Existing law, the Financial Institutions Law, regulates the activities of various financial entities, including commercial banks, industrial banks, trust companies, credit unions, and savings associations. The Banking Law defines and regulates state banks and commits the enforcement of banking laws to the Commissioner of Business Oversight.

Existing law prohibits a county from giving or loaning its credit to, or in aid of, any person or corporation. Existing law requires a local agency, as defined, to deposit all money belonging to, or in the custody of that local agency, into specified state or national banks, as defined. Existing law regulates the investment of public funds by local agencies.

This bill would define the term bank for purposes of the Financial Institutions Law and the Banking Law to include a public bank. The bill would define the term public bank to mean a corporation, organized as either a nonprofit mutual benefit corporation or a nonprofit public benefit corporation 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.

The bill would require a public bank to obtain a certificate of authorization to transact business as a bank from the commissioner and to obtain and maintain insurance, subject to specified requirements. The bill would prohibit the commissioner from issuing more than 2 public bank licenses, as defined, in a calendar year and would prohibit the commissioner from authorizing more than 10 public banks at one time. The bill would require a public bank to include a specified purpose statement in its articles of incorporation and make conforming changes. The bill would require a local agency to conduct and approve, as specified, a study of the viability of a public bank containing specified elements before submitting an application to the commissioner to organize and establish a public bank and would require the local agency to include a copy of that study in the application submitted to the commissioner. The bill would require a local agency that is not a charter city to obtain voter approval of a motion to submit an application to the commissioner, as specified. The bill would authorize a county to lend its available funds to a public bank. The bill also would authorize a local agency to deposit funds in a public bank, and to invest in a public bank, subject to certain requirements. The bill would authorize a public bank to make distributions to its members. The bill would require, as specified, a public bank to conduct retail activities in partnership with local financial institutions and would prohibit a public bank from competing with local financial institutions.

The Corporation Tax Law imposes a franchise tax on financial corporations, but provides that the tax is in lieu of all other state and local taxes and licenses, with certain exceptions. That law also exempts specified classes of entities from the franchise and income taxes imposed by that law, including state-chartered credit unions.

This bill would additionally exempt from those franchise and income taxes any public bank. This bill would also exempt a public bank from all other state and local taxes and licenses, with certain exceptions.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 857

Author:(Chiu and Santiago)

As Amended Ver:September 6, 2019

Majority vote

SUMMARY:

Provides for the establishment of a public bank by a local agency, subject to approval by the Department of Business Oversight (DBO) and Federal Deposit Insurance Corporation (FDIC).

The Senate Amendments:

1. Require a local agency that is not a charter city to obtain voter approval prior to applying for a public bank charter, as specified.
2. Provide that all provisions of law applicable to nonprofit corporations generally shall apply to public banks. If such a provision is inconsistent with a provision of the Public Banking division added by this bill, the provision of the Public Banking division shall apply, and the inconsistent provision applicable to nonprofit corporations shall not apply.
3. Restrict the number of public bank licenses that may be approved by the Commissioner of Business Oversight, as follows:
   1. The commissioner may not issue more than two public bank licenses in a calendar year, nor more than ten in total.
   2. The commissioner may not issue a public bank license more than seven years after promulgating regulations pursuant to the Public Banking division.
4. Require a public bank to conduct retail activities, as defined, in partnership with local financial intuitions and prohibit a public bank from competing with local financial institutions, except in the case of local agency banking, infrastructure lending, wholesale lending, and participation lending, as defined.
5. Exempt from public disclosure specified information and records of a public bank, as specified.
6. Authorize the governing board of a public bank or a committee of the governing board of a public bank to meet in closed session.

COMMENTS:

On the heels of the 2007-08 financial crisis, renewed interest in public banking has sparked legislation or feasibility studies in state and local governments around the United States. To date, no state or local government has established a public bank, and feasibility studies often find significant start-up costs and high levels of financial and operational risk associated with public banks.

This bill would specify a process for a local agency to apply for a public bank license from the Department of Business Oversight (DBO). The local agency would need to meet the same general requirements and approval criteria as existing law requires of a private sector applicant, including deposit insurance provided by the FDIC. Under the proposed bill and existing law, both the DBO and FDIC would provide routine supervision and examinations of a public bank to evaluate the nature of the bank's operations, the adequacy of the bank's internal controls and its internal audit function, and the bank's compliance with laws and regulations. If weaknesses are identified, the regulators have tools to correct deficiencies in the bank's risk management practices and address weaknesses in the bank's operations.

In addition to FDIC insurance, existing law provides protections for taxpayer dollars that may be deposited in a public bank. After the bankruptcy of Orange County in the mid-1990s, the Legislature passed laws requiring that funds deposited by a local agency must be protected with special collateral requirements. These requirements ensure that taxpayer funds are protected, even if the size of the local agency's deposit account is greater than the FDIC protection limit of $250,000. This bill does not exempt a public bank from these collateral requirements.

While collateral requirements protect local government deposits, any capital provided to a public bank by the local government as shareholder equity or as a non-deposit liability may be exposed to losses. Additionally, a local agency may expend significant taxpayer funds in studying the viability of a public bank and in organizational start-up costs, only to later find that the public bank proposal does not meet the requirements of the DBO or FDIC. As fiduciaries and trustees of taxpayer funds, local government officials should carefully consider the cost and risks involved with public bank proposals, particularly in light of their responsibilities under the prudent investor rule.

According to the Author:

AB 857 provides more local control, transparency, and self-determination in how local taxpayer dollars are leveraged in the banking system by allowing local governments to charter their own public banks. These public banks would have oversight from the Department of Business Oversight (DBO) and a separate, professional board. In contrast to profit-driven commercial banks, the public bank's board of directors will have a fiduciary duty to protect taxpayers' assets... By creating a public bank, taxpayer money will be held by an insured financial institution that measures its return on investment not only by profits, but also by its success in supporting communities.

Arguments in Support:

According to the California Public Bank Alliance, "Unlike a privately-owned bank, which prioritizes shareholder returns, public banks leverage their deposit base and lending power to benefit the public. This allows public banks to focus on pressing local needs, like affordable housing, small business loans, and public infrastructure projects such as rebuilding after wildfires. A public bank's decisions may consider the needs of the community and leverage public funds to meet those needs at a lower cost than the private sector."

Arguments in Opposition:

According to the California Bankers Association, "AB 857 infers that banks are not serving their communities, an argument repeatedly made by public bank activists in a variety of forums…Proponents for the creation of a public bank have failed to identify how the current marketplace is not meeting the public's financial needs…Commercial banks, particularly community banks, will be harmed by the taking of local agency deposits which would otherwise be used as a source of liquidity by these banks to make loans into their communities. The notion that the public bank will cooperate with local financial institutions is illusory and this measure forces community banks to compete on an unlevel playing field."

The California Association of County Treasurers and Tax Collectors states, "there is simply no question that county treasurers complying with state law cannot possibly deposit county funds into a public bank...Moving forward this legislation creates a false sense of hope for proponents who have been repeatedly advised that county pools cannot be used for these purposes, and that critical statutory protections of local dollars cannot be lightly dismissed."

FISCAL COMMENTS:

According to the Senate Appropriations Committee, this bill will result in significant ongoing costs to DBO for the oversight of newly formed public banks. DBO will incur initial costs to develop regulations for the public banks. Assuming that two public banks are formed in the first year following the promulgation of regulations, and every year thereafter for five years, DBO will incur estimated ongoing costs in the hundreds of thousands of dollars to low millions of dollars per year. These estimates include costs for examiners, managers, legal staff, and support staff. DBO will be able to recoup some of its costs with application fees and annual renewal fees.

This bill may also result in an unknown, potentially significant reduction in tax revenue to the General Fund. Public banks, which will be exempt from the 10.84% of apportioned net income in franchise taxes, will be competitive against commercial banks, which are subject to the franchise tax. As such, the state could incur a reduction in tax revenue from the commercial banks due to the formation of tax-exempt public banks.

VOTES:

ASM BANKING AND FINANCE: 7-3-2

YES: Limón, Bauer-Kahan, Burke, Gabriel, Mark Stone, Weber, Wicks

NO: Chen, Choi, Melendez

ABS, ABST OR NV: Cervantes, Grayson

ASM LOCAL GOVERNMENT: 5-2-1

YES: Aguiar-Curry, Bloom, Boerner Horvath, Luz Rivas, Robert Rivas

NO: Lackey, Voepel

ABS, ABST OR NV: Ramos

ASM APPROPRIATIONS: 11-5-2

YES: Gonzalez, Bloom, Bonta, Calderon, Carrillo, Chau, Eggman, Gabriel, Eduardo Garcia, Quirk, Robert Rivas

NO: Bigelow, Brough, Diep, Fong, Obernolte

ABS, ABST OR NV: Maienschein, Petrie-Norris

ASSEMBLY FLOOR: 41-29-10

YES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Bonta, Burke, Carrillo, Chau, Chiu, Chu, Cunningham, Eggman, Friedman, Gabriel, Eduardo Garcia, Gipson, Gloria, Gonzalez, Holden, Irwin, Jones-Sawyer, Kalra, Levine, Limón, Low, Maienschein, McCarty, Mullin, Nazarian, O'Donnell, Luz Rivas, Robert Rivas, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NO: Bigelow, Boerner Horvath, Chen, Choi, Cooper, Dahle, Daly, Diep, Flora, Fong, Frazier, Gallagher, Cristina Garcia, Gray, Kamlager-Dove, Kiley, Lackey, Mathis, Medina, Melendez, Obernolte, Patterson, Petrie-Norris, Quirk-Silva, Ramos, Blanca Rubio, Salas, Voepel, Waldron

ABS, ABST OR NV: Brough, Calderon, Cervantes, Cooley, Grayson, Mayes, Muratsuchi, Quirk, Reyes, Rodriguez

SENATE FLOOR: 25-11-4

YES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Dodd, Durazo, Galgiani, Glazer, Lena Gonzalez, Hill, Hueso, Jackson, Leyva, McGuire, Mitchell, Monning, Portantino, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NO: Bates, Chang, Dahle, Grove, Hurtado, Jones, Moorlach, Morrell, Nielsen, Stone, Wilk

ABS, ABST OR NV: Borgeas, Hertzberg, Pan, Roth

UPDATED:

VERSION: September 6, 2019

CONSULTANT: Michael Burdick / B. & F. / (916) 319-3081 FN: 0002335

 THIRD READING  

Bill No: AB 857

Author: Chiu (D) and Santiago (D), et al.

