DOVER, Del. — A state panel has shot down a proposal by Delaware’s treasurer to spur economic development by depositing taxpayer money in local banks to free up other capital for loans to small businesses.
Treasurer Chip Flowers proposed depositing up to $200 million of state funds into federally insured banks over a period of 18 months, allowing the banks to draw on other capital for business loans.
But members of the Cash Management Policy Board, which sets policies for investing the state’s money, expressed several concerns about the proposal, questioning whether Flowers has the legal authority to carry out the program.
“I don’t have a problem with the concept of the program itself,” board Chairman John Flynn said Tuesday. “What I have a problem with is that this program is economic development. It is not the cash management board’s responsibility for economic development.”
The board did not take a formal vote on the proposal, but members made it clear that they would not sign off on it.
A frustrated Flowers said he was surprised by the opposition, particularly after a meeting two weeks ago at which he believed he had addressed concerns raised by the attorney general’s office and Gov. Jack Markell’s administration.
“I think it’s equivalent to opposing giving out turkeys on Thanksgiving,” Flowers said after the meeting, suggesting that board members may simply be resistant to change and interested in protecting “old guard” banks such as JPMorgan Chase and Wilmington Trust that traditionally have handled the state’s money.
Under Flowers’ proposal, banks participating in the Small Business Economic Recovery Program would pay an administrative fee to the state of $7,350 for every $1 million deposited in the interest-free demand deposit accounts. Flowers suggested that the fee could result in a better return for the state than what current interest rates offer.
The program is designed to take advantage of a Federal Deposit Insurance Corp. program offering unlimited insurance on demand deposit accounts. The program expires on Dec. 31, 2012.
“This program is putting checking accounts in Delaware banks, nothing more, nothing less, Flowers said.
But board members believe the program carries a host of potential problems.
Some argued that the state can’t impose a new fee without a three-fifths vote by lawmakers in the General Assembly. Others questioned whether federal regulators might equate the fee paid by banks with interest payments, meaning the deposits would be subject to FDIC insurance limits on interest-bearing accounts.
Board members also expressed concern about the potential impact on small banks from the state withdrawing its money at the end of 2012.
“My biggest problem with it is the short duration. … We need to find something that is more long-term,” said Secretary of State Jeffrey Bullock.
Flowers maintains that he has the authority to deposit money in any bank at any time, but that he would try to work with the General Assembly and the attorney general’s office to find a path forward.
“We think this is a great program and we really do believe it protects taxpayer money in a safe manner while promoting Delaware banks,” he said.
Michael MacFarland, a regional vice president for TD Bank, indicated that his company might be willing to accept $10 million in demand deposits through the program if the kinks could be worked out.
“You’re raising awareness for small business lending in the state,” he said.
But Flynn, the board chairman, noted there’s nothing stopping TD Bank and other companies from trying to drum up small business lending on their own.