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California, Hawaii Aim to Replicate North Dakota's Model State Bank

LOS ANGELES — After failed attempts to pass legislation to form state-owned banks last year, lawmakers in Hawaii and California are taking another stab at it.

The Western states are among the 17 where lawmakers have introduced legislation aimed at replicating the model of the state-owned, 93-year-old Bank of North Dakota. That institution holds all state government deposits, makes loans to boost the local economy, and returns profits to the state general fund.

In Hawaii, four bills related to the creation of a state bank passed the House on Tuesday and now head to the Senate for consideration.

The measures include both a bill that would study the idea of forming a state bank and a bill to create a state bank and operate a mortgage cleansing program to assist the homeowners of foreclosed properties. Another measure would establish an independent Clean Economy Bank to provide financing and risk-management support for clean energy, while another would allow the Department of Budget and Finance to enter into agreements with other bond issuers to pool bond allocations.

“The citizens of North Dakota can address shortfalls by tapping into bank dividends that would normally go to shareholders,” said Rep. Marcus Oshiro, a Democrat who chairs the Hawaii House’s finance committee and sponsored the bills.

He proposes a similar idea for Hawaii: deposit tax receipts into a state bank, rather than a commercial bank.

“We could make money off of taxpayer dollars and maybe retain some of the earnings,” Oshiro said.

He has proposed legislation to study forming a state bank for the past three years, but this year he also introduced legislation to go ahead and form a bank.

Oshiro says the proposal could solve a multitude of problems for Hawaii. He envisions it as not only bringing in revenue for the state and assisting those unde-served by traditional banks, but also providing low-interest financing for clean energy projects and stimulating economic development.

The final legislation would enable the state to broker multi-state projects, putting Hawaii in a position to serve as a national and international finance center, Oshiro said.

The state bank could also serve as a hub for some existing state bond programs, and earlier drafts of the legislation called for the bank to be staked with proceeds from a Hawaii bond issue.

In California, the state bank’s lead legislative backer is taking a similar approach to Oshiro.

Legislation to create a task force to study the idea sailed through California’s House and Senate last year only for Gov. Jerry Brown to veto it. This year, Assemblyman Ben Hueso, D-San Diego, decided to skip the study process and introduce a bill to form a bank.

AB 2500 was introduced on Feb. 24 and will be heard in committee on March 27.

In states struggling to balance budgets, North Dakota’s example is alluring. The oil and natural gas-rich state has sailed through the Great Recession.

The Bank of North Dakota, established in 1919 to provide loans to farmers, has transferred $555 million in profits to the general fund since 1945, according to bank documents. The state posted a $1 billion surplus in 2011 and has a 3.3% unemployment rate, the lowest in the country, according to the federal Bureau of Labor Statistics.

BND acts as a mini reserve bank for the state’s banking industry and serves the functions of a bankers’ bank, a wholesale bank that provides participation loans made with community banks to small businesses, homebuyers, farmers and students, said Eric Hardmeyer, the BND’s chief executive and president.

The loans help increase private banks’ lending power, because the state bank can also purchase part or all of a loan after it has been issued, which helps a private bank stay within its capital requirements.

As North Dakota’s rural community banks struggled to provide mortgage loans to potential homebuyers because of the more stringent lending requirements implemented through the Dodd-Frank Act, BND has stepped in to provide loans to potential homeowners, Hardmeyer said. Although the bank’s charter permits it to provide retail bank services, it typically does not.

When Brown vetoed the California bank study bill in September, he said he opposed formation of a blue-ribbon commission because the Assembly and Senate banking and finance committees could study the proposal using existing resources.

A spokesman in the governor’s office said it doesn’t comment on legislation prior to action from the governor.

Timothy Canova, a professor of international economic law at Chapman University in Orange, Calif., has written a position paper on the subject and has met with politicians in the state to try to convince them of the benefits of the idea. He is not hopeful that Brown will sign legislation to form a state bank.