Amended: 9/6/19 in Senate

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 4-2, 6/19/19

AYES: Bradford, Durazo, Hueso, Portantino

NOES: Chang, Dahle

NO VOTE RECORDED: Caballero

SENATE GOVERNANCE & FIN. COMMITTEE: 4-3, 7/3/19

AYES: McGuire, Beall, Hertzberg, Wiener

NOES: Moorlach, Hurtado, Nielsen

SENATE APPROPRIATIONS COMMITTEE: 5-2, 8/30/19

AYES: Portantino, Bradford, Durazo, Hill, Wieckowski

NOES: Bates, Jones

ASSEMBLY FLOOR: 41-29, 5/30/19 - See last page for vote

SUBJECT: Public banks

SOURCE: California Public Banking Alliance

DIGEST:

This bill authorizes local agencies to form public banks, subject to approval from the Department of Business Oversight and the Federal Deposit Insurance Corporation, as specified.

Senate Floor Amendments of 9/6/19 add clarifying language and renumber a code section.

ANALYSIS:

Existing law:

1. Regulates the businesses of commercial and industrial banking in California via Division 1 (Financial Code Section 99 et seq.) and Division 1.1 of the Financial Code (Financial Code Section 1000 et seq.) and their implementing regulations (California Code of Regulations Title 10, Chapter 1), all of which are administered by the Department of Business Oversight (DBO).
2. Requires the Commissioner of DBO (commissioner) to make or cause to be made a careful investigation and examination of the following when an application to organize and establish a corporation to engage in the banking business in California is submitted to DBO (Financial Code Section 1022):
   1. The character, reputation, and financial standing of the organizers and their motives in seeking to organize the proposed bank.
   2. The need for banking facilities or additional banking facilities, giving particular consideration to the adequacy of existing banking facilities.
   3. The character, financial responsibility, banking experience, and business qualifications of the proposed officers of the bank.
   4. The character, financial responsibility, business experience, and standing of the proposed stockholders and directors.
3. Prohibits the commissioner from approving an application to form a bank in California until the commissioner has ascertained all of the following to his or her satisfaction (Financial Code Section 1023):
   1. That the public convenience and advantage will be promoted by the establishment of the proposed bank.
   2. That the proposed bank will have a reasonable promise of successful operation.
   3. That the bank is being formed for no other purpose than the legitimate objects contemplated by the Banking Law.
   4. That the proposed capital structure is adequate.
   5. That the proposed officers and directors have sufficient banking or trust experience, ability, and standing to afford reasonable promise of successful operation.
4. Limits the entities that may acquire control of an industrial loan company to those engaged only in the activities of a financial holding company, as provided in Section 103 of the federal Graham-Leach-Bliley Act, as specified (Financial Code Section 1252).
5. Provides that, when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the county treasurer, the board of supervisors, or the trustee, as applicable, shall act with care, skill, prudence, and diligence, as specified, to safeguard the principal and maintain the liquidity needs of the county, the agency, and the other depositors, as applicable (Government Code Sections 27000.3 and 53600.3).
6. Limits the amount of money a local agency may deposit in a depository institution, at a level intended to ensure that deposits do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository, as specified (Government Code Section 53638).
7. Prohibits the Legislature from authorizing the state or any political subdivision of the state to subscribe for stock or to become a stockholder in any corporation (California Constitution Article XVI, Section 6).

This bill:

1. States the intent of the Legislature that this bill authorizes the lending of public credit to public banks and authorizes public ownership in public banks for the purpose of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities. Further states the intent of the Legislature that public banks partner with and refrain from competing with local financial institutions, such as credit unions and local public banks.
2. Adds a new division titled, “Public Banks,” to the title of the Government Code governing local agencies. For purposes of this new division,
   1. “Local financial institution” means a certified community development financial institution, a credit union, or a small or intermediate small bank, as defined.
   2. “Public bank” means a corporation organized under the Nonprofit Mutual Benefit Corporation Law or the Nonprofit Public Benefit Corporation Law for the purpose of engaging in the commercial banking or industrial banking business, which is wholly owned by a local agency or agencies or by a joint powers authority composed only of local agencies.
   3. References in the Banking Law to “share,” “shareholder,” or “stockholder” mean “membership” or “member” in the public banking context.
   4. A local agency located within a county whose population is less than 250,000 may organize a public bank only if it does so as part of a joint powers authority formed for that purpose.
3. Requires a public bank to obtain a certificate of authorization to transact business as a bank pursuant to Division 1.1 of the Financial Code before it engages in business and to obtain and maintain deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC), as specified. Provides that all provisions of law applicable to nonprofit corporations generally shall apply to public banks, and further provides that whenever a provision of the Public Banking division in the Government Code is inconsistent with a provision of law applicable to nonprofit mutual benefit corporations or nonprofit public benefit corporations, the provisions of the Public Banking division shall apply, and the inconsistent provision of the Corporations Code shall not apply.
4. Limits the commissioner’s ability to issue licenses (i.e., certificates of authorization) to public banks, as follows:
   1. The commissioner may not issue more than two public bank licenses in a calendar year, nor more than ten in total.
   2. The commissioner may not issue a public bank license more than seven years after promulgating regulations to carry out the Public Banking division.
5. Requires the commissioner to conduct a study of public banking in California within two years after issuing the tenth public bank license.
6. Authorizes a public bank to engage in local agency banking, infrastructure lending, wholesale lending, and participation lending, as defined, and to engage in retail activities, as defined, that are not offered or provided by local financial institutions in the jurisdiction of the local agency or agencies that own the public bank.
7. Requires a local agency to conduct a study to assess the viability of a proposed public bank before it may submit an application to organize and establish that bank. The study must include, but is not limited to, all of the following:
   1. A discussion of the purposes of the bank, a fiscal analysis of costs associated with starting the proposed bank, and an estimate of the initial amount of capital to be provided by the local agency to the proposed public bank.
   2. Financial projections of the public bank, including a balance sheet and income statement for at least the first five years of the bank’s operation, under at least two different scenarios, one of which assumes favorable economic conditions, and the other of which assumes unfavorable economic conditions. All of the projections must include an estimate of the length of time before expected revenues exceed expected costs and an estimate of the total operating subsidy the local agency may be required to provide until the bank generates sufficient revenue to cover its costs.
   3. A legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article XVI of the California Constitution.
   4. An analysis of how the proposed governance structure of the public bank would protect the bank from unlawful insider transactions and apparent conflicts of interest.
8. Requires the local agency to make available to the public the financial models and key assumptions used to develop the financial projections included in the study before that study is presented to the governing body of the local agency.
9. Requires the aforementioned study to be presented to and approved by the governing body of the local agency that commissioned the study.
10. Requires the governing body of the local agency that commissioned the study to affirmatively vote to move forward with an application for a public banking charter, at a public meeting, before the local agency may submit an application for a public bank charter. Provides that, before the local agency may submit an application to form a public bank, the motion to move forward is subject to voter approval at the next regularly scheduled election held at least 180 days following the vote of the governing body.
11. Exempts charter cities from the voter approval requirement described immediately above.
12. Exempts a public bank from all state and local taxes and licenses, as well as from state energy resources surcharges, state emergency telephone users’ surcharges, and any tax or license fee imposed by the state on motor vehicles.
13. Adds “commercial paper, debt securities, or other obligations of a public bank” to those investments a local agency may make and adds public banks to the types of depository institutions in which local agencies are authorized to deposit money belonging to them or in their custody.
14. Authorizes a county to lend its credit to any public bank and provides that any local agency may invest in commercial paper, debt securities or other obligations of a public bank. Provides that any person or entity, including a local agency, that owns, controls, or holds an ownership interest in a public bank is not a bank holding company by reason of that ownership interest.
15. Requires a local agency to comply with the requirements of Government Code Section 53638 with respect to its deposits in a public bank, unless, with the prior approval of the commissioner, the public bank and the local agency depositor agree otherwise.
16. Provides an exemption from public disclosure of specified information and records of a public bank and related decisions of the director, officers, and managers of a public bank; and contains legislative findings and declarations supporting the need for such exemptions from public disclosure.
17. Authorizes the governing board of a public bank or a committee of the governing board of a public bank to meet in closed session, as specified.

Related/Prior Legislation

SB 528 (Hueso, 2019) would have convened a task force to study the workability, potential costs, and estimated time frame to transition the California Infrastructure and Economic Development Bank into a depository institution to accept deposits from the state and local governments and to lend money to local governments for their infrastructure needs. Held on the Senate Appropriations Committee Suspense File.

AB 750 (Hueso, 2011) would have established the Investment Trust Blue Ribbon Task Force to consider the viability of establishing the California Investment Trust, which would have been a state bank receiving deposits of state funds. Vetoed by Governor Brown.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, this bill will result in significant ongoing costs to DBO for the oversight of newly formed public banks. DBO will incur initial costs to develop regulations for the public banks. Assuming that two public banks are formed in the first year following the promulgation of regulations, and every year thereafter for five years, DBO will incur estimated ongoing costs in the hundreds of thousands of dollars to low millions of dollars per year. These estimates include costs for examiners, managers, legal staff, and support staff. DBO will be able to recoup some of its costs with application fees and annual renewal fees.

This bill may also result in an unknown, potentially significant reduction in tax revenue to the General Fund. Public banks, which will be exempt from the 10.84% of apportioned net income in franchise taxes, will be competitive against commercial banks, which are subject to the franchise tax. As such, the state could incur a reduction in tax revenue from the commercial banks due to the formation of tax-exempt public banks.

