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Special project Summary

Hussam, Shareef M. 2018. "Public Banking for Infrastructure Finance." Department of City and Regional Planning, Cornell University.

Prepared for Professor Mildred Warner
January 2018

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This report examines the ways in which public banking can help local governments in affordably and sustainably financing infrastructure, with a focus on waste, wastewater, stormwater, and sewage systems. The paper first presents the research methodology. Next, it introduces the underlying theory and concepts of public banking. Third, a detailed case study of the Bank of North Dakota and its 2015 Infrastructure Loan Fund is developed. Finally, the paper examines the unique benefits of public banks and explores strategies for the implementation of similarly structured institutions in New York State and the broader U.S. context.


Research for this report began with a literature review on public banking in the United States – foreign models were excluded. The review focused primarily on the Bank of North Dakota, with additional review of public banking feasibility studies in New Mexico, New Hampshire, and Massachusetts. To develop the Infrastructure Loan Fund case study, interview and information requests were sent to all seven participating cities and the Bank of North Dakota (“BND”). Three cities and the BND responded. Interviews were supplemented with reports published online by the cities and BND.

Theory and Concepts

What is Public Banking?
A public bank is a bank primarily capitalized with public monies and thus owned by the public. Public sector entities, often at the subnational level, deposit all their funds (from taxation and other sources) with the public bank as opposed to a privately-owned bank (Public Banking 2 2 Institute, 2017). While public banks do take direct deposits from private citizens, in most cases loans/purchases made by the bank are from the balance sheets of the government entity owning the bank, and all profits are thus returned to the general funds of the entity (Public Banking Institute, 2017).

Public Banking for Infrastructure
There are several theoretical and practical concerns that public banking can address. First and foremost, public banks can help correct market failures that limit municipalities’ ability to acquire affordable financing for infrastructure development. One such failure is the lack of markets for small-scale infrastructure projects, which may result from private sector capital constraints, unwillingness to lend, or the projects’ low profitability. This is crucial especially for municipalities that struggle to obtain private sector loans or issue bonds for small, unglamorous, yet critical infrastructure such as wastewater or sewage systems. A public banking institution would be highly beneficial in this case, providing low-interest rate loans and filling a market gap. Because of its additional focus on the common good, public banks should be more willing to make these types of loans and investments.

Bank of North Dakota

The Bank of North Dakota is the oldest and only currently operating state-level public bank in the U.S - although the federal government has explored the idea of a National Infrastructure Bank for some time. BND was created in 1919 in response to price gouging by private sector banks and was initially capitalized with $25 million in 2011 dollars (Kodryzcki and Elmatad, 2011). The operating policy of the Bank of North Dakota states that it aims to be “helpful to and to assist in the development of state and national banks and other financial institutions and public corporations 3 3 within the state and not, in any manner, to destroy or to be harmful to existing financial institutions” (North Dakota, 2017).

As a public bank, BND has an account with the U.S. Federal Reserve, although its deposits are insured not by the FDIC but rather guaranteed by the State of North Dakota (Kodryzcki and Elmatad, 2011). Most of BND’s deposits are North Dakota state funds – excluding pension fund assets and State-managed trusts (ILSR, 2015). In 2016, BND reported $136.2 million in operating income and a total of $7.295 billion in total assets (Bank of North Dakota, 2016). The bank is widely involved in the North Dakotan economy, with over $4.789 billion in loans - 14.3% in agriculture loans, 41.5% in business loans, 15.4% in home loans, and 28.8% in student loans (Bank of North Dakota, 2016).

BND's Legislative Mandate and Governance
The Bank of North Dakota has a direct legislative mandate from the North Dakota State government, and is operated, managed, and controlled by the Industrial Commission of North Dakota. The Industrial Commission is comprised of the Governor, Attorney General, and Agriculture Commissioner (North Dakota, 2017). Chapter 6-09 of the North Dakota Century Code further establishes an advisory board of directors to “enlist the help of private enterprise” in operating the bank (North Dakota, 2017). This seven-member board is selected by the Industrial Commission, and must have at least two members who are officers of banks where a majority of stock is owned by North Dakota residents, and at least one member who is an officer of a statechartered or federally-chartered financial institution (North Dakota, 2017). The Governor appoints a Chairman, Vice Chairman, and Secretary to the board and all directors serve a term of four years (North Dakota, 2017). The role of the advisory board is primarily to make recommendations regarding the management and operations of the bank.

