A path forward for public banks?

If public banking advocates get their way, California municipalities will soon have an avenue to set up taxpayer-owned banks to hold public money and fund local infrastructure projects.

Largely a response to previous questions about how public banks would be set up and regulated, a bill introduced in the California State Assembly last month would establish a legal process for local jurisdictions to charter their own public banks. Several California cities have already entertained the idea of establishing public bank, but there is no formal framework for them to do so.

The bill is still stuck in committee and faces a tough road to passage. The state’s banks and credit unions fiercely oppose it and even Democratic lawmakers could have concerns about how such banks would be capitalized. Gov. Gavin Newsom, a Democrat who has supported other public banking measures, has been noncommittal.

Still, this latest effort shows that in spite of a few recent setbacks, the public banking debate isn’t going away anytime soon.

The U.S. is home to just two public banks: the Bank of North Dakota and the Territorial Bank of American Samoa. The Bank of North Dakota, the inspiration for the California bill, was founded about 100 years ago while the Territorial Bank of American Samoa received its routing number just last year.

Yet the idea of public banking has gained a lot of attention in recent years. A number of cities and states, including Los Angeles, Seattle, New Jersey and Massachusetts, have entertained the notion for reasons ranging from providing banking services for legal marijuana companies to funding public infrastructure projects.

To date, those proposals have mostly resulted in feasibility studies that often raise more questions than they answer. What kind of charter would a municipality apply for? Who would regulate public banks? And what would they do about insurance?

This California bill attempts to answer some of those questions, while allowing local jurisdictions to decide on the size, scope and purpose of their own public banks.

For example, the bill stipulates that a public bank would be chartered as a commercial bank and regulated by the state department of business oversight. A public bank would also have to obtain insurance from Federal Deposit Insurance Corp. or buy private insurance.

Proponents made it clear that they do not intend for public banks created under the framework to compete with community banks and credit unions. These public banks could potentially offer some very basic retail deposit products to consumers do not otherwise have access to a bank, but they would not have storefronts, advocates say.

The California Bankers Association pushed back, pointing to previous feasibility studies that concluded a public bank would be risky and expensive. The association also pointed to a recently failed ballot measure in Los Angeles that would have amended the city’s charter to allow it to establish a public bank.

“We think these efforts are misguided, and that the proponents of creating public banks have failed to identify how the current financial system is not meeting the needs of our cities and communities,” spokeswoman Beth Mills said in an email to American Banker. “There are more than 150 commercial banks serving the state of California, so there is much choice in the current marketplace.”

Public banking advocates say that public funds should be held at taxpayer-owned institutions and that the management fees cities pay to private sector banks could be better spent on public projects.

“We think the large scale banks are doing a disservice to our cities and counties, capturing far too much of the upside of public debt and public spending, and that we need to have some financial independence and create a public banking option for our governments,” said David Jette, the legislative director of Public Bank LA.

At a press conference in March, Assembly member David Chiu, a Democrat and a co-sponsor of the bill, also highlighted the issue of local control over tax dollars and city revenues. He said that many large banks finance activities many Californians don’t want to see their tax dollars support, such as oil pipelines and private prisons.

“It will allow us to keep our tax dollars in our communities, rather than giving them to Wall Street banks for profits, to invest in our cities, to create jobs and build housing, to focus on the public nonprofits with a fiduciary duty to safeguard funds,” he said of the bill.

(Several large banks, including JPMorgan Chase, U.S. Bank and Wells Fargo, have all said recently that they will exit the business of financing private prisons.)

The proposal is currently before the state assembly’s banking and finance committee. Jette said that Democratic Chairwoman Monique Limon has been directly engaged in talks with the California Public Banking Alliance, but hasn’t declared her support for the bill.

The city of San Jose has already vowed to study the feasibility of establishing its own public bank, motivated partly by the proposed bill and by the difficulty it encountered trying to find a bank for the city’s funds.

With the expiration of its current contract with Wells Fargo looming, the city bid out its municipal banking business last summer. But a 2016 ordinance prohibits the city from doing business with companies facing wage theft violations, which would preclude it from banking with either Wells or JPMorgan Chase, the two main contenders.

Rather than make an exception for Chase, city councilors voted to extend the contract with Wells, reopen the bidding process and explore the feasibility of creating a city-owned public bank. City finance officials say they are also exploring the possibility of unbundling some of those banking services to attract smaller institutions.

While that proposal was unanimously adopted, the city council was not necessarily unanimous in its support for the public bank concept.

Council member Johnny Khamis specifically expressed concerns about taxpayers’ recourse in the event that a public bank fails. He said he’s supportive of studying a public bank “because I want my colleagues to know how dangerous it would be for our citizens and our taxpayers.”

“I just hope that people measure twice and cut once,” he told American Banker. “I’m glad to study something, but I would really have to be convinced somehow that taxpayers would not be on the hook for creating a whole new banking institution run by the city.”