Comprehensive study by Cornell University supports public banking model to finance needed infrastructure
Posted by Public Banking Institute, 14 Feb 2019 [1,2]
In honour of the Bank of North Dakota’s centennial anniversary, we commend an excellent academic report published by Cornell University [3] that includes a detailed case study of the Bank of North Dakota (BND) 2015 Infrastructure Loan Fund. The report examines the unique benefits of public banks and explores strategies for the implementation of similar structured institutions in New York State and the broader US context. Prepared by Shareef M. Hussam for Professor Mildred Warner at Cornell’s Department of City and Regional Planning, it provides academic reinforcement for advocates’ testimony, concluding: “The public banking model (discussed) offers several lessons for governmental entities seeking to affordably and sustainably finance infrastructure. First, funds for infrastructure investment should not be separated by sector, but rather commingled to enable cross- subsidization. Second, by pooling municipal capital and resources into an umbrella institution, local governments could access cheaper financing and improve their ability to compete for federal and state grants. Third, the institution should have profit motive, market discipline, political independence, and good governance. Through implementation of these strategies, it may be possible to sustainably finance critical infrastructure through public banking.”
The report continues: “Despite being owned and managed by the public sector, the governance structures and aims of BND often mirror those in the private sector – there is a still a profit motive, although driven not by shareholder interests but by citizen interests.
“Although members of the Industrial Commission and Advisory Board are appointed by the state Governor, the management of the BND has been described as “professional, conservative, and independent of political forces, in similar ways to private banks,”
and the BND financial accounts are separate from those of other govern- mental entities engaged in more politically sensitive projects such as public housing or mass transit (Kodryzcki and Elmatad, 2011).
BND’s Financing Tools
“The BND utilizes a variety of financing mechanisms to support development in North Dakota. The most prevalent is in loan participation and loan purchases originated by private community banks, which make up approximately 50% of the BND’s business (Kodryzcki and Elmatad, 2011).
“The BND also directly contributes capital to new projects, provides interest rate buy-downs, and loan service guarantees. Historically, BND also purchased municipal bonds, essentially financing governmental debt, although their balance sheets have now shifted away from securities (Kodryzcki and Elmatad, 2011).
“The Bank places a strong emphasis on sound lending practices, leaving riskier financing activities to private sector entities or other quasi-public entities.
“In addition, the BND also supports the state government’s finances and is viewed by the state as a revenue source. BND may even make loans to the state general fund at interest rates set by the Industrial Commission, essentially allowing North Dakota to “loan itself” money in times of fiscal stress.”
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