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Study: Vt. Should Allow VEDA to Be State Bank

West Lebanon — Allowing the Vermont Economic Development Authority to operate as a state bank would create thousands of jobs, save the state millions in interest costs and add hundred s of millions in value and production, a study released last week says.

The peer-reviewed study, conducted by the Gund Institute at the universities of Vermont and Massachusetts, did not recommend that Vermont start a state bank from scratch, but suggested an expansion of the existing agency, which essentially functions as public bank now.

Interest in establishing public banks has been growing nationwide in the wake of the 2008 banking crisis. North Dakota has the only state bank in the country, and during the last legislative session, Vermont lawmakers considered, but didn’t pass, bills to study the impact of a state bank based on the North Dakota model.

A coalition of organizations, individuals and businesses, called Vermonters for a New Economy, commissioned this study with funding from the Donella Meadows Institute of Norwich.

Proponents believe Vermont could save hundreds of millions of dollars, stimulate business and create jobs with a state bank, and the study’s findings support that view.

The Vermont Economic Development Authority , along with Vermont Housing Finance Authority and Vermont Student Assistance Corp., have the unrestricted net assets to meet the capital requirements for a bank and adequate holdings of securities to serve as collateral for short-term loans. Although the study found that the North Dakota model might not be the best for Vermont, it did note that the combined operations and assets of VEDA and VHFA are equivalent to the North Dakota institution.

“We recommend allowing VEDA to operate as a bank with a pilot project by depositing a portion of state funds in VEDA and chartering VEDA as a bank or empowering VEDA as a bank by statute. VEDA would have to add deposit management, check processing and proofing and cash management to its current services. Since it already functions as a bank, we do not consider this an insurmountable obstacle,” author Gary Flomenhoft said in the report.

During the last fiscal year, the state deposited funds totaling more than $313 million in two banks, TD Bank and Peoples Bank. The state could earn a better rate of return on those funds by switching to a state bank.

“If deposits of state cash funds were used for VEDA and VHFA loans, $263.2 million in public lending could result in 2,535 jobs, $192 million in value added (gross state product) and a $342 million increase in state output,” the study said. “If used to finance state capital expenditures, funding through a public bank could save close to $100 million … due to most interest payments no longer leaving the state.”

Potential positive benefits of considering student loans, municipal bonds and partnership banking were not factored into the analysis.

Following the recommendations of the study, Sen. Anthony Pollina, P-Middlesex, Dick McCormack, D-Bethel, and four other state senators have sponsored Senate Bill 204, which will extend the authority of VEDA to become a fully functioning bank. Under the provisions of the bill, a pilot program would be established allowing the state treasurer to deposit 10 percent of Vermont’s unrestricted funds with VEDA and allow the agency to leverage the funds, like any other bank, and make partnership loans with community banks to foster economic development.

The current method of financing for VEDA requires that state funds be appropriated to VEDA by the Legislature or through floating bonds. None of these methods allows VEDA to leverage the funds that it receives to create more money the way banks are allowed to do.