SUPPORT: (Verified 9/6/19)

California Public Banking Alliance (source)

350 Bay Area Action

350 Chico

350 Conejo San Fernando Valley

350 Riverside

350 Santa Cruz

350 Silicon Valley

350 Sonoma

350 South Bay Los Angeles

Act LA

Active San Gabriel Valley

AFSCME California

AFSCME Council 57

Alameda County

Alameda County Democratic Party

Alliance for Community Transit – Los Angeles

Alliance for Democracy

Alliance of Californians for Community Empowerment Action

American Federation of Teachers Guild, Local 1931

American Federation of Teachers Local 2121

American Indian Movement SoCal

American Postal Workers Union, AFL-CIO

Asian Pacific Environmental Network

Backbone Campaign

Beneficial State Foundation

Bernie Sanders Brigade

Beverly-Vermont Community Land Trust

Bolinas Community Land Trust

Brightline Defense

California Association for Micro Enterprise Opportunity

California Board of Equalization Member Malia Cohen

California Community Land Trust Network

California Democratic Party

California Environmental Justice Alliance

California Faculty Association – San Francisco State University

California for Progress

California Labor Federation

California Native Vote Project

California Nurses Association, AFL-CIO

California Progressive Alliance

California Reinvestment Coalition

California State Board of Education

Campaign for Sustainable Transportation – Santa Cruz

Center for Community Action and Environmental Justice

Center for Farmworker Families

City and County of San Francisco

City of Berkeley

City of Beverly Hills

City of Capitola

City of Eureka

City of Huntington Park

City of Long Beach

City of Los Angeles

City of Oakland

City of Richmond

City of San Diego

City of San Jose

City of Santa Cruz

City of Sebastopol

City of Watsonville

Coleman Advocates for Children

Committee for Better Banks

Common Defense

Commonomics USA

Communities for a Better Environment

Community Financial Resources

Conejo 350 San Fernando Valley

Consumers for Auto Reliability and Safety

Cooperation Humboldt – Eureka

Cooperative Center Federal Credit Union

County of Santa Clara Supervisor Cindy Chavez

County of Santa Cruz

Courage Campaign

Democracy Collaborative

Democratic Party of Contra Costa County

Democratic Party of San Fernando Valley

Democratic Socialists of America – Los Angeles

Democratic Socialists of America – San Francisco

Divest LA

Food & Water Watch

Fossil Free California

Fresno County Democratic Party

Friends of Public Banking Santa Rosa

Friends of the Earth

Friends of the Santa Rosa Climate Action Plan

Green America

Green Party of California

Green Party of Santa Clara County CA

Greenpower

Healthcare for All – California

Hollywood Now

Home It

Housing and Economic Rights Advocates

Hubert Humphrey Democratic Club

Humanity First Coalition

Humboldt and Del Norte Labor Council

Idle No More

Idle No More – San Francisco Bay

Indivisible Alta Pasadena

Indivisible CA

Indivisible CA – 33

Indivisible California Green Team

Indivisible California: StateStrong

Indivisible East Bay

Indivisible Hillcrest

Indivisible Los Angeles, CA – 43

Indivisible Marin

Indivisible San Jose

Indivisible Sonoma County

Indivisible South Bay

Indivisible South Bay L.A.

Lakota People’s Law Project

Lawyers’ Committee for Civil Rights of the San Francisco Bay Area

Leadership Council for Justice and Accountability

Local Clean Energy Alliance

Los Angeles County Democratic Party

McGee-Spaulding Neighbors in Action

Media Alliance

Monterey Bay Central Labor Council

Monterey County Democratic Party

Movement for a People’s Party

NAACP – Santa Cruz Chapter

National Lawyers Guild – LA Chapter

National Nurses United

National Organization for the Advancement of Colored People

North Bay Labor Council, AFL-CIO

Northridge Indivisible

Oakland Educators Association

Oakmont Democratic Club

OC Racial Justice Collaborative

Orange County Employees Association

Orange County Green Party

Orange County Poor People’s Campaign

Our Green Challenge

Our Revolution

Our Revolution Long Beach

Our Revolution Los Angeles

Pacific Palisades Democratic Club

Peace and Freedom Party

People Demanding Action --CA

People for Public Banking Santa Cruz

People Organizing to Demand Environmental and Economic Rights

People’s Democratic Club of Santa Cruz County

Progressive Asian Network for Action

Progressive Democrats of America -- California

Public Bank East Bay

Public Bank Los Angeles

Public Bank San Diego

Public Bank Santa Barbara

Public Banking Institute

Public Banking Institute for Action Backbone Campaign

Resistance – Northridge, Invisible

Revolution LA

Romero Institute

Rooted in Resistance

San Francisco Berniecrats

San Francisco Board of Supervisors

San Francisco Democratic Party

San Francisco Living Wage Coalition

San Francisco Public Bank Coalition

San Francisco Rising Alliance

Santa Barbara County Democratic Central Committee

Santa Clara County Democratic Party

Santa Cruz Climate Action Network

Santa Cruz County Democratic Central Committee

Santa Cruz County Democratic Party

Santa Cruz for Bernie

Santa Monica Democratic Club

SEIU California

SoCal 350 Climate Action

Sonoma County Climate Action Network

South Bay Progressive Alliance

Stonewall Democratic Club

Strike Debt Bay Area

Sunflower Alliance

Sunrise Movement – Bay Area

Sunrise Movement – Los Angeles

Sustainable Economies Law Center

Teamsters Local 665

The Future Left

The Resistance – Northridge, Indivisble

Top West Architecture and Planning

Transition Berkeley

UDW/AFSCME Local 3930

United Educators of San Francisco

United Food and Commercial Workers Local 5

United Food and Commercial Workers Western States Council

Urban Habitat

We the People

Wellstone Democratic Renewal Club

West LA Democratic Club

Westchester-Playa Democratic Club

Windsor Democratic Club

Women’s International League for Peace and Freedom

YIMBY Democrats

YIMBY Democrats of San Diego County

Five individual city councilmembers from the Cities of San Jose, Berkeley, Oakland, Los Angeles, and San Francisco

550 Delegates of the California Democratic Party

Two individuals

OPPOSITION: (Verified 9/6/19)

Bay Area Council

California Association of County Treasurers and Tax Collectors

California Bankers Association

California Business Roundtable

California Chamber of Commerce

California Community Banking Network

CalTax

County of Madera

DefendingConstitutionalRights

Howard Jarvis Taxpayers Association

Los Angeles County Business Federation

San Francisco Committee on Jobs

San Gabriel Valley Economic Partnership

Silicon Valley Leadership Group

Southwest California Legislative Counsel

State Association of County Auditors

Valley Industry & Commerce Association

ARGUMENTS IN SUPPORT: A coalition of public banking advocates from a wide variety of sectors believe that public banking represents a way to establish more local control and demand for ethical, transparent use of public funds. They state: “Public banks create a stable means to divest public funds and investments from banking organizations and industries that may not align with the values of our communities. A robust public banking network in California provides strong protections against insolvency of large banks in periods of economic duress. Public banks return interest and fee revenues to the communities they serve, creating value and revenue reserves for local constituencies. Public banks bolster and enhance local bank and credit union activities, enabling lending capital for local businesses. Public banking under our legislation enables a viable means of publicly financing housing and infrastructure projects to remediate our statewide housing crisis. Public banks promote a transparent, independent and publicly governed finance system that is accountable to the people they serve.”

ARGUMENTS IN OPPOSITION: The California Association of County Treasurers and Tax Collectors states, “there is simply no question that county treasurers complying with state law cannot possibly deposit county funds into a public bank...Moving forward this legislation creates a false sense of hope for proponents who have been repeatedly advised that county pools cannot be used for these purposes, and that critical statutory protections of local dollars cannot be lightly dismissed.”

ASSEMBLY FLOOR: 41-29, 5/30/19

AYES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Bonta, Burke, Carrillo, Chau, Chiu, Chu, Cunningham, Eggman, Friedman, Gabriel, Eduardo Garcia, Gipson, Gloria, Gonzalez, Holden, Irwin, Jones-Sawyer, Kalra, Levine, Limón, Low, Maienschein, McCarty, Mullin, Nazarian, O'Donnell, Luz Rivas, Robert Rivas, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NOES: Bigelow, Boerner Horvath, Chen, Choi, Cooper, Dahle, Daly, Diep, Flora, Fong, Frazier, Gallagher, Cristina Garcia, Gray, Kamlager-Dove, Kiley, Lackey, Mathis, Medina, Melendez, Obernolte, Patterson, Petrie-Norris, Quirk-Silva, Ramos, Blanca Rubio, Salas, Voepel, Waldron

NO VOTE RECORDED: Brough, Calderon, Cervantes, Cooley, Grayson, Mayes, Muratsuchi, Quirk, Reyes, Rodriguez

Prepared by: Eileen Newhall / B. & F.I. /

9/9/19 18:38:15

**** END ****

 THIRD READING  

Bill No: AB 857

Author: Chiu (D) and Santiago (D), et al.

Amended: 8/30/19/ in Senate

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 4-2, 6/19/19

AYES: Bradford, Durazo, Hueso, Portantino

NOES: Chang, Dahle

NO VOTE RECORDED: Caballero

SENATE GOVERNANCE & FIN. COMMITTEE: 4-3, 7/3/19

AYES: McGuire, Beall, Hertzberg, Wiener

NOES: Moorlach, Hurtado, Nielsen

SENATE APPROPRIATIONS COMMITTEE: 5-2, 8/30/19

AYES: Portantino, Bradford, Durazo, Hill, Wieckowski

NOES: Bates, Jones

ASSEMBLY FLOOR: 41-29, 5/30/19 - See last page for vote

SUBJECT: Public banks

SOURCE: California Public Banking Alliance

DIGEST:

This bill authorizes local agencies to form public banks, subject to approval by the Department of Business Oversight and the Federal Deposit Insurance Corporation, as specified.

ANALYSIS:

Existing law:

1. Regulates the businesses of commercial and industrial banking in California via Division 1 (Financial Code Section 99 et seq.) and Division 1.1 of the Financial Code (Financial Code Section 1000 et seq.) and their implementing regulations (California Code of Regulations Title 10, Chapter 1), all of which are administered by the Department of Business Oversight (DBO).
   
2. Requires the Commissioner of DBO (commissioner) to make or cause to be made a careful investigation and examination of the following when an application to organize and establish a corporation to engage in the banking business in California is submitted to DBO (Financial Code Section 1022):
   
   1. The character, reputation, and financial standing of the organizers and their motives in seeking to organize the proposed bank.
      
   2. The need for banking facilities or additional banking facilities, giving particular consideration to the adequacy of existing banking facilities.
      
