Public Bank Proposal on Town Meeting Ballots Across Vermont

Voters in three Vermont towns in the Upper Valley and 17 other communities in the state will face a simple question at Town Meeting this year: Should the Legislature be urged to examine the creation of a state bank?

The answer is anything but simple — for both supporters and opponents.

Advocates argue that creating a state bank will save Vermont hundreds of millions in tax dollars while putting the state on a path to a sustainable economic future. Opponents view a state bank as a potential threat to the state’s 20 community banks, one that could even jeopardize their future solvency.

In short, the battle lines are drawn between visionaries and the financial establishment on an issue that has been kicking around for the last six years. This year, the fight has begun anew in Montpelier over three bills pending in the House and Senate that address the matter.

Voters in Royalton, Randolph and Tunbridge will answer the question. If they say yes, they will add support to Senate Bill 55, a compromise holdover from the last legislative session that calls on the Legislature to study the creation of a state bank.

Already moving through both houses are additional bills that would require the state to deposit 10 percent of its reserve funds — about $35 million a year — with the Vermont Economic Development Authority and to allow VEDA to operate as a state bank. The Senate bill, which was introduced by Sen. Anthony Pollina, P-Middlesex, Sen. Dick McCormack, D-Bethel, and four other state senators, calls for the money to be used for loans for such purposes as community and economic development, weatherizing homes, renewable energy, reducing student loan rates and others.

There will likely be some progress on both the House and Senate bills by mid-March, McCormack said.

“I’m not completely sold on establishing a state bank, but at first blush it looks like a good idea that could save some money. I co-sponsored the bill because I think we should take a look at it,” he said.

Senate Bill 204, and a matching bill in the House, follow closely the findings released in January of a peer-reviewed study, evaluated and written by the Gund Institute for Ecological Economics at the University of Vermont and compiled by the Political Economy Research Institute at the University of Massachusetts.

The Gund study did not recommend that Vermont start a state bank from scratch, but suggested an expansion of VEDA, which essentially functions as public bank now.

Establishing a bank that accepts only 10 percent of the state’s reserve funds is not a problem for community banks, said Ken Wells, senior vice president at Mascoma Savings Bank.

“Our concern is that government entities don’t shrink. They only grow, and if the state bank starts taking deposits from towns, school districts and municipalities, which we accept, and makes loans to businesses and homeowners, then the state has created a tax-exempt competitor that would put us at a great disadvantage,” Wells said.

All of the state’s 20 community banks oppose Senate Bill 204, said Chris D’Elia, president of the Vermont Bankers Association.

“We support depositing 10 percent of the state’s surplus funds in VEDA and the other Vermont authorities and using the money for the projects that are outlined in the bill. We think that would be wonderful and would help the state. What we oppose is letting VEDA operate as a bank. We think that’s a bad idea for a number of reasons,” D’Elia said.

The current method of financing for VEDA requires that state funds be appropriated to VEDA by the Legislature or through floating bonds. Neither of these methods allows VEDA to leverage the funds it receives to create more money the way banks are allowed to do.

The Senate Government Operations Committee has been holding hearings on Senate bills 55 and 204 and will make recommendations to the Senate Finance Committee.

On Feb. 5, State Treasurer Beth Pearce testified in support of the concept of 10 percent for Vermont but in opposition to making VEDA a bank. The state treasurer said putting state revenues into a state bank is more risky than depositing them into a large bank.

The companion bill, House Bill 627, has been assigned to the Commerce and Economic Development Committee.

Interest in public banks has been growing nationwide in the wake of the 2008 banking crisis. During the last legislative session, Vermont lawmakers considered — but didn’t pass — bills to study the impact of a state bank based on the model of North Dakota, which established its state bank in 1919 .

The proposed legislation was reintroduced this session, but proponents say the Gund study makes the bill moot.

