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Should NJ bank on Murphy’s state bank?

The State of New Jersey took a giant step to establish a state-run bank on Nov. 13. Gov. Phil Murphy signed an executive order creating a 14-member “implementation board,” which is charged with presenting him with a plan, in a year, that would set the stage for New Jersey to join North Dakota in having a staterun bank.

North Dakota has had a state-run bank since 1919 and began operations with $2 million in capital. The Bank of North Dakota (BND) receives virtually all state funds from fees and taxes and obtains funds from “corporate accounts, North Dakota city and county government entities and North Dakota residents.” Deposits are not FDIC insured, but “all deposits are guaranteed by the full faith and credit of the State of North Dakota.”

The BND’s deposits are used to make agriculture, business, residential, infrastructure and student loans. In addition, “BND follows a conservative investment policy, investing in AAA securities that by the federal government or agencies of the federal government.” Moreover, the Bank “maintains adequate reserves and allowance for credit loss to protect itself from credit risk embedded in its loan portfolio.”

The Bank is audited by a state agency as well as having “robust internal audit department to ensure compliance with federal banking regulations…” According to the Bank’s website, throughout its 100-year existence it “maintains strong relationships with financial institutions in the state and does not compete with them.” BND’s business model is based upon a simple premise. For example, if a borrower has a $5 million project and puts 25% equity into the deal, he or she would apply for a loan with the commercial lender for $3.75 million. The lender, in turn, would make an application to participate in one of BND’s programs. If the loan is approved the lender and BND would each provide $1.875 million to the borrower.

For the general public, BND does not offer credit card or ATM services. This could be considered a major drawback if individuals and families only want to bank at one institution.

As far as profits are concerned, the Bank appropriates a portion to the North Dakota Legislature for the General Fund, provides funding for mission-driven loan programs such as economic development and infrastructure projects and excess earnings are used to boost the Bank’s capital. In 2018, the Bank’s profits were $158 million.

Can the Bank of North Dakota be replicated in New Jersey? Should it be replicated in New Jersey?

At first glance, the BND is a model of financial strength, ethical management with a sound mission statement that provides needed capital to the citizens and businesses of the state. In addition, the Bank funds necessary infrastructure projects to improve the quality of life of North Dakotans.

Establishing a state bank in New Jersey is problematic for several reasons. First, the state’s pension plans are grossly underfunded and need to be shored up before any additional taxpayer-funded initiatives should be undertaken. Second, this is New Jersey, which has been dubbed by one author/journalist as the “Soprano state.”

Do we taxpayers want the Governor and Legislature to create another state-run institution in a state where corruption, if not systematic, is at least an ongoing issue for the long-suffering taxpayers of the Garden State?

Let us also realize that Governor Murphy’s stated goal to increase access to “underserved” communities for funds can be achieved without the creation of a state bank.

Throughout American history, mutual aid societies have been vital local institutions providing services such as life and unemployment insurance and other fundamental social and economic programs for members who were bound by race, ethnicity and nationality.

Instead of waiting another year for a “plan,” Governor Murphy should be a cheerleader to mobilize the state’s most competent social entrepreneurs to step up to the plate and create a network of nonprofit financial institutions that would not only provide loans to fledgling entrepreneurs in our inner cities but also teach much needed financial literacy to high school and college students, single moms and dads, and couples.

New Jersey has no shortage of talent to improve the lives of individuals and families from Sussex County to Atlantic County, but a state-run bank in New Jersey would create another “crony” institution in a state with a poor record of being a trustworthy steward of taxpayers’ money. New Jersey is not North Dakota.

A state-run bank is too great a risk for New Jersey taxpayers.

Murray Sabrin is a professor of finance at Ramapo College and the author of “Why the Federal Reserve Sucks: It Causes Inflation, Recessions, Bubbles and Enriches the One Percent”.

Gov. Phil Murphy has signed an executive order creating a board, which is charged with presenting him with a plan that would set the stage for New Jersey to have a state-run bank. KEVIN R. WEXLER/NORTHJERSEY.COM

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