   3. The character, financial responsibility, banking experience, and business qualifications of the proposed officers of the bank.
      
   4. The character, financial responsibility, business experience, and standing of the proposed stockholders and directors.
      
3. Prohibits the commissioner from approving an application to form a bank in California until the commissioner has ascertained all of the following to his or her satisfaction (Financial Code Section 1023):
   
   1. That the public convenience and advantage will be promoted by the establishment of the proposed bank.
      
   2. That the proposed bank will have a reasonable promise of successful operation.
      
   3. That the bank is being formed for no other purpose than the legitimate objects contemplated by the Banking Law.
      
   4. That the proposed capital structure is adequate.
      
   5. That the proposed officers and directors have sufficient banking or trust experience, ability, and standing to afford reasonable promise of successful operation.
      
4. Limits the entities that may acquire control of an industrial loan company to those engaged only in the activities of a financial holding company, as provided in Section 103 of the federal Graham-Leach-Bliley Act, as specified (Financial Code Section 1252).
   
5. Provides that, when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the county treasurer, the board of supervisors, or the trustee, as applicable, shall act with care, skill, prudence, and diligence, as specified, to safeguard the principal and maintain the liquidity needs of the county, the agency, and the other depositors, as applicable (Government Code Sections 27000.3 and 53600.3).
   
6. Limits the amount of money a local agency may deposit in a depository institution, at a level intended to ensure that deposits do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository, as specified (Government Code Section 53638).
   
7. Prohibits the Legislature from authorizing the state or any political subdivision of the state to subscribe for stock or to become a stockholder in any corporation (California Constitution Article XVI, Section 6).
   

This bill:

1. States the intent of the Legislature that this bill authorizes the lending of public credit to public banks and authorizes public ownership in public banks for the purpose of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities. Further states the intent of the Legislature that public banks partner with and refrain from competing with local financial institutions, such as credit unions and local public banks.
   
2. Adds a new division titled, “Public Banks,” to the title of the Government Code governing local agencies. For purposes of this new division,
   
   1. “Local financial institution” means a certified community development financial institution, a credit union, or a small or intermediate small bank, as defined.
      
   2. “Public bank” means a corporation organized under the Nonprofit Mutual Benefit Corporation Law or the Nonprofit Public Benefit Corporation Law for the purpose of engaging in the commercial banking or industrial banking business, which is wholly owned by a local agency or agencies or by a joint powers authority composed only of local agencies.
      
   3. References in the Banking Law to “share,” “shareholder,” or “stockholder” mean “membership” or “member” in the public banking context.
      
   4. A local agency located within a county whose population is less than 250,000 may organize a public bank only if it does so as part of a joint powers authority formed for that purpose.
      
3. Requires a public bank to obtain a certificate of authorization to transact business as a bank pursuant to Division 1.1 of the Financial Code before it engages in business and to obtain and maintain deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC), as specified. Provides that all provisions of law applicable to nonprofit corporations generally shall apply to public banks, and further provides that whenever a provision of the Public Banking division in the Government Code is inconsistent with a provision of law applicable to nonprofit mutual benefit corporations or nonprofit public benefit corporations, the provisions of the Public Banking division shall apply, and the inconsistent provision of the Corporations Code shall not apply.
   
4. Limits the commissioner’s ability to issue licenses (i.e., certificates of authorization) to public banks, as follows:
   
   1. The commissioner may not issue more than two public bank licenses in a calendar year, nor more than ten in total.
      
   2. The commissioner may not issue a public bank license more than seven years after promulgating regulations to carry out the Public Banking division.
      
5. Requires the commissioner to conduct a study of public banking in California within two years after issuing the tenth public bank license.
   
6. Authorizes a public bank to engage in local agency banking, infrastructure lending, wholesale lending, and participation lending, as defined, and to engage in retail activities, as defined, that are not offered or provided by local financial institutions in the jurisdiction of the local agency or agencies that own the public bank.
   
7. Requires a local agency to conduct a study to assess the viability of a proposed public bank before it may submit an application to organize and establish that bank. The study must include, but is not limited to, all of the following:
   
   1. A discussion of the purposes of the bank, a fiscal analysis of costs associated with starting the proposed bank, and an estimate of the initial amount of capital to be provided by the local agency to the proposed public bank.
      
   2. Financial projections of the public bank, including a balance sheet and income statement for at least the first five years of the bank’s operation, under at least two different scenarios, one of which assumes favorable economic conditions, and the other of which assumes unfavorable economic conditions. All of the projections must include an estimate of the length of time before expected revenues exceed expected costs and an estimate of the total operating subsidy the local agency may be required to provide until the bank generates sufficient revenue to cover its costs.
      
   3. A legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article XVI of the California Constitution.
      
   4. An analysis of how the proposed governance structure of the public bank would protect the bank from unlawful insider transactions and apparent conflicts of interest.
      
8. Requires the local agency to make available to the public the financial models and key assumptions used to develop the financial projections included in the study before that study is presented to the governing body of the local agency.
   
9. Requires the aforementioned study to be presented to and approved by the governing body of the local agency that commissioned the study.
   
10. Requires the governing body of the local agency that commissioned the study to affirmatively vote to move forward with an application for a public banking charter, at a public meeting, before the local agency may submit an application for a public bank charter. Provides that, before the local agency may submit an application to form a public bank, the motion to move forward is subject to voter approval at the next regularly scheduled election held at least 180 days following the vote of the governing body.
    
11. Exempts charter cities from the voter approval requirement described immediately above.
    
12. Exempts a public bank from all state and local taxes and licenses, as well as from state energy resources surcharges, state emergency telephone users’ surcharges, and any tax or license fee imposed by the state on motor vehicles.
    
13. Adds “commercial paper, debt securities, or other obligations of a public bank” to those investments a local agency may make and adds public banks to the types of depository institutions in which local agencies are authorized to deposit money belonging to them or in their custody.
    
14. Authorizes a county to lend its credit to any public bank and provides that any local agency may invest in commercial paper, debt securities or other obligations of a public bank. Provides that any person or entity, including a local agency, that owns, controls, or holds an ownership interest in a public bank is not a bank holding company by reason of that ownership interest.
    
15. Requires a local agency to comply with the requirements of Government Code Section 53638 with respect to its deposits in a public bank, unless, with the prior approval of the commissioner, the public bank and the local agency depositor agree otherwise.
    
16. Provides an exemption from public disclosure of specified information and records of a public bank and related decisions of the director, officers, and managers of a public bank; and contains legislative findings and declarations supporting the need for such exemptions from public disclosure.
    
17. Authorizes the governing board of a public bank or a committee of the governing board of a public bank to meet in closed session, as specified.
    

Related/Prior Legislation

SB 528 (Hueso, 2019) would have convened a task force to study the workability, potential costs, and estimated time frame to transition the California Infrastructure and Economic Development Bank into a depository institution to accept deposits from the state and local governments and to lend money to local governments for their infrastructure needs. Held on the Senate Appropriations Committee Suspense File.

AB 750 (Hueso, 2011) would have established the Investment Trust Blue Ribbon Task Force to consider the viability of establishing the California Investment Trust, which would have been a state bank receiving deposits of state funds. Vetoed by Governor Brown.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, this bill will result in significant ongoing costs to DBO for the oversight of newly formed public banks. DBO will incur initial costs to develop regulations for the public banks. Assuming that two public banks are formed in the first year following the promulgation of regulations, and every year thereafter for five years, DBO will incur estimated ongoing costs in the hundreds of thousands of dollars to low millions of dollars per year. These estimates include costs for examiners, managers, legal staff, and support staff. DBO will be able to recoup some of its costs with application fees and annual renewal fees.

This bill may also result in an unknown, potentially significant reduction in tax revenue to the General Fund. Public banks, which will be exempt from the 10.84% of apportioned net income in franchise taxes, will be competitive against commercial banks, which are subject to the franchise tax. As such, the state could incur a reduction in tax revenue from the commercial banks due to the formation of tax-exempt public banks.

SUPPORT: (Verified 8/30/19)

California Public Banking Alliance (source)

350 Bay Area Action

350 Chico

350 Conejo San Fernando Valley

350 Riverside

350 Santa Cruz

350 Silicon Valley

350 Sonoma

350 South Bay Los Angeles

Act LA

Active San Gabriel Valley

AFSCME California

AFSCME Council 57

Alameda County

Alameda County Democratic Party

Alliance for Community Transit – Los Angeles

Alliance for Democracy

Alliance of Californians for Community Empowerment Action

American Federation of Teachers Guild, Local 1931

American Federation of Teachers Local 2121

American Indian Movement SoCal

American Postal Workers Union, AFL-CIO

Asian Pacific Environmental Network

Backbone Campaign

Beneficial State Foundation

Bernie Sanders Brigade

Beverly-Vermont Community Land Trust

Bolinas Community Land Trust

Brightline Defense

California Association for Micro Enterprise Opportunity

California Board of Equalization Member Malia Cohen

California Community Land Trust Network

California Democratic Party

California Environmental Justice Alliance

California Faculty Association – San Francisco State University

California for Progress

California Labor Federation

California Native Vote Project

California Nurses Association, AFL-CIO

California Progressive Alliance

California Reinvestment Coalition

California State Board of Education

Campaign for Sustainable Transportation – Santa Cruz

Center for Community Action and Environmental Justice

Center for Farmworker Families

City and County of San Francisco

City of Berkeley

City of Beverly Hills

City of Capitola

City of Eureka

City of Huntington Park

City of Long Beach

City of Los Angeles

City of Oakland

City of Richmond

City of San Diego

City of San Jose

City of Santa Cruz

City of Sebastopol

City of Watsonville

Coleman Advocates for Children

Committee for Better Banks

Common Defense

Commonomics USA

Communities for a Better Environment

Community Financial Resources

Conejo 350 San Fernando Valley

Consumers for Auto Reliability and Safety

Cooperation Humboldt – Eureka

Cooperative Center Federal Credit Union

County of Santa Clara Supervisor Cindy Chavez

County of Santa Cruz

Courage Campaign

Democracy Collaborative

Democratic Party of Contra Costa County

Democratic Party of San Fernando Valley

Democratic Socialists of America – Los Angeles

Democratic Socialists of America – San Francisco

Divest LA

Food & Water Watch

Fossil Free California

Fresno County Democratic Party

Friends of Public Banking Santa Rosa

Friends of the Earth

Friends of the Santa Rosa Climate Action Plan

Green America

Green Party of California

Green Party of Santa Clara County CA

Greenpower

Healthcare for All – California

Hollywood Now

Home It

Housing and Economic Rights Advocates

Hubert Humphrey Democratic Club

Humanity First Coalition

Humboldt and Del Norte Labor Council

Idle No More

Idle No More – San Francisco Bay

Indivisible Alta Pasadena

Indivisible CA

Indivisible CA – 33

Indivisible California Green Team

Indivisible California: StateStrong

Indivisible East Bay

Indivisible Hillcrest

Indivisible Los Angeles, CA – 43

Indivisible Marin

Indivisible San Jose

Indivisible Sonoma County

Indivisible South Bay

Indivisible South Bay L.A.

