The concept of public banking in California is making a comeback.
By law, currently California cities and counties typically have one place to deposit the funds they collect from taxes, fees and fines: private commercial banks. Billions of dollars of public money are handled by commercial banks — for a fee.
Despite having billions of dollars banked, municipalities have no say in how their money is used by commercial banks. Bank management, owners and stockholders set policy.
With a public bank, the “shareholder” is the public, not private individuals. The goal of personal profit is replaced with whatever benefits the community.
But public banking advocates say that because commercial banks are loyal to their shareholders, that policy reflects the shareholders’ desire for high profit, not the interests of the community whose money they bank.
Last month, the Assembly on a bare majority vote approved AB 857, by Assembly Democrats Miguel Santiago of Los Angeles and David Chiu of San Francisco. The measure amends existing banking law to allow California municipalities to establish their own public banks. The bill was sent to the Senate, where the Banking & Financial Institutions Committee approved last week and sent to it to Governance and Finance.
Meanwhile, the Senate is also considering another bill related to public banking and the existing Infrastructure Bank, SB 528, by Sen. Ben Hueso, D-San Diego. And there are moves to form public banks in San Francisco, Los Angeles, Oakland, San Jose, Santa Rosa, Santa Cruz, Santa Barbara, San Diego, Eureka, and Orange County.
With a public bank, the “shareholder” is the public, not private individuals. The goal of personal profit is replaced with whatever benefits the community. If a municipality prioritizes low interest small business loans in a blighted area in order to bring jobs to an impoverished community, the public bank is there as a resource. Municipalities can, in turn, use their rich deposits to secure low interest loans for infrastructure development, low income housing, and other projects commercial banks are loath to loan money to, especially at low interest rates.
Advocates say that a public bank — a common institution generations ago and in the 19th century — can save a municipality “millions or even billions of dollars” in fees and interest “by cutting out the middleman and private shareholders.” The California Public Banking Alliance suggests that cities could save millions just by refinancing their debt.
Proponents “have failed to identify how the current financial system is not meeting the needs of our cities and communities, and frankly why there is a need for this bill.” — Beth Mills.
Because the public bank is public, it is “accountable” to the public through their representative, although that does not mean that politicians run the public bank or are allowed to micromanage. While a city can make policy and set priorities and goals, the public bank is run by “qualified bankers,” professionals. Public banks generally do not involve themselves in consumer banking.
Over the past year, the California Banking Association’s Beth Mills has offered numerous objections to public banks. Mills, the commercial bank lobby’s principal spokesperson, says that “there is much choice in the current marketplace,” that “there is substantial cost and risk associated with operating a public bank,” and that “running a bank is not inexpensive.”
In response to AB 857, passed in the Assembly late May, Mills told CNBC that “proponents of the measure have failed to identify how the current financial system is not meeting the needs of our cities and communities, and frankly why there is a need for this bill.”
Public banking supporters counter that the “the current financial system is not meeting the needs of our cities and communities” — which is why they are pushing for public banks. Supporters answer other objections by noting the experience of the Bank of North Dakota.
Coming out of the early 20th century Progressive Movement, the Bank of North Dakota (BND) was founded by farmers wanting an alternative to commercial banks and what the farmers saw as the banks’ monopolistic practices. They believed whatever profit commercial banks earned from their money would go straight to Wall Street and in private pockets and not be reinvested in their communities.
AB 857 is supported by the cities of Berkeley, Eureka, San Francisco, Huntington Beach, Long Beach, Los Angeles, Oakland, Richmond, San Diego and San Jose, among others.
So, in 1919, the Bank of North Dakota was formed. It survived the Great Depression, mass bank and savings and loans failures, and multiple recessions, including the Great Recession.
The Huffington Post reported that BND “earned profits for 14 straight years, during the Great Recession and North Dakota’s more recent downturn from a collapse in oil prices, according to its 2017 annual report.” Moreover, because BND supports community banks, it provides stability to North Dakota’s banking system: Not one North Dakota bank failed as a result of the 2007 financial crisis.
Critics state that comparing the Bank of North Dakota to potential California public banks is unfair. The amount of money that North Dakota deals with pales in comparison to the money that flows through California’s cities and counties.
The community bank lobby opposes AB 857, stating that public banks present unfair competition and will risk the health of community banks. Chiu says that the legislation directs public banks to work hand-in-hand with community banks and that public banks pose no threat to consumer banking.
As passed by the Assembly, AB 857, “define[s] the term “bank” for purposes of the Financial Institutions Law and the Banking Law to include a public bank…the [public bank being] a corporation, organized for the purpose of engaging in the commercial banking business or industrial banking business, that is wholly owned by a local agency, as specified, local agencies, or a joint powers authority.”
AB 857 is supported by the cities of Berkeley, Eureka, Huntington Beach, Long Beach, Los Angeles, Oakland, Richmond, San Diego, San Jose City, Santa Cruz, Santa Rosa, Watsonville, and the city and county of San Francisco, as well as the California Democratic Party, labor unions, the NAACP, and over 100 community groups.
It is opposed by the California Chamber of Commerce, California Bankers Association, Howard Jarvis Taxpayers Association, and six other financial industry lobbying groups.
As originally written, SB 528 would establish the “California Infrastructure and Economic Development Bank” (the I-Bank), a public bank which would enable counties to follow suit. However, SB 528 has been substantially altered in committee. The bill now requires the state “to study the workability, potential costs, and estimated time frame to transition the I-Bank into a depository institution to accept deposits from state and local governments and to lend money to local governments for their infrastructure needs.”
While cities and counties cannot establish a public bank until the state legislature enables them to do so, they have been active. In support of a bank, San Francisco’s Board of Supervisors established the Municipal Bank Feasibility Task Force, which in March issued a 48-page study on the financial challenges of a public bank.
A feasibility study has been done in Alameda County. Santa Clara County’s Board of Supervisors voted in April to explore the idea of a public bank. San Jose has also approved a feasibility study.
In 2018, the Los Angeles City Council unanimously voted to put a public bank measure on the ballot – Measure B. Though it failed at the polls, Public Bank LA is continuing to organize locally and statewide through the California Public Banking Alliance.