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 Governor, the management of BND has been described as “professional, conservative, and independent of political forces, in similar ways to private banks,” and BND financial accounts are separate from those of other governmental entities engaged in more politically sensitive projects such as public housing or mass transit (Kodryzcki and Elmatad, 2011).

BND's Financing Tools
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 BND’s business (Kodryzcki and Elmatad, 2011). 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. 

BND Infrastructure Loan Fund
In 2015, the Bank of North Dakota started its first ever Infrastructure Loan Fund (“ILF”). Created by the State Legislature through House Bill 1433, the purpose of the fund was to finance new “essential infrastructure,” defined in the bill as waste and wastewater treatment plants, sewer and stormwater infrastructure, and curb and gutter transportation infrastructure (North Dakota, 2017). The ILF was capitalized through a $50 million, one-time transfer from the Strategic Investment and Improvements Fund (SIIF) - which is funded from oil tax revenues – as well as $100 million in BND profits (Hullet, 2017). Such transfers of oil tax revenues may be limited in the future, as there has been a significant decline in oil tax revenues from $579.5 million in the 2013-2015 biennium to $261.5 million forecasted for 2015-2017 (Bank of North Dakota, 2016). The ILF loans are maximum of $15 million with a term of up to 30 years at 2% interest.

In 2016, seven North Dakotan cities were given loans: Colfax, Hazen, Milnor, Grand Forks, Park River, West Fargo, and Wahpeton. According to Bank of North Dakota Program Manager Kelvin Hullet, a total of over $38 million was disbursed to these towns ranging in population from 145 residents in Colfax to 57,339 in Grand Forks (Hullet, 2017). Because the program is so new, selection of projects was primarily on a first come, first serve basis (Hullet, 2017). In its due diligence process, BND partnered with the Department of Transportation, Department of Health, and the North Dakota Public Finance Authority to develop a Scoring Matrix for applicants. The Scoring Matrix aimed to fulfill the “public interest” role of the BND, as it served as a mechanism to gauge public need (Hullet, 2017).

Grand Forks Case Study
Grand Forks is the 3rd largest city in North Dakota, with a population of approximately 57,000. In late 2015, the municipality identified $31 million in infrastructure financing needs and 6 6 applied for the BND Infrastructure Loan (Hullet, 2017). According to Grand Forks Finance Director Maureen Storstad, because the State of North Dakota “does not allow municipalities to borrow money from banks,” the ILF program was preferred because it was less complicated than selling bonds, which require more administrative work (Storstad, 2017). Despite these benefits, the $15 million ILF loan size was insufficient to meet needs, and BND additionally required the city to “fund a reserve,” likely as collateral (Storstad, 2017). The city’s needs included water mains, stormwater collection, stormwater outfall ponds, and paving. The city used a balanced approach to support the loan, including: utility fees, special assessment districts, a sales tax, and monies from other funds (Storstad, 2016).

According to the City of Grand Forks Staff Report on the project, the city saw several benefits to utilizing the BND ILF. First, the City was able to save on interest costs. ILF offers loans at 2 percent interest over terms between 20 to 30 years (Storstad, 2016). In the private markets the City is only able to secure interest rates between 2.75 percent and 3.5 percent over the same 20 to 30 year terms (Storstad, 2016). The cheaper financing saves Grand Forks and landowners (who pay special assessments and taxes) interest costs over the lifetime of the loan.

Second, the flexible terms of the ILF program improved cost savings for the City, as interest rate charges only become active on the portion of the loan drawn at any given time, instead of continuously on the entire principal balance.

