As you well know, the state and the nation are facing significant budget shortfalls. This can be addressed immediately by creating a public bank. Public banks provide major new income without raising taxes. Though our ability to control COVID-19 is limited, we can stop an economic collapse and position Colorado for our best future. By using the power of an Executive Order to create a State Public Bank, our state can use monies from the Federal Reserve at its rate of 0.25%. A state public bank could then generate low-interest loans at 1-2% for local and state investments that can deliver returns to Colorado and Coloradans. This will also provide immediate economic relief. Fed loans can be rolled over daily after three months. The Fed also recently eliminated reserve requirements and relaxed capital requirements. See this article by Ellen Brown, author of The Public Bank Solution, showing how the new Fed rules empower banks in this crisis. Many do not realize that banks actually create new money out of nothing when they make loans (Bank of England 2014) and that the public sector could access money much more easily for investments that serve the public interest. Colorado can realize this power by establishing its own bank. This helps direct investment in terms of Colorado priorities and benefits to our state and ensures that the interest income accrues to Colorado rather than to major bank shareholders who live elsewhere.
Colorado can leverage its own deposits. The state can move its deposits and investments from Wall Street banks to its own bank. CHFA and other loan funds can go much further as capital to generate much more lending in these and other priority areas. Revenue bonds could add to the bank capital as could investment pools. We would recommend that the order authorize the use of up to 5% of PERA investments for capital. The latter would provide PERA a higher and safer return than its present hedge fund investments. The bank could lend 10 times its capital or more under the new relaxed Fed rules.
Public banks provide major new income without raising taxes and could sometimes enable tax reductions. Colorado’s Office of Legislative Legal Services (OLLS) issued a Legal Opinion that a public bank as a self-sustaining “TABOR enterprise” would not violate Colorado’s constitution.
An executive order, like legislation, would carry a “heavy presumption” of constitutionality, and anyone contesting its constitutionality would have to show it was unconstitutional “beyond a reasonable doubt.” OLLS also concluded that home rule cities and counties could likely establish public banks without the need for state legislation if they operated within their jurisdiction.
Banking experts say a public bank could be started in just a few months. A state bank could be started with a structure similar to the Bank of North Dakota, with the Governor, Attorney General, and Treasurer as the bank’s governing board, in turn selecting the initial chief executive officer of the bank. Other provisions might provide for representation by community stakeholder interests to ensure the bank operates in a non-discriminatory manner in regard to race, color, sex, sexual orientation, nationality or other prohibited forms of discrimination.
The public bank could make loans in partnership with and backing local community banks to build substantially more affordable housing, help small and medium sized businesses, expand COVID-19-related health services, finance infrastructure, convert to clean energy, and refinance student loans. These actions would save millions of dollars on the cost of interest annually which averages nearly half the cost of infrastructure and up to 77% of the cost of affordable housing, enabling much more to be provided.
An executive order should require transparency and accountability, management of the public bank by professional bankers, and prevention of conflicts of interest and political or corporate interference.
Public banks have low overhead and high profitability from the beginning—no ads, branches or ATMs, no excessive salaries, no speculative loans, and no dividends to pay, ensuring its profitability from its very first year. The Bank of North Dakota (BND) has averaged 20% profit per year over the last 18 years, much higher than Wall Street.
Other states are realizing the benefits public banking offers. Last October, California enacted a bill authorizing cities and counties to obtain public bank charters, and in November New Jersey’s Governor Murphy issued an executive order establishing a board to implement a public bank. Washington state passed legislation in 2018 that facilitated the creation of a business plan for a state public bank. In 2019, the Bank of North Dakota had $4.5 billion in outstanding loans in a state with 762,062 people. In the 2008 crash, BND increased lending slightly to offset the decline, making North Dakota the only state to avoid recession and instead achieve record profit each year. Some argue it was North Dakota’s oil, but Montana and Alaska had as much oil and still had budget deficits and high unemployment. North Dakota’s fracking income did not kick in until 2010.
Alberta province, Canada, has operated the largest public bank in North America—ATB Financial, since 1938. With a population of 4.4 million, its bank has $47 billion in loans outstanding, a bulwark for its economy. A comparable bank for Colorado’s 5.76 million population could generate $61 billion in loans, enough to rapidly reverse the recession. The multiplier effect augments the benefits.
This is an opportune time to again demonstrate outstanding leadership and issue executive orders that will put Colorado on a competitive path in the future. Colorado could recover fully in 12 months and be a model for the country. Because the COVID-19 financial crisis did not strike until this legislative session was well under way and in recession, we recommend that you issue an executive order to create a state public bank, or that you issue an order calling the legislature into special session to consider such action.