Lakota People’s Law Project

Lawyers’ Committee for Civil Rights of the San Francisco Bay Area

Leadership Council for Justice and Accountability

Local Clean Energy Alliance

Los Angeles County Democratic Party

McGee-Spaulding Neighbors in Action

Media Alliance

Monterey Bay Central Labor Council

Monterey County Democratic Party

Movement for a People’s Party

NAACP – Santa Cruz Chapter

National Lawyers Guild – LA Chapter

National Nurses United

National Organization for the Advancement of Colored People

North Bay Labor Council, AFL-CIO

Northridge Indivisible

Oakland Educators Association

Oakmont Democratic Club

OC Racial Justice Collaborative

Orange County Employees Association

Orange County Green Party

Orange County Poor People’s Campaign

Our Green Challenge

Our Revolution

Our Revolution Long Beach

Our Revolution Los Angeles

Pacific Palisades Democratic Club

Peace and Freedom Party

People Demanding Action --CA

People for Public Banking Santa Cruz

People Organizing to Demand Environmental and Economic Rights

People’s Democratic Club of Santa Cruz County

Progressive Asian Network for Action

Progressive Democrats of America -- California

Public Bank East Bay

Public Bank Los Angeles

Public Bank San Diego

Public Bank Santa Barbara

Public Banking Institute

Public Banking Institute for Action Backbone Campaign

Resistance – Northridge, Invisible

Revolution LA

Romero Institute

Rooted in Resistance

San Francisco Berniecrats

San Francisco Board of Supervisors

San Francisco Democratic Party

San Francisco Living Wage Coalition

San Francisco Public Bank Coalition

San Francisco Rising Alliance

Santa Barbara County Democratic Central Committee

Santa Clara County Democratic Party

Santa Cruz Climate Action Network

Santa Cruz County Democratic Central Committee

Santa Cruz County Democratic Party

Santa Cruz for Bernie

Santa Monica Democratic Club

SEIU California

SoCal 350 Climate Action

Sonoma County Climate Action Network

South Bay Progressive Alliance

Stonewall Democratic Club

Strike Debt Bay Area

Sunflower Alliance

Sunrise Movement – Bay Area

Sunrise Movement – Los Angeles

Sustainable Economies Law Center

Teamsters Local 665

The Future Left

The Resistance – Northridge, Indivisble

Top West Architecture and Planning

Transition Berkeley

UDW/AFSCME Local 3930

United Educators of San Francisco

United Food and Commercial Workers Local 5

United Food and Commercial Workers Western States Council

Urban Habitat

We the People

Wellstone Democratic Renewal Club

West LA Democratic Club

Westchester-Playa Democratic Club

Windsor Democratic Club

Women’s International League for Peace and Freedom

YIMBY Democrats

YIMBY Democrats of San Diego County

Five individual city councilmembers from the Cities of San Jose, Berkeley, Oakland, Los Angeles, and San Francisco

550 Delegates of the California Democratic Party

Two individuals

OPPOSITION: (Verified 8/30/19)

Bay Area Council

California Association of County Treasurers and Tax Collectors

California Bankers Association

California Business Roundtable

California Chamber of Commerce

California Community Banking Network

California Credit Union League

CalTax

County of Madera

DefendingConstitutionalRights

Howard Jarvis Taxpayers Association

Los Angeles County Business Federation

San Francisco Committee on Jobs

San Gabriel Valley Economic Partnership

Silicon Valley Leadership Group

Southwest California Legislative Counsel

State Association of County Auditors

Valley Industry & Commerce Association

ARGUMENTS IN SUPPORT: A coalition of public banking advocates from a wide variety of sectors believe that public banking represents a way to establish more local control and demand for ethical, transparent use of public funds. They state: “Public banks create a stable means to divest public funds and investments from banking organizations and industries that may not align with the values of our communities. A robust public banking network in California provides strong protections against insolvency of large banks in periods of economic duress. Public banks return interest and fee revenues to the communities they serve, creating value and revenue reserves for local constituencies. Public banks bolster and enhance local bank and credit union activities, enabling lending capital for local businesses. Public banking under our legislation enables a viable means of publicly financing housing and infrastructure projects to remediate our statewide housing crisis. Public banks promote a transparent, independent and publicly governed finance system that is accountable to the people they serve.”

ARGUMENTS IN OPPOSITION: The California Association of County Treasurers and Tax Collectors states, “there is simply no question that county treasurers complying with state law cannot possibly deposit county funds into a public bank...Moving forward this legislation creates a false sense of hope for proponents who have been repeatedly advised that county pools cannot be used for these purposes, and that critical statutory protections of local dollars cannot be lightly dismissed.”

ASSEMBLY FLOOR: 41-29, 5/30/19

AYES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Bonta, Burke, Carrillo, Chau, Chiu, Chu, Cunningham, Eggman, Friedman, Gabriel, Eduardo Garcia, Gipson, Gloria, Gonzalez, Holden, Irwin, Jones-Sawyer, Kalra, Levine, Limón, Low, Maienschein, McCarty, Mullin, Nazarian, O'Donnell, Luz Rivas, Robert Rivas, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NOES: Bigelow, Boerner Horvath, Chen, Choi, Cooper, Dahle, Daly, Diep, Flora, Fong, Frazier, Gallagher, Cristina Garcia, Gray, Kamlager-Dove, Kiley, Lackey, Mathis, Medina, Melendez, Obernolte, Patterson, Petrie-Norris, Quirk-Silva, Ramos, Blanca Rubio, Salas, Voepel, Waldron

NO VOTE RECORDED: Brough, Calderon, Cervantes, Cooley, Grayson, Mayes, Muratsuchi, Quirk, Reyes, Rodriguez

Prepared by: Eileen Newhall / B. & F.I. /

9/3/19 11:26:06

**** END ****

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 857 (Chiu) - Public banks

Bill Summary:

AB 857 would authorize local agencies to form public banks, subject to approval by the Department of Business Oversight (DBO) and the Federal Deposit Insurance Corporation (FDIC), as specified.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on August 30, 2019

Fiscal Impact:

• Significant ongoing costs to DBO for the oversight of newly formed public banks. DBO would incur initial costs to develop regulations for the public banks. Assuming two public banks would be formed in the first year following the promulgation of regulations and every year thereafter for five years, DBO would incur ongoing costs in the hundreds of thousands of dollars to low millions per year. This would include costs for examiners, managers, legal staff, and support staff. (Financial Institutions Fund)
• DBO would be able to recoup some of the cost that the department would incur with application fees and annual renewal fees.
• Unknown, potentially significant reduction in tax revenue. Public banks, which would be exempt from the 10.84% of apportioned net income in franchise taxes, would be competitive against commercial banks, which are subject to the franchise tax. As such, the state could incur a reduction in tax revenue from the commercial banks due to the formation of tax exempt public banks. (GF)

Author Amendments:

• Clarify that a public bank is a corporation under either Nonprofit Mutual Benefit Corporation Law or Nonprofit Public Benefit Corporation Law and specify requirements of a public bank under those laws.
• Clarify various definitions.
• Exempt specified information from disclosure requirements.
• Limit the establishment of new public banks to two annually.
• Limit the total number of public banks to 10.
• Require the Commissioner of DBO to conduct a study of public banking in the state within two years after the date in which the 10th bank is issued a license.
• Add findings and declarations.

Committee Amendments:

Prohibit the Commissioner of DBO from issuing a public bank license after seven years from the date upon which the Commissioner first promulgates regulations.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 857 (Chiu) - Public banks

Bill Summary:

AB 857 would authorize local agencies to form public banks, subject to approval by the Department of Business Oversight (DBO) and the Federal Deposit Insurance Corporation (FDIC), as specified.

Fiscal Impact:

• Significant ongoing costs to DBO for the oversight of newly formed public banks. The overall cost would be dependent on the number of new public banks created. Assuming 12 public banks would be formed, an estimated $2.4 million would be required in the first year and ongoing costs of $2.2 million annually thereafter. This would include costs for examiners, managers, legal staff, and support staff. This bill, however, would give authorization for thousands of public agencies to form a public bank. Should DBO receive hundreds of applications for public banks, the department would need a larger number of new personnel to handle the workload. (Financial Institutions Fund)
• DBO would be able to recoup some of the cost that the department would incur with application fees and annual renewal fees.
• Unknown, potentially significant reduction in tax revenue. Public banks, which would be exempt from the 10.84% of apportioned net income in franchise taxes, would be competitive against commercial banks, which are subject to the franchise tax. As such, the state could incur a reduction in tax revenue from the commercial banks due to the formation of tax exempt public banks. (GF)

Background:

Local agency investments

Since 1913, state law has authorized local officials to invest a portion of their temporarily idle funds in a variety of financial instruments, including as deposits in state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in the State of California. These public deposits can include certificates of deposit, so long as the FDIC insures the bank, or the deposit is sufficiently collateralized with certain types of securities in specified amounts. State law allows local agencies to invest directly, or pool resources together, subject to specific concentration limits.

Traditionally, large, commercial banks provide most banking services for local agencies. Agencies with larger budgets often require services from large, diversified banks due to the size and complexity of their banking needs. Many local agencies also contract for services with smaller credit unions and community banks. State law applies several requirements on banks receiving funds from local agencies, such as federal insurance and collateralization requirements, which decrease the risk local agencies assume when making deposits.