Finally, usage of the ILF program resulted in lower issuance costs for the loan due to bond counsel provided by BND. This service reduced the overall cost of the loan especially in comparison to more expensive private sector services as well as the cost of information and search associated with public-private sector contract negotiation.

BND's Infrastructure Finance Model
In broad terms, BND provides several services that greatly aid municipalities in financing infrastructure: 1) Bond Counsel, 2) Direct Finance, and 3) Governance/Management. First, BND’s legal counsel helped Grand Forks lower their cost of bond issuance and thus, their overall cost of financing. Second, BND’s direct financing of the loan enabled Grand Forks to directly access lowinterest capital. Third, BND’s profit motive, market discipline, political independence, and good governance ensure smart investments and long-term sustainability.

The model of BND offers ideas for improving some of the challenges identified in more conventional infrastructure finance methods. These include challenges of technical capacity, declining revenues, and lack of coordination. First, by providing counsel, BND helps municipalities with limited knowledge of financial markets or the grant application process to access capital at lower rates and with cheaper transaction costs. Second, to address declining public revenues for infrastructure, BND’s direct low-interest loans allow it to leverage capital on terms that are favorable to the public. Finally, the centralized management of public funds under BND as well as its ability to cross-subsidize various projects in different sectors improves its ability to sustainably and profitably finance infrastructure. Together, the BND model allows governments to keep more of their own money in their jurisdiction while maximizing return on capital employed and the public good.

Broader Implications

While the Bank of North Dakota case is certainly special and works in North Dakota due to unique demographic, political, financial, and social characteristics, aspects of the model could be exported elsewhere and utilized effectively. This section highlights these unique features, 8 8 developing a broader concept of sub-national infrastructure financing institutions and some of the financial, economic, and political considerations needed to make them a reality.

Public Banks vs. State Infrastructure Banks / Revolving Loan Funds
There are characteristics of BND that distinguish it from other infrastructure investment vehicles and quasi-public agencies. The first defining feature of BND is that it is a bank - with all associated governance and organizational characteristics - and that it accepts deposits. Although most of these deposits come from North Dakota state revenues, the associated accounting functions greatly improve the ability of BND to move around money to meet cash-flow and interest-payment requirements. 

A second defining factor is the manner in which the investments are managed and selected. According to an analysis on SIBs by the Brookings institution, “ensuring more rigorous project selection may take adopting market discipline” (Puentes & Thompson, 2012). SIBs often lack this discipline, whereas BND is respected for its management and has consistently made profit over the past 13 years, even after the 2007-2008 financial crisis when North Dakota was one of the few states that avoided a budget deficit.

Institutional Design
First, municipalities and sub-national governments - whether at the local, county, or state level - should consider creating umbrella institutions that finance infrastructure. Although certain institutions such as State Infrastructure Banks and Revolving Loan Funds have existed for some time, they often lack the counsel, financing, and governance characteristics that make the public banking model well-suited for infrastructure finance. Furthermore, these umbrella institutions should be politically-independent, have market discipline, and most importantly pursue the public interest.

The institution should have several functions. To begin, funds for infrastructure development should not be separated by sector, but rather commingled. Doing so will allow crosssubsidization between sectors. For example, water and sewage systems are difficult to finance because of their low profitability. However, if the funds for these systems are managed under the same organization that handles green finance, it is possible to move money around and crosssubsidize less profitable - but equally necessary - infrastructure.

Furthermore, 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. Public entities at the city, county, or regional level could join together to create new institutions with potentially higher credit ratings (and thus cheaper capital) resulting from investors and rating agencies’ increased confidence in the stability of multiple governments rather than one. This model already exists in the form of institutions such as the Virginia Resources Authority, Vermont Municipal Bond Bank, and other state-level public finance authorities and bond banks.

