Ex-Goldman Sachs senior executive Phil Murphy talks a lot about his public bank: it will supposedly support students and small businesses, help finance public housing and community development, and invest in infrastructure.
And that’s about all he says about it.
Despite being a senior executive at one of the most powerful banks on earth, he has given little to no details on how exactly he would structure his flagship economic revitalization plan. No Goldman Sachs banker worth his salt would be this scant with the details.
Is it that Phil Murphy doesn’t know what his bank will look like, or is he hiding it because he doesn’t want anyone to know how risky this is for a state that has ignored its pension, school funding, and property tax crises?
Voters should be skeptical as more than once Phil has misrepresented this bank. During the Tuesday, May 9th debate Phil Murphy played fast and loose with the facts when he claimed Bernie Sanders had endorsed a public bank in New Jersey, which is in fact not what happened.
Murphy’s attempt to carbon copy the Bank of North Dakota, a small state with huge oil and gas reserves, shows that at best, he has the naive logic of someone that isn’t prepared to govern. At worst, it’s an intentionally thinly veiled attempt to fit a North Dakota-shaped peg into a New Jersey-shaped hole and hope the voters won’t notice.
This bank has a multitude of problems:
- There is nothing to prevent this from becoming the governor’s dedicated piggy bank
- Its full of overblown promises and can’t reach the goals Murphy is promising
- There are significant startup costs
- It is not FDIC insured – if the bank runs in trouble, then depositors and taxpayers are on the hook
- A public bank is incompatible with New Jersey’s political framework – this state can’t get the pension right and now Murphy expects us to give him a bank?
- Inevitably the bank will be have to be funded by taking away the reserves of other state entities.
More information is available below.
FACT CHECK: WHY PHIL MURPHY’S STATE BANK FOR NEW JERSEY WILL NOT WORK
Budgets are about choice and priorities. There’s no question that New Jersey’s budget has wrongly prioritized the support for programs that did little to invest in people and prepare the state financially for the future. In the wake of unfunded pensions, burdensome student debt, and skyrocketing property taxes, New Jersey has seen its credit rating downgraded 11 times.
The next governor must get the state’s financial house in order, while ensuring that the state makes the necessary investments to support the working families.
One idea that has popped up during the gubernatorial campaign is the concept of establishing a state-owned bank in New Jersey. Only one state in the nation has such a bank — North Dakota — and there should be significant doubts that it could serve as a fiscally responsible path for New Jersey.
There is only one functioning example in the nation to model New Jersey after – the Bank of North Dakota (“BND” or “the Bank”). The Bank was established in 1919 and structured as a state government agency. Each fiscal year, the State of North Dakota and all of its agencies are required to place their appropriations and revenue (if any) into the Bank.
North Dakota is very different from New Jersey. It is a state that has enormous oil and gas reserves, a low unemployment rate and a very small population.
A candidate for New Jersey Governor with a Wall Street background is proposing a state bank. He has said his Bank will pursue three lines of business; provide student loans, make small infrastructure investments, and invest in small businesses.
A public bank is incompatible with New Jersey’s political framework
In October of 2013, current BND president Eric Hardmeyer wrote an op-ed titled “Why Public Banking Works in North Dakota” in which he said the following:
“We do not advocate the use of this model elsewhere. The Bank of North Dakota is successful because we are partners with North Dakota’s financial institutions, not competitors.”
The candidate’s proposal to create a state run bank that collects deposits from local and county governments will definitely do one thing; it will put local bank branches out of business in the state. The proposal made does not describe how local bank branches would survive without the deposits. These local branches support jobs and the local community by offering loans, deposits and other services.
In the nineteenth century there were a number of state-owned U.S. banks that failed at great expense to the taxpayer. The current state-owned bank in North Dakota subsidizes the fossil fuel industry through below-market lending, illustrating that government-owned banks will subsidize powerful interests.
In a state like New Jersey, political influence should also be a concern. According to the New York Times (10-1-2013) Slovenia, a small European country of 2 million people, saw political interference in the decision-making of their state bank, the kind of problems that could emerge in a New Jersey bank as well. For example, the head of the largest Slovenian bank resigned in 2009 after only three months in office, citing political interference. His successor did the same a year later, also mentioning political pressure.
Not FDIC insured
According to BND, the Bank’s general deposits are backed solely by the “good faith and credit” of North Dakota. Deposits, regardless of size or account holder, are not FDIC-insured, meaning that there would be no insurance to cover lost deposits if the Bank were to fail. For a state that had an oil output valued at over $22 billion in 2012, this isn’t a problem. If there is ever a year when liabilities exceed assets, North Dakota could simply tap into its abundant natural resources so taxpayers don’t have to foot the bill.
New Jersey lacks the natural resource reserves or any other not already committed guaranteed revenue streams to avoid passing potentially debilitating burdens onto taxpayers, leaving the state vulnerable to costs that far outweigh the benefits.