Currently, there is only one public bank in the nation – the Bank of North Dakota – which has continuously operated since 1919.

DBO Oversight

DBO, led by the Commissioner of Business Oversight, regulates banks, industrial banks, trust companies, credit unions, money transmitters, issuers of payment instruments and traveler’s checks, savings associations, business and development corporations, premium finance companies, and a variety of nondepository unsecured and secured lenders, broker-dealers, and investment advisers. Current law prohibits the commissioner from approving an application to form a bank until the commissioner has ascertained that the public convenience and advantage will be promoted by the establishment of the bank, the bank will have a reasonable promise of successful operation, the bank is being formed for no other purpose than the legitimate objects contemplated by the Banking Law, the proposed capital structure is adequate, and the proposed officers and directors have sufficient banking or trust experience, ability, and standing to afford reasonable promise of successful operation.

Corporation taxes

State law imposes a franchise tax on all corporations doing business in California equal to 8.84% of the corporation’s taxable income attributable to California; banks pay an additional 2% “bank rate” in-lieu of local gross receipts and personal property taxes. State law also imposes a Minimum Franchise Tax (MFT) of $800 on all corporations that incorporate under the laws of the state, or are doing business in the state. Corporations must pay either the regular franchise tax or the MFT, whichever is greater. The MFT ensures businesses that do not show a profit in a taxable year bear some of the cost of public services.

Proposed Law:

This bill would authorize local agencies to form public banks, subject to approval by DBO and FDIC. Specifically, this bill would:

• State legislative intent that the bill authorize the lending of public credit to public banks and authorize public ownership of stock in public banks for the purpose of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities. Further state legislative intent that public banks partner with and refrain from competing with local financial institutions, such as credit unions and local public banks;
• Add “commercial paper, debt securities, or other obligations of a public bank” to those investments a local agency may make and add public banks to the types of depository institutions in which local agencies are authorized to deposit money belonging to them or in their custody;
• Authorize a county to lend its credit to any public bank and provide that any local agency may invest in debt securities or other obligations of a public bank. Further provide that any person or entity, including a local agency, that owns, controls, or holds an ownership interest in a public bank is not a bank holding company by reason of that ownership interest;
• Define a public bank as 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, local agencies, or a joint powers authority and specify that a local agency located within a county with a population of less than 250,000 may organize a public bank only if it does so as part of a joint powers authority formed for that purpose;
• Require a public bank, among other things, to obtain and maintain deposit insurance provided by the FDIC;
• Require a public bank, before engaging in business, to obtain a certificate of authorization to transact business as a bank pursuant to California Banking Law;
• Require a local agency to comply with the limitation requirements for the amount of money a local agency may deposit in a bank or credit union;
• Authorize a public bank to engage in banking activities, as specified;
• Require a local agency to conduct a study, as specified, to assess the viability of the proposed public bank before it may submit an application to organize and establish that bank;
• Require a local agency to make available to the public, the financial models and key assumptions used to develop the financial projections included in the study and require the study to be presented and approved by the governing body of the local agency that commissioned the study and submitted to the Commissioner of DBO;
• Require the governing body of the local agency that commissioned the study to affirmatively vote to move forward with an application for a public banking charter, at a public meeting, before the local agency may submit an application for a public bank charter;
• Require the before the local agency submits an application for a public banking charter, the motion to move forward with an application for a public banking charter be subject to voter approval at the next regularly scheduled election held at least 180 days following the vote of the governing body;
• Exempt a public bank from all state and local taxes and licenses, with specified exceptions.

Related Legislation:

SB 51 (Hertzberg, 2019) would authorize the creation of cannabis limited charter banks and credit unions and authorize the use of special purpose checks issued by those institutions for specified purposes. The measure is pending in the Assembly Appropriations Committee.

SB 528 (Hueso, 2019), amongst other things, would have authorized the state and local agencies to deposit funds into the California Infrastructure and Economic Development Bank (I-Bank). The measure was held in the Senate Appropriations Committee.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Public banks

Creates a process for local agencies to create public banks.

Background

Local agency investments. Local agency governing boards are responsible for managing public funds, but can delegate this task to its treasurer for up to one year, who must make monthly reports of transactions to the governing board. After the County of Orange entered bankruptcy in 1994 resulting from severe losses in its investment pool, the Legislature enacted several changes to increase safeguards on these funds, including to consider governing bodies or persons authorized to make investment decisions on behalf of those local agencies trustees and fiduciaries, subject to the prudent investor standard. State law says that the first and most important consideration when managing public funds is preservation of principal, the second is liquidity, and the third is to achieve a return.

Since 1913, state law has authorized local officials to invest a portion of their temporarily idle funds in a variety of financial instruments, including as deposits in state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in the State of California. These public deposits can include certificates of deposit, so long as the Federal Deposit Insurance Corporation insures the bank, or the deposit is sufficiently collateralized with certain types of securities in specified amounts. State law allows local agencies to invest directly, or pool resources together, subject to specific concentration limits.

Traditionally, large, commercial banks provide most banking services for local agencies. Agencies with larger budgets often require services from large, diversified banks due to the size and complexity of their banking needs. Many local agencies also contract for services with smaller credit unions and community banks. State law applies several requirements on banks receiving funds from local agencies, such as federal insurance and collateralization requirements, which decrease the risk local agencies assume when making deposits. State law also limits the amount of money a local agency may deposit in a depository institution at a level that seeks to ensure safety of deposits. However, these limits can make using the services provided by credit unions and community banks more difficult because they have fewer assets and a smaller deposit base than larger financial institutions.

Bank regulation. In California, the Department of Business Oversight (DBO) regulates banks, industrial banks, trust companies, credit unions, money transmitters, issuers of payment instruments and traveler’s checks, savings associations, business and development corporations, premium finance companies, and a variety of nondepository unsecured and secured lenders, broker-dealers, and investment advisers. DBO is led by the Commissioner of Business Oversight. State law sets forth a process to form a corporation who seeks to conduct commercial banking business corporations. DBO inspects several aspects of the application when determining whether to grant approval. Additionally, all corporations must register with the Secretary of State.

Public agencies as shareholders. Dating to the state’s original 1849 Constitution, Section 6 of Article XVI of the California Constitution prohibits the Legislature from giving the credit of the state or of any local agency to any person, association, or corporation, whether municipal or otherwise. This section also applies to pledging the credit “in any matter whatever for the payment of the liabilities of any individual, association, municipal or other corporation,” and precludes the Legislature from authorizing the state or any political subdivision to subscribe for stock, or become a shareholder in any corporation. Often called the ban on the gift of public funds, this prohibition responded to local agencies becoming insolvent as a result of issuing debt to purchase railroad stock that would ensure railroads built rail lines that connected their jurisdictions. However, courts have generally recognized a “public purpose" exception to the constitutional prohibition against the gift of public funds, under which credit may be extended and public funds disbursed if a direct and substantial public purpose is served, and any non-state entities’ benefit is only incidental to the public purpose (California Housing Finance Agency v. Elliott, 17 Cal.3d 575 (1976)). Additionally, Section 17 of Article XVI additionally prohibits the state or a local agency from loaning its credit or being interested in the stock of any company, but allows the state and local agencies to acquire and hold stock in mutual water companies.

Joint Exercise of Powers Act. The Joint Exercise of Powers Act (Act) allows two or more public agencies to use their powers in common if they sign a joint powers agreement. Sometimes an agreement creates a new, separate government called a joint powers agency or joint powers authority (JPA). Agencies that can exercise joint powers include federal agencies, state departments, counties, cities, special districts, school districts, federally recognized Indian tribes, and even other joint powers authorities.

The Act allows a JPA to specify its own mission, structure, governing board, each member’s financial obligations, and provisions for members to enter and exit the JPA, among other items. Agreements outline the governing board, including whether member agencies can appoint alternate members. In some cases, members of the governing board have to be members of the legislative body that appointed them. In other cases, legislative bodies can appoint alternate members who may not be members of the legislative body, but may be a staff member with significant expertise in the policy area.

Corporation taxes. State law imposes a franchise tax on all corporations doing business in California equal to 8.84% of the corporation’s taxable income attributable to California; banks pay an additional 2% “bank rate” in-lieu of local gross receipts and personal property taxes (California Constitution, Article XIIII, Section 27). State law also imposes a Minimum Franchise Tax (MFT) of $800 on all corporations that incorporate under the laws of the state, or are doing business in the state. Corporations must pay either the regular franchise tax or the MFT, whichever is greater. The MFT ensures businesses that do not show a profit in a taxable year bear some of the cost of public services.

Seeking to create authority for local agencies who want to create public banks, public banking advocates want to create a process for local agencies to operate state-licensed banks.

Proposed Law

Assembly Bill 857 creates a process for local agencies to create public banks, defined as 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, local agencies, or a joint powers authority. Local agencies with populations of less than 250,000, using the most recent estimate from the Department of Finance, may only form a public bank by creating a joint powers authority. The local agency or joint powers authority must set forth a social purpose or specific public benefit as part of its articles of incorporation.

Prior to forming a public bank, AB 857 requires a local agency to first conduct a study to assess its viability. The study must include:

• A discussion of the purposes of the bank, a fiscal analysis of costs associated with starting the proposed bank, and an estimate of the initial amount of capital to be provided by the local agency to the proposed public bank.
• Financial projections of the public bank, including a balance sheet and income statement for at least the first five years of the bank’s operation, under at least two different scenarios, one of which assumes favorable economic conditions, and the other of which assumes unfavorable economic conditions. All of the projections must include an estimate of the length of time before expected revenues exceed expected costs and an estimate of the total operating subsidy the local agency may be required to provide until the bank generates sufficient revenue to cover its costs.
• A legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article XVI of the California Constitution.
• An analysis of how the proposed governance structure of the public bank would protect the bank from unlawful insider transactions and apparent conflicts of interest.

The measure provides that the study must be presented to and approved by the governing body of the local agency. The governing body of the local agency must approve a motion to move forward with an application for a public bank by majority vote at a public meeting before submitting its application. The local agency must include the feasibility study in any application submitted to the Commissioner of Business Operations. Additionally, the local agency must make available any financial models and key assumptions used in the study.

