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.