Significant startup costs
Starting up a state-owned bank is not as simple as just moving money from one bank account to another. There are enormous costs associated with the move that may result in serious challenges for the state.
According to the New England Public Policy Center in a research report (May 2011) prepared on a Massachusetts proposal to start a bank said the state’s economy could be harmed:
“The potential costs of starting up a state-owned bank could be significant. Capitalizing a new bank along the lines of the initial size of BND—but scaled up to reflect the current size of the Massachusetts economy—would require funds roughly equal to one-fifth of the state’s general obligation debt. Transferring funds from existing private bank accounts and the investment fund of the Massachusetts Municipal Depository Trust would result in cutbacks in existing sources of credit. To the extent that these funds are now used to finance activities in Massachusetts, the state economy would be affected.”
There are many promises being made about the potential for the bank and how it would affect the state’s economy. But many of those promises are overblown. Again, from the New England Public Policy Center in a Research Report (May 2011) it concludes:
“With the possible exception of the Great Depression, BND’s contributions to stabilizing the
state economy and finances appear to have been relatively minor. The North Dakota economy has exhibited considerable sensitivity to commodity prices. Judging by indicators such as unemployment, personal income, and mortgage foreclosures, the state’s economy has not been more stable than that of South Dakota, which has many similar characteristics but no state-owned bank. While the government of North Dakota receives dividend-type payments from the Bank of North Dakota, it relies much more heavily on traditional fiscal stabilization funds to smooth out its overall revenue stream. These findings suggest that Massachusetts and other states should continue to pursue their stabilization goals primarily by encouraging a diversified mix of economic activities and revenue sources, and by maintaining or even augmenting their use of rainy day funds to smooth public service provision during the business cycle.”
The governor’s dedicated piggy bank
Even if a public bank plan managed to account for the economic incompatibilities present, there is still a very concerning lack of good governance inherent in BND’s makeup. New Jersey is a state infamous for making transactional deals that are both politically motivated and rarely benefit average New Jerseyans. The recent decision in the Assembly to give police and fire unions control over their investment decisions in their pension funds while leaving the downside risk – the moral hazard – in the hands of taxpayers, is a textbook example of New Jersey’s transactional politics.
Assemblyman Wisniewski holds severe reservations about the following tenets of the code establishing BND being made applicable to New Jersey:
● “The industrial commission shall operate, manage, and control the Bank of North Dakota, locate and maintain its places of business, of which the principal place must be within the state, and make and enforce orders, rules, regulations, and bylaws for the transaction of its business.” If New Jersey operates like BND, that means this three-member commission will include the governor and the attorney general he or she appoints. This gives the governor unilateral power to operate the Bank however they choose with no meaningful accountability structure. (6-09-02)
● “The governor shall appoint an advisory board of directors to the Bank of North Dakota…The governor shall appoint a chairman, vice chairman, and secretary from the advisory board of directors.” This exponentially increases the already heavily disproportionate power of the Office of the Governor and requires no transparency. If Christie’s administration is any example of how power can be abused, this board of directors will pursue investments that are best for the governor’s political interests, not what is best for the state or middle class. (Section 6-09-02.1)
● “The official having control thereof [of the bank’s funds] and the sureties on the bond of every such official shall be exempt from all liability by reason of loss of any such funds while so deposited.” The Bank has free reign to gamble the deposits of a senior citizen’s pension or a young adult’s paycheck with 0% risk. For example, if a pet project of the governor’s falls through, the Bank isn’t on the hook, taxpayers are. Account holders harmed by such a Bank failure would have no recourse to recoup their lost assets. (Section 6-09-08) This would be a repeat of Freddie Mac and Fannie Mae during the 2008 housing crisis.
● “The state treasurer [is responsible for determining] when the balance in the state general fund is insufficient to meet legislative appropriations.” In New Jersey, that is an incredibly low and opaque bar. The State Treasurer is appointed by the Governor, and the Governor’s office unilaterally sets the budget. There is nothing stopping a Governor from declaring that the fund cannot satisfy legislative appropriations at whim in any given fiscal year. This means that the Governor can essentially demand the fund carry more capital at any given time, in turn increasing the taxpayer obligation necessary to keep it solvent. (6-09-15.1)
There is nothing to prevent a raid on the Bank if the legislature and the Governor are in agreement. In tight fiscal situations, there may be a move to raid the Bank and use the money for State Government operating expenses. This would only further damage the state’s already terrible reputation for financial management and place taxpayers at risk.
John Wisniewski is against implementing a public bank in this state. New Jersey residents deserve a government that will make real investments in their futures, not create new bureaucracies that will not improve their lives. Uprooting the state’s financial system when it cannot manage to fully fund its pension and public education obligations is misguided and the working families of the state deserves better.