Financial Considerations
In establishing a public bank, one of the most significant obstacles is initial capitalization of the bank (Updike and Erickson, 2016). For a state-level bank, these costs are estimated to be around $10 to $30 million dollars in New Hampshire – by comparison, BND was capitalized with $25 million in 2011 dollars (Khao et. al., 2016). However, the amount of capital needed for smaller-scale (i.e. county or town-level) initiatives as well as for larger states will vary significantly depending on the objectives of the bank and the financial situation of the entities involved. For example, research on public banking for the State of Massachusetts estimated a required capitalization of at least $325 million when considering the growth of the national economy since BND’s establishment in 1919 (Kodryzcki and Elmatad, 2011). Because the size of 10 10 the NYS economy is approximately three times that of Massachusetts, a public bank in the State of New York would require at least $1 billion for capitalization. 

Initial capital could be sourced in several ways including through new bond issuance, taxation, transfers from the general fund or other special funds, or from large existing pools such as pension funds. Because of each potential government’s unique financial and accounting situation, the capitalization techniques will vary. For example in New York State – which has a state pension fund with value of $192.4 billion (DiNapoli, 2017) relative to a GDP of $1.45 trillion (U.S. Census Bureau, 2016) – a significant amount of capital invested in assets outside of the state with comparable (2%) interest rates could be reinvested locally. The fundamental question in this case is one of portfolio theory – are there enough profitable investments in New York State for a public bank to remain solvent while the pension fund also fulfills its fiduciary obligations? 

Economic and Political Considerations
Beyond the financial considerations, the implementation of public banking results in several economic and political consequences. First and most importantly, private sector banks may feel threatened by government-owned enterprises, fearing competition and crowding out. Crucially, the BND model addresses this directly by noting in its founding charter that it does not in any manner intend to “destroy” or be “harmful” to any existing institutions (North Dakota, 2017). Public banks should primarily aim to fill gaps in the markets and support the existing markets through guarantees or loan purchases, rather than compete with the private sector.

In addition to concerns about economic interference, there are challenges to garnering political support. Although public banks are largely viewed as constitutional, mobilizing politicians and administrators at higher levels of government could be difficult (Khao et. al., 2016). 11 11 Establishing a public bank would need significant reorganization of existing funding streams and policies, and thus require cooperation from many constituencies. 


The public banking model 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.


Bank of North Dakota. Bank of North Dakota Annual Report 2016. 2016.

Hullet, Kelvin L. “Bank of North Dakota Infrastructure Loan Program.” Phone Interview. 26 Oct. 2017.

“Introduction to Public Banking.” Public Banking Institute. Web. 5 November 2017.

Khao, Ke, Mariel Wallace, Sean Connolly, and Sarah Han. Public Banking in New Hampshire: Assessing the Possibility of Establishing a State Bank. The Nelson A. Rockefeller Center at Dartmouth College. 2016. 

Kodryzcki, Yolanda K., and Tal Elmatad. The Bank of North Dakota: A Model for Massachusetts and Other States? New England Public Policy Center, 2011. Accessed 5 November 2017.

"New York State Common Retirement Fund.” DiNapoli, Thomas P. Web. 11 December 2017. 

North Dakota State Legislature. “North Dakota Century Code Chapter 6-09.” North Dakota Century Code Chapter 6-09.

North Dakota State Water Commission. Water Development Report 2017-2019. Accessed 5 November 2017.

"Public Banks: Bank of North Dakota." Institute for Local Self-Reliance, 2 July 2015. Web. 18 Dec. 2017. .

Puentes, Robert and Jennifer Thompson. Banking on Infrastructure: Enhancing State Revolving Funds for Transportation. The Brookings Institution and the Rockefeller Foundation, September 2012.

Storstad, Maureen. "City Infrastructure Finance / Bank of North Dakota." E-mail Interview. 23 Oct. 2017.

Storstad, Maureen. City of Grand Forks Staff Report. 16 Apr 2016.

Updike, Katherine L., and Christopher Erickson. Public Banking Feasibility Study Final Report for the City of Santa Fe. 2016. Building Solutions LLC and Arrowhead Center, New Mexico State University.

U.S. Census Bureau. U.S. American Community Survey 2015. 2015.