California 'public banks' legislation could upend local government finance, backers say

Should banks exist to make a profit, a difference, or both?

A bill in the California Legislature allowing municipalities to create their own banks could upend how they handle their money and finance long-term projects. It also has the potential to squeeze out larger financial institutions, replacing them with these so-called 'public banks.'

The legislation, Assembly Bill 857, could also have a resounding impact on the North Bay.

Cities and counties could combine to found a bank that would replace larger institutions in underwriting 'participation loans' made to projects in partnership with local banks and credit unions, according to Susan Harman of the Public Bank East Bay advocacy group, part of the statewide California Public Bank Alliance.

'We would replace Wall Street banks, offer local rates and the money would stay local,' Harman said. 'The public bank would buy that loan essentially, back it, and provide the capital that the credit union or community bank would need.'

There are different visions for how public banks could work and how many municipalities would be involved in one. In the North Bay, some advocates envision a wide-ranging conglomeration of cities and counties participating in the bank.

Under the bill, municipalities could band together to create joint powers authorities, or JPAs, to increase their size and improve the chance of loan profitability.

'The combined counties of Sonoma, Mendocino and Humboldt could serve as a public bank for the north coast,' said Shelly Browning, a Santa Rosa business owner and public banks booster. She testified earlier this month in front of the Santa Rosa City Council, which passed a resolution to send a letter supporting AB 857 to Sacramento on Mayor Tom Schwedhelm's letterhead.

'For the bank to be profitable it's going to require quite a few municipalities to come together to say that they want this,' said Chris Petlock, the administration and finance manager for the Valley of the Moon Water District just outside the city of Sonoma and a supporter of the legislation and public banking in the North Bay.

He said that profitability would be based in part on how much money any public bank would start with and based on a study done by San Francisco on the concept.

'Capitalization needs to be somewhere north of $5 billion,' Petlock said.

Sonoma County supervisors approved a $1.78 billion budget this month for the 2019-2020 fiscal year. Santa Rosa's fiscal year 2018-2019 budget clocked in at $448.3 million.

It would remain up to each bank and participating municipality how much money they would want to put into their local public bank. Petlock said he envisioned the day-to-day cash handling services remaining with the larger banks like Wells Fargo and West America Bank that currently handle big municipal accounts.

'We could put some longer term money in a public bank and get a loan from that bank for capital projects at better rates,' Petlock said.

He singled out making repairs and upgrading flood-plagued Highway 37 linking the North and East Bay as the kind of project that a public bank could finance with loans at lower interest rates because of a lack of incentive to pay back shareholders and decreased overhead compared to large Wall Street banks.

He added interest rates could also be more favorable to municipalities that put their money in a public bank for the same reasons.

While the bill would not create any public banks in California, it would allow counties, cities and JPAs to apply to the California Department of Business Oversight for a charter to create a publicly owned and run bank after completing due diligence, including a feasibility or viability study plus a business plan.

The bill already passed the Assembly and sailed through the state Senate Banking and Financial Institutions Committee.

Unsurprisingly the bill requires any public bank to report on its profitably. Unlike private banks however, a public bank could commit to certain causes, be they infrastructure, housing or others and would have to report progress it has made in achieving its goals in those areas. Despite its unusual goals, a public bank would still have to make a profit to continue functioning.

The bill is not without its detractors however.

'Ultimately the threat that should be looked at is the threat to taxpayer dollars if they were to get into community banking,' said Beth Mills, senior vice president of communications at the California Bankers Association, which opposes the bill. 'We're not persuaded by any of the arguments we've heard that there's a need or that the public is clambering for another alternative to the current financial system.'

Her organization commissioned a poll in April, which among other findings showed 60% of Californians are opposed to creating government-run public banks, and 30% support the concept. An outside firm conducted the poll with 600 Californians likely to cast a ballot in the November 2020 election.

Public banks advocates like David Jette of the Public Bank Los Angeles group said the banking industry exaggerates the risk to protect their business.

'The [California Bankers Association] arguing that public banks would be risky manages to paper over the risk all of us have experienced coming from their members for the past 25 years,' he said.

The bankers association and 'Wall Street interests … would prefer for cities to have only one option or a choice between two mega banks,' Jette said.

The idea of a public bank is not a new one, and advocates said the bill is based on the The Bank of North Dakota, a 100-year-old public bank established when North Dakota's economy was still largely agrarian.

According to their website, the bank was founded in response to out of state 'grain dealers who suppressed grain prices, farm suppliers who increased their prices, and banks in Minneapolis and Chicago which raised the interest rates on farm loans, sometimes up to 12%.'

Some advocates for the bill and public banking in California also frame the issue as a political one, saying divesting taxpayer funds from large banks that invest in non-progressive causes is essential.

'It's the continuation of Occupy Wall Street,' said Harman of Public Bank East Bay.

Harman highlighted the city of Oakland's banking with Union Bank. It is owned by Mitsubishi, which she said is a large investor in the Dakota Access oil pipeline, which was the source of heavy protest in 2016.

'Banks invest in terrible things: pipelines, private prisons, deportation centers, firearms, the war machine,' Harman said.

She noted community banks and credit unions are too small to handle large municipal accounts.

'They have no choice they switch from Bank of America to Chase and it's the same thing,' Harman said.

Mills of the California Bankers Association said different banks had different investment portfolios.

'I think there's a lot of choice in the marketplace for financial service providers,' she said. 'I think ultimately that's the best option out there.'

AB 857 now heads to the senate Governance and Finance Committee, chaired by North Bay state Sen. Mike McGuire, D-Healdsburg. McGuire's office did not respond to an emailed request for comment, but Petlock and others said he had yet to support or oppose the bill in their conversations with him.