The North Dakota bank, the only state bank in the country, typically returns 70 percent of its earnings to the state. In 2009, during the national banking crisis, the state bank delivered a $30 million dividend to public coffers. The North Dakota model, under which the state bank makes residential and business loans and operates much as a commercial bank, wasn’t supported by the Gund study, however.

A coalition of organizations, individuals and businesses called Vermonters for a New Economy commissioned the Gund study with funding from the Donella Meadows Institute of Norwich. The study supports the views of proponents that Vermont could save hundreds of millions of dollars, stimulate business and create jobs by establishing a state bank.

While the Donella Meadows Institute does not endorse the findings of the study, it funded the research, which the institute stands behind, to foster a discussion between proponents and opponents, institute Chairman Wayne Barstad said in a letter to the Valley News published Jan. 18.

“Our hope is that a healthy discussion … of public banking can help the larger public achieve greater clarity and help the Vermont Legislature and other decision-makers decide on the best course of action for the residents, businesses and communities of the state,” Barstad said in the letter.

VEDA, 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, the study found. It noted that, while the North Dakota model might not be the best for Vermont, the combined operations and assets of VEDA and VHFA are equivalent to the North Dakota institution.

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, the study says.

“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 says. “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.”

The campaign for the Town Meeting warning articles was spearheaded by Pollina and Gwendolyn Hallsmith, executive director and founder of Global Communities Initiative based in Montpelier.

Hallsmith is one of the co-founders of Vermonters for a New Economy, and she has been an outspoken advocate for public banking, complementary currencies, new measures for economic progress such as the “Genuine Progress Indicator” and “Gross National Happiness,” and democratic ownership models like co-ops and worker-owned businesses. She announced earlier this month that she is running for mayor of Montpelier, where she was recently fired from her job as director of planning and community development, which she had held for seven years.

Last year, Montpelier Mayor John Hollar accused her of being “anti-capitalist,” and called her tenure into question, sparking a controversy over her right to advocate for New Economy issues as a private citizen, Hallsmith said in an email announcing her candidacy for mayor.

Prior to working for Montpelier, Hallsmith was the town manager in Randolph.

Smaller, local banks aren’t able to handle state deposits that amounted more than $300 million last year, so Vermont has to send those funds to large, out-of-state national banks, which invest the money in Wall Street, Hallsmith said in an interview in January.

“A public bank would be able to help local banks underwrite their lending capacity, and also would help fund and coordinate existing agencies that are already lending funds to small businesses,” she said.

For example, with backing of the Bank of North Dakota, community banks in that state are able to make larger loans that they would not be able to make. Those loans are now falling to larger national banks. The big banks that are receiving Vermont’s deposits are sending that money to Wall Street for investments and are not putting the money back into the state, Pollina and other supporters of the state bank have said.

That’s not true, D’Elia of the Bankers Association said.

“TD Bank invest heavily in Vermont with business and residential loans and community support. The bank also employs hundreds of Vermonters and contributes to local economies,” he said.

Another issue with a state bank is liquidity. The state now deposits funds on a short-term basis so that the money can be used when needed. If funds deposited in a state bank are loaned out for long-term projects as specified in the Senate and House bills, then the money would not be available for budgeted needs. The state would have to turn to bonds to fund budgets. Bond ratings could be hurt and increase the cost of borrowing, D’Elia said.

“The cost of things like building schools and other projects could be affected.”

Another problem with a state bank is liability. What happens if the bank fails?

“Now, state funds deposited with TD Bank are protected by an irrevocable letter of credit from the Federal Home Loan Bank of Pittsburgh. If TD Bank fails, and that’s not going to happen, all the state has to do is contact the bank in Pennsylvania to get the money. … If a state bank suffers losses, they will be borne by the taxpayers,” he said.

“We support local investment, and we are part of the local community and have been for many years. We’d like to help make the state more efficient and work in partnership with the proponents of a state bank to come up with something that is the best for all of us,” D’Elia said.

Warren Johnston can be reached at or 603-727-3216.