Before commencing operations, AB 857 requires the public bank to obtain a certificate of authorization to transact business as a bank issued by the Commissioner of Business Oversight. The public bank must also obtain and maintain deposit insurance provided by the Federal Deposit Insurance Corporation. The bill states that a current requirement that limits local agency deposit amounts in specified financial institutions applies, unless the public bank and the local agency depositor agree, with the approval of the Commissioner of Business Oversight. A public bank must conduct its retail activities in partnership with local financial institutions wherever possible. The measure also allows public banks to engage in lending for specified purposes and to conduct retail activities

AB 857 also exempts public banks formed under the bill from the Corporation Tax, as well as any local business license tax. The bill provides that public banks are subject to taxes upon its real property, local utility user taxes, sales and use taxes, state energy resources surcharges, state emergency telephone users surcharges, motor vehicle and other vehicle registration license fees, and any other tax or license fee imposed by the state upon vehicles, motor vehicles, or the operation thereof.

The measure also makes conforming changes to:

• Provide authority for local agencies to invest in the commercial paper, debt securities, or other obligations of a public bank.
• Allow counties to grant credit to a public bank.
• Allow local agencies to maintain a deposit in a public bank.

The measure makes statements of legislative intent setting forth the purposes of public banks, and defines several terms.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “AB 857 provides more local control, transparency, and self-determination in how local taxpayer dollars are leveraged in the banking system by allowing local governments to charter their own public banks. These public banks would have oversight from the Department of Business Oversight (DBO) and a professional board. By creating a public bank, taxpayer money will be held by a FDIC-insured financial institution that measures its return on investment not only by profits, but also by its success in supporting communities.”

2. Feasible? Forming a bank under private ownership is difficult and costly, and this process will likely be harder for a public one. Banks must begin with sufficient capital to induce confidence from customers that their deposits are safe and accessible. Banks must also correctly price its risk to ensure it can generate net interest margin sufficient to maintain solvency, and hopefully profitability. Banks must comply with a myriad of requirements set by various state and federal authorities or face sanctions. Any public bank would have to meet all of the above requirements, with the added accountability inherent in a public agency managed by local elected officials, who would add the duties of bank management onto their current duties of managing the provision of public services within their jurisdictions. The nation’s only known public bank – the Bank of North Dakota - has continuously operated since 1919, so a functioning public bank is possible.

Recently, the San Francisco Office of the Treasurer & Tax Collector issued a Municipal Bank Feasibility Task Force Report to “research the viability and advisability of a municipal bank as well as other opportunities to leverage the City’s banking and investment practices to promote community goals.” The SF feasibility study examined three financial models: a non-depository reinvestment entity that focuses on affordable housing and small business lending to achieve

community goals (Model One); a depository institution that allows the City to divest from large Wall Street banks and which performs the City’s cash management (Model Two); and a combination of the first two models (Model Three). The following table summarizes the results for each of the three models studied.

As shown above, both of the models that envision taking deposits (Models Two and Three) are considerably more expensive to establish than the model that envisions lending without also taking deposits. The task force study did not recommend one model over either of the others; instead, the report was intended to provide information for use by the Board of Supervisors and Mayor when deciding whether, and, if so, how, to move forward. Regardless of which option is chosen, any local agency wanting to form a public bank will need significant financial resources to capitalize it, the source of which is unclear. The Committee may wish to consider whether AB 857’s goals are feasible.

3. Permissive. AB 857 does not form of a public bank; instead, it creates a process for local agencies to form one should they so choose. The measure explicitly allows local agencies to invest in specified obligations of a public bank, and make deposits with one, but does not require it, thereby maintaining the decision-making authority of public officials who invest public funds subject to the fiduciary standard. Any local agency seeking to create a public bank must first complete a feasibility study, which should inform local officials’ decisions regarding whether to form one. After the feasibility study is complete, the local agency governing board must approve a motion to move forward with a license application. The measure also makes other conforming changes to state law necessary should local officials opt form a public bank.

4. Tax exemption. In California, public agencies are generally exempt from property and income taxes, but have to pay sales and use taxes, among others. However, it is unclear whether a public bank created under AB 847 would be exempt from federal and state income taxes, as the Internal Revenue Code, to which California conforms, requires corporations created by public agencies, such as municipal utilities, to perform essential government functions to be exempt from tax. While only Congress or the Internal Revenue Service could affect the tax treatment of a public bank formed under AB 857 for purposes of federal law, AB 857 provides an explicit exemption from the state’s Corporation Tax for its public banks, among other taxes. As such, a public bank would enjoy a tax advantage over any private competitor, who pay a rate of 10.84% of apportioned net income in California.

5. More needed? State law authorizes cities and counties to create a variety of entities and corporations to perform specified services, such as municipal or public utilities, community energy authorities, and infrastructure finance districts, among others. These laws generally set forth the powers and duties of these entities and corporations, such as the authority to contract, acquire and own property, and purchase supplies and materials. Some of these laws set forth a governing structure for these entities and corporations. AB 857 would likely benefit from provisions setting forth the structure, powers and duties of local banks.

6. Related legislation. On May 13^th, the Committee approved SB 528 (Hueso) by a vote of 4 to 2, which authorized the state and local agencies to deposit funds into the California Infrastructure and Economic Development Bank (I-Bank), and removed I-Bank from the Governor’s Office of Business and Economic Development’s supervision to a newly formed Commission. The measure was subsequently held on the Senate Appropriations Committee’s suspense file.

7. Incoming! The Senate Banking and Financial Institutions Committee approved AB 857 by a vote of 4 to 2 on June 19^th. The Committee on Governance and Finance is hearing the measure as the Committee of second reference.

8. Scope? As mentioned above, when the Senate Banking and Financial Institutions Committee approved AB 857, it did so with three amendments. Two of the amendments are incorporated in the June 20 version of the bill: (1) requiring a public bank to obtain a certificate of authorization to transact business as a bank from the Commissioner of Business Oversight, and (2) stating that a current requirement that limits local agency deposit amounts in specified financial institutions applies unless the public bank and the local agency depositor agree, with the approval of the Commissioner of Business Oversight. The third amendment to require voter approval for a local agency to apply for, establish, and subsidize the operation of the public bank was to be adopted in this Committee. However, the amendments did not specify whether the requirement should apply to both charter and general law cities, or just general law cities, as well as how voter approval requirements would apply to local agencies forming a public bank as a joint powers agency.

9. Technicals. Committee staff recommends the following technical amendments:

• On Page 11, Line 25, strike out “(q)” and insert “(r).”
• On Page 14, Line 34, strike “credit” and insert: “any of its available funds”
• On Page 17, Line 6, strike “or taxes on its real property.”

Assembly Actions

Assembly Local Government Committee: 7-3
Assembly Banking Committee: 5-2
Assembly Appropriations Committee: 11-5
Assembly Floor: 41-29

Support and Opposition

(6/28/19)

Support: Public Banking Alliance (sponsor), 350 Bay Area Action, 350 Chico, 350 Conejo San Fernando Valley, 350 Riverside, 350 Santa Cruz, 350 Silicon Valley, 350 Sonoma, 350 South Bay Los Angeles, Act LA, Active San Gabriel Valley, AFSCME California, AFSCME Council 57, Alliance for Community Transit – Los Angeles, Alliance for Democracy, Alliance of Californians for Community Empowerment Action, American Federation of Teachers Guild Local 1931, American Federation of Teachers Local 2121, American Indian Movement SoCal, American Postal Workers Union, AFL-CIO, Asian Pacific Environmental Network, Backbone Campaign, Beneficial State Foundation, Beverly-Vermont Community Land Trust, California American Postal Workers Union, AFL-CIO, California Association for Micro Enterprise Opportunity, California Community Land Trust Network, California Environmental Justice Alliance, California Faculty Association – San Francisco State University, California Labor Federation, California Nurses Association/National Nurses United AFL-CIO, California Progressive Alliance, California Reinvestment Coalition, California State Board of Education, Campaign for Sustainable Transportation – Santa Cruz, Center for Community Action and Environmental Justice, Center for Farmworker Families, City and County of San Francisco, City of Berkeley, City of Eureka, City of Huntington Beach, City of Long Beach, City of Los Angeles, City of Oakland, City of Richmond, City of San Diego, City of San Jose, City of Santa Cruz, City of Watsonville, Coleman Advocates for Children, Committee for Better Banks, Common Defense, Commonomics USA, Communities for a Better Environment, Community Financial Resources, Conejo 350 San Fernando Valley, Consumers for Auto Reliability and Safety, Cooperation Humboldt – Eureka, Cooperative Center Federal Credit Union, County of Santa Cruz, Courage Campaign, Democratic Party of San Fernando Valley, Democratic Socialists of America – Los Angeles, Divest LA, Food & Water Watch, Fossil Free California, Friends of Public Banking Santa Rosa, Friends of the Earth, Friends of the Santa Rosa Climate Action Plan, Green America, Green Party of California, Green Party of Santa Clara County, Greenpower, Healthcare for All California , Housing and Economic Rights Advocates, Humboldt and Del Norte Labor Council, Idle No More, Idle No More – San Francisco Bay, Indivisible Alta Pasadena, Indivisible CA, Indivisible CA – 33, Indivisible California Green Team, Indivisible East Bay, Indivisible Los Angeles, CA – 43, Indivisible Marin, Indivisible San Jose, Indivisible Sonoma County, Indivisible South Bay – LA, Lakota People’s Law Project, Lawyers’ Committee for Civil Rights of the San Francisco Bay Area, Local Clean Energy Alliance, Los Angeles County Democratic Party, Leadership Council for Justice and Accountability, Media Alliance, Monterey Bay Central Labor Council, NAACP – Santa Cruz Chapter, National Organization for the Advancement of Colored People, North Bay Labor Council AFL-CIO, Northridge Indivisible, Oakland Educators Association, OC Racial Justice Collaborative, Orange County Green Party, Orange County Poor People’s Campaign, Our Green Challenge, Our Revolution, Our Revolution Long Beach, Our Revolution Los Angeles, People Demanding Action California, Peace and Freedom Party, People for Public Banking Santa Cruz, People Organizing to Demand Environmental and Economic Rights, Progressive Asian Network for Action, Poder, Public Bank East Bay, Public Bank Los Angeles, Public Bank San Diego, Public Bank Santa Barbara, Public Banking Institute, Public Banking Institute for Action Backbone Campaign, The Resistance – Northridge Indivisible, Revolution LA, Romero Institute, Rooted in Resistance, San Francisco Berniecrats, San Francisco Democratic Party, San Francisco Public Bank Coalition, San Francisco Rising Alliance, Santa Cruz Climate Action Network, Santa Cruz County Democratic Central Committee, Santa Cruz County Democratic Party, Santa Cruz for Bernie, Santa Monica Democratic Club, SEIU California, SoCal 350 Climate Action, Sonoma County Climate Action Network, South Bay Progressive Alliance, Sunrise Movement – Los Angeles, Sustainable Economies Law Center, Teamsters Local 665, The Future Left, Uniyted Domestic Workers AFSCME Local 3930, United Educators of San Francisco, United Food and Commercial Workers Western States Council, Urban Habitat, We the People, Windsor Democratic Club, Women’s International League for Peace and Freedom, YIMBY Democrats, YIMBY Democrats of San Diego County, 552 Individuals

Opposition: Bay Area Council, California Association of County Treasurer-Tax Collectors, California Bankers Association, California Business Roundtable, California Chamber of Commerce, California Community Banking Network, California Credit Union League, California Taxpayers Association, Howard Jarvis Taxpayers Association, Los Angeles County Business Federation, San Francisco Committee on Jobs, Silicon Valley Leadership Group, Southwest California Legislative Counsel.

