.

H 3543, An Act Establishing the Massachusetts Infrastructure Bank, had a hearing Thursday before the Joint Committee on Community Development and Small Businesses. Hub Public Banking volunteers joined with the bill’s sponsors, Rep. Byron Rushing and Rep. Mike Connolly, legendary community activist and former Representative Mel King, and Charles Grigsby, formerly of the Massachusetts Growth Capital Corporation and a member of the 2011 study commission that first looked into the viability of a public bank for Massachusetts. The panel’s testimony was supported by statements from Tom Sgouros, a Rhode Island policy analyst and consultant, and author of Checking the Banks: The Nuts and Bolts of Banking for People Who Want to Fix It, and Walt McCree, president and chair of the Public Banking Institute.

We’ll be posting some of the testimony given at the hearing in the next few weeks. If you are interested in learning what you can do locally to help move the bill, please contact us.

A step forward on public banking in Washington DC

This week the Washington DC City Council authorized $200,000 in the city’s FY2018 budget for a feasibility study for a public bank, following approval by the city’s Committee on Business and Economic Development last month.

As this post on the DC Public Banking Center’s blog notes, one of the catalysts for the vote was the city’s determination to review its banking relationship with Wells Fargo, after that institution failed a review of its community lending activities under the Community Reinvestment Act. This followed the 2016 revelation that the bank opened new accounts for existing customers without their permission, leading to legal actions resulting in hundreds of millions of dollars in settlements. In addition, the group DCReinvest has drawn attention to Wells Fargo’s funding of the controversial Dakota Access Pipeline.

Congratulations to the DC Public Banking Center, which has been educating and organizing since 2013—this is a big step forward both locally and for many other states and municipalities considering a public bank.

Support for a Massachusetts infrastructure bank

William Shelton, former director of Somerville Community Corporation, recently wrote a great essay for the Somerville Times in support of a public infrastructure bank, and our bill, H3543, ending with a call to to municipal managers and officials to help get more legislators informed and interested in the idea of a state infrastructure bank.

If you need a quick rundown of why a public bank would be a very good idea from someone who has worked in community development, read the article. It not only details what the bill would do, but goes into the widespread need for alternative sources of funding, and the reluctance that many cash-strapped towns feel about borrowing in an age where their residents face an uncertain economy and stagnant wages.

We know the time has come for a public infrastructure bank, but it’s great to get support from someone very familiar with the funding problems faced by cities and community developers.