Geographies | October 8, 2019

City-owned banks in California could leverage public funds for local impact

Amy Cortese
ImpactAlpha Editor

Amy Cortese

If states are the laboratories for democracy, cities may be where finance goes to innovate. 

San Francisco and Los Angeles are moving forward with plans to create city-owned banks after California Gov. Gavin Newsom signed a bill last week to allow for the creation of city-owned banks. The public banks, nonprofit public benefit corporations with independent boards of directors, could pave the way for new models of civic funding for everything from green infrastructure to affordable housing.

“I see the public bank becoming a new locus of community development activity,” said Sushil Jacob, an attorney with the Lawyer’s Committee for Civil Rights, who helped draft the bill and is working on San Francisco’s effort to create public bank.

The legislation was inspired by the 100-year-old Bank of North Dakota, currently the only public bank in the nation. The state-owned bank is credited with boosting North Dakota’s economy and buffering it from the economic dislocations of the Great Recession. North Dakota’s bank has one of the highest returns on equity among U.S. banks and returns up to $50 million a year to the state’s coffers.

California’s Public Banking Act will let up to 10 cities or regions create public banks over seven years. Not beholden to shareholders, the banks are intended to serve the common good. The publicly owned banks could hold the cities’ deposits and essentially be their bankers, saving on Wall Street fees, and redeploying their idle capital for local projects. The public banks would need approval from the Federal Deposit Insurance Corp.

Like commercial banks, public banks could borrow at low rates from the Federal Reserve and make low-cost loans for renewable energy and other public needs. They could also save taxpayers money. By one estimate, financing costs related to interest and fees can double the cost of municipal infrastructure projects.

What the public banks won’t do: compete with commercial banks at the retail level. Instead, public banks would partner with local banks, credit unions and community development financial institutions, or CDFIs, to facilitate loans to individuals. (The exception: city-owned banks would be allowed to offer services in underserved areas where commercial banks are not meeting needs).

Local experiments

The Lawyer’s Committee was part of a coalition, including eight cities, that lobbied for the law under the aegis of the California Public Banking Alliance. The effort gained steam after the financial crisis devastated municipal finances and, more recently, with the movement to urge banks to divest from fossil fuel projects, and the Dakota Access Pipeline in particular. 

“It is time that banks start working on behalf of people, not Wall Street investors,” said San Francisco assembly member David Chiu, a coauthor of the bill, in announcing it earlier this year. “Time and time again, we have seen big banks invest our money in institutions most Californians are opposed to – oil pipelines, gun manufacturers, private prisons, and companies with unfair labor practices. This legislation allows us to take a first step towards ensuring the public’s money is used for public good.”      

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The bill drew fierce opposition from financial groups, including the California Bankers Association.  “Californians are not clamoring for a public bank option,” the group said in statement. “By signing this measure into law, taxpayer dollars have been potentially put at risk.”

Proponents say the law has checks and balances built in, including obtaining approval by the Commissioner of the Department of Business Oversight and maintaining FDIC insurance, among other measures. The path from business plan to approval could take up to two years.  

State and local governments in the U.S. have more than $500 billion on deposit in commercial banks. A dozen other jurisdictions, including Washington, New Mexico, Michigan, New York City, Portland, Philadelphia, Chicago and others, are mulling public banking legislation. California’s law is considered a pilot; advocates hope it will be renewed after its initial seven-year term.

Cities are likely to take different approaches. A feasibility study by the San Francisco treasurer’s office, for example, identified three models for a potential San Francisco public bank: a reinvestment entity that focuses on underserved areas such as affordable housing and small business lending; a “divestment” bank that handles the city’s cash management and commercial banking (currently performed by Bank of America and US Bank); or a combination of both. 

Among the possibilities in San Francisco: Loan products, perhaps with loan-loss reserves, distributed through local financial institutions and aimed at increasing local lending to people of color. Jacobs also sees roles for impact investors in blending finance or syndicating loans for affordable housing, infrastructure or other areas in which public banks can directly participate.

“As a financial center, [a public bank] will use its lending power to promote change in local financial institutions,” said Jacob. “It’s a value multiplier.”