Canova looks to Brown’s appointment of Michael Rossi, 67, a former Bank of America executive, as his jobs czar as a sign of which way the governor is likely to go.

“The governor has the expertise on this and yet he sits back and vetoes it,” Canova said. “The only thing I can think of is that he must be opposed to the idea of a state bank.”

Canova thinks the state could convert the existing California Infrastructure and Economic Development Bank to a full state bank. He says the advantages are clear.

“This state puts millions of dollars into commercial banks,” Canova said. “The money could be put into the infrastructure bank or a state bank, which would mean the funds would be reinvested in California.”

The Bank of North Dakota handed $300 million to the state treasury over the past decade, Canova noted.

North Dakota’s economy has remained strong through the entire recession, though that has more to do with an oil extraction boom than anything else.

Hardmeyer doesn’t attribute the state’s current distinction as the “miracle state” to the bank, which has been swamped with calls nationally and internationally from government officials hoping to replicate the state’s success since 2008.

“As people looked at what was different in North Dakota, where we have a positive budget balance and have been lowering taxes, they erroneously decided it was the bank,” Hardmeyer said. “They are in error, because the bank is only a part of it.”

Proponents admit states will have an uphill battle establishing banks because of general fear from constituents that the various states can’t successfully manage such institutions and pushback from the banking lobbies and bank associations, which want states to continue to place revenues in their commercial banks.

Even Hardmeyer said he was doubtful any state would be able to replicate his bank because of the “political headwinds” faced by the legislation, though states have progressed further than he thought they would.

“We are a part of the state’s success,” he said. “We have a major economic boom, because of a significant energy play. The Bank of North Dakota has played a role in financing housing and the infrastructure in and around it.”

The California Banking Association opposed Hueso’s bill last year, but has not taken a formal position yet on this year’s bill that would form a state bank.

“Part of our concern was what would the regulatory system be?” said association spokeswoman Liz Freeman. “Our members follow state and federal regulations that don’t apply to governmental financial institutions.”

The Bank of North Dakota is not regulated by the Federal Deposit Insurance Corp. The bank is backed by the state’s general fund.

“The state bank would compete with the commercial banks,” Freeman said. “Going back to the regulatory structure: would they be given different considerations than our member banks?”

She also asked where the money would come from to capitalize the bank. North Dakota capitalized the bank at $2 million in 1919, but the bank is now capitalized at $270 million, according to the bank’s website.

Hawaii’s legislation initially included plans to issue $500 million worth of bonds to capitalize the bank, but the amount was taken out of the measure in an amendment before it passed the House on a party-line vote.

“Arguably it’s the worst legislative initiative we have taken thus far in the 2012 session,” said Rep. Gene Ward, one of eight Republicans in the 51-member House. “It is putting us into an unknown area where we have no money and experience.”

Hawaii’s banks are paying the state $16 million per year to park their money in various banks, according to Ward.

“If we follow BND, the model everyone has engaged, its $30 million a year they put in treasury — that is only double what we are getting now,” he said.

The Banking Association of North Dakota is likely the only such group sold on the idea of a state bank.

Rick Clayburgh, its president and chief executive officer, said he supports the idea because “here in North Dakota we are familiar with it. If the Bank of North Dakota didn’t exist and there was legislation creating the bank, our association would be opposed to it because of the unknown and fear that it would compete with the private structure.”

In North Dakota, the state bank does not compete with commercial banks and neither would Hawaii’s proposed model, according to Oshiro.

“The No. 2 fear has been that it would take market share from existing commercial banks,” he said.

“Notwithstanding the fact, we have been telling them we would not be competitors, but collaborators.”

As for start-up capital, Oshiro thinks other states may have overlooked the possibility of using bond financing for start-up capital.

“Or we might use energy bonds,” he said. “There are other ways to get start-up capital besides general funds.”

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