-- END --

1. As used by the authors of the SF report, the “size” of a bank refers to its outstanding loans plus its cash and securities on hand. For a depository, this sum should equal the bank’s deposits plus capital. ↑

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2019 - 2020 Regular

Bill No: AB 857 Hearing Date: June 19, 2019

Subject: Public banks.

SUMMARY

This bill authorizes local agencies to form public banks, subject to approval by the Department of Business Oversight and the Federal Deposit Insurance Corporation, as specified.

EXISTING LAW

1. Regulates the businesses of commercial and industrial banking in California via Division 1 (Financial Code Section 99 et seq.) and Division 1.1 of the Financial Code (Financial Code Section 1000 et seq.) and their implementing regulations (California Code of Regulations Title 10, Chapter 1), all of which are administered by the Department of Business Oversight (DBO).
   
2. Requires the Commissioner of Business Oversight (commissioner) to make or cause to be made a careful investigation and examination of the following when an application to organize and establish a corporation to engage in the banking business in California is submitted to DBO (Financial Code Section 1022):
   
   1. The character, reputation, and financial standing of the organizers and their motives in seeking to organize the proposed bank.
      
   2. The need for banking facilities or additional banking facilities, giving particular consideration to the adequacy of existing banking facilities.
      
   3. The character, financial responsibility, banking experience, and business qualifications of the proposed officers of the bank.
      
   4. The character, financial responsibility, business experience, and standing of the proposed stockholders and directors.
      
3. Prohibits the commissioner from approving an application to form a bank in California until the commissioner has ascertained all of the following to his or her satisfaction (Financial Code Section 1023):
   
   1. That the public convenience and advantage will be promoted by the establishment of the proposed bank.
      
   2. That the proposed bank will have a reasonable promise of successful operation.
      
   3. That the bank is being formed for no other purpose than the legitimate objects contemplated by the Banking Law.
      
   4. That the proposed capital structure is adequate.
      
   5. That the proposed officers and directors have sufficient banking or trust experience, ability, and standing to afford reasonable promise of successful operation.
      
4. Limits the entities that may acquire control of an industrial loan company to those engaged only in the activities of a financial holding company, as provided in Section 103 of the federal Graham-Leach-Bliley Act, as specified (Financial Code Section 1252).
   
5. Provides that, with regard to county funds deposited in the county treasury, the board of supervisors is the agent of the county, who serves as a fiduciary and is subject to the prudent investor standard, unless a delegation has occurred, as specified, in which case the county treasurer is the agent of the county with respect to those funds, serves as a fiduciary, and is subject to the prudent investor standard (Government Code Section 27000.3).
   
6. Provides that, with regard to funds deposited in the county treasury by local agencies other than the county, the county treasurer serves as a fiduciary subject to the prudent investor standard (Government Code Section 27000.3).
   
7. Provides that, except as specified in Government Code Section 27000.3, all governing bodies of local agencies or persons authorized to make investment decisions on behalf of those local agencies investing public funds are trustees and therefore fiduciaries subject to the prudent investor standard (Government Code Section 53600.3).
   
8. Provides that, when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the county treasurer, the board of supervisors, or the trustee, as applicable, shall act with care, skill, prudence, and diligence, as specified, to safeguard the principal and maintain the liquidity needs of the county, the agency, and the other depositors, as applicable (Government Code Sections 27000.3 and 53600.3).
   
9. Limits the amount of money a local agency may deposit in a depository institution, at a level intended to ensure that they do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository, as specified (Government Code Section 53638).
   
10. Prohibits the Legislature from authorizing the state or any political subdivision of the state to subscribe for stock or to become a stockholder in any corporation (California Constitution Article XVI, Section 6).

THIS BILL

1. States the intent of the Legislature that the bill authorize the lending of public credit to public banks and authorize public ownership of stock in public banks for the purpose of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities. Further states the intent of the Legislature that public banks partner with and refrain from competing with local financial institutions, such as credit unions and local public banks.
   
2. Adds “commercial paper, debt securities, or other obligations of a public bank” to those investments a local agency may make and adds public banks to the types of depository institutions in which local agencies are authorized to deposit money belonging to them or in their custody.
   
3. Authorizes a county to lend its credit to any public bank and provides that any local agency may invest in debt securities or other obligations of a public bank. Provides that any person or entity, including a local agency, that owns, controls, or holds an ownership interest in a public bank is not a bank holding company by reason of that ownership interest.
   
4. Adds a new division titled, “Public Banks,” to the title of the Government Code governing local agencies. For purposes of this new division,
   
   1. “Local financial institution” is defined as a certified community development financial institution, a credit union, or a small or intermediate small bank, as defined under federal law.
      
   2. “Public bank” is defined as a corporation, organized for the purpose of engaging in the commercial banking or industrial banking business, that is wholly owned by a local agency or agencies or by a joint powers authority composed only of local agencies.
      
   3. A local agency located within a county whose population is less than 250,000 may organize a public bank only if it does so as part of a joint powers authority formed for that purpose.
      
5. Requires a public bank to do all of the following:
   
   1. Identify a social purpose, as defined, or a specific public benefit, as defined, in its articles of incorporation (e.g., strengthening local economies, supporting community economic development, addressing infrastructure and housing needs, or providing banking services to the unbanked or underbanked).
      
   2. Obtain and maintain deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC), as specified.
      
   3. Comply with all requirements of the Financial Institutions Law and the Banking Law, except to the extent that a requirement of those laws is inconsistent with the Public Banking division this bill adds to the code, in which case the provisions of the Public Banking division prevail.
      
   4. Comply with the requirements of Government Code Section 53638 (which limits the amount of money a local agency may deposit in a bank or credit union), unless the public bank and the depositor agree otherwise.
      
6. Authorizes a public bank to engage in banking activities, including, but not limited to infrastructure lending, wholesale lending, and participation lending, and in retail activities that are not provided by local financial institutions in the jurisdiction of the local agency or agencies that own the public bank, but requires, wherever possible, that any retail services offered be conducted in partnership with local financial institutions.
   
7. Requires a local agency to conduct a study to assess the viability of the proposed public bank before it may submit an application to organize and establish that bank. The study must include, but is not limited to, all of the following:
   
   1. A discussion of the purposes of the bank, a fiscal analysis of costs associated with starting the proposed bank, and an estimate of the initial amount of capital to be provided by the local agency to the proposed public bank.
      
   2. Financial projections of the public bank, including a balance sheet and income statement for at least the first five years of the bank’s operation, under at least two different scenarios, one of which assumes favorable economic conditions, and the other of which assumes unfavorable economic conditions. All of the projections must include an estimate of the length of time before expected revenues exceed expected costs and an estimate of the total operating subsidy the local agency may be required to provide until the bank generates sufficient revenue to cover its costs.
      
   3. A legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article XVI of the California Constitution.
      
   4. An analysis of how the proposed governance structure of the public bank would protect the bank from unlawful insider transactions and apparent conflicts of interest.
      
8. Requires the local agency to make available to the public the financial models and key assumptions used to develop the financial projections included in the study.
   
9. Requires the aforementioned study to be presented and approved by the governing body of the local agency that commissioned the study.
   
10. Requires the governing body of the local agency that commissioned the study to affirmatively vote to move forward with an application for a public banking charter, at a public meeting, before the local agency may submit an application for a public bank charter.
    
11. Exempts a public bank from all state and local taxes and licenses, except for the following: taxes imposed on its real property, local utility user taxes, sales and use taxes, state energy resources surcharges, state emergency telephone users’ surcharges, and any tax or license fee imposed by the state on motor vehicles.
    

COMMENTS

1. Purpose: This bill is sponsored by the California Public Banking Alliance to provide more local control over and transparency regarding the way in which local taxpayer dollars are leveraged in the banking system.
   
2. Author’s Statement: According to the author’s office, municipal public banks have the potential to do all of the following: a) keep taxpayer dollars in the communities from which they are sourced; b) lower administrative fees paid by local governments to large banks; c) increase the lending capacity of local financial institutions via partnerships with a public bank; d) strengthen small business lending in communities by offering loans, perhaps at below-market rates; e) address localities’ infrastructure and housing needs; f) provide banking services to the un- and underbanked; and g) divest from industries and sectors deemed inconsistent with the local government’s values.
   
3. Discussion: Unlike an earlier bill heard by this Committee in April 2019 (SB 528, Hueso), this bill does not create a public bank; instead, it authorizes local governments to decide for themselves whether they should apply for a public bank charter and envisions DBO and the FDIC as the primary regulators of that bank, if its charter application and application for deposit insurance are approved.
   
   This bill envisions that a municipal public bank could take one of two forms: commercial bank or industrial loan company. Commercial banks are familiar to everyone; they can accept all types of deposits and provide retail or wholesale banking services. If owned by a third party, a commercial bank must be owned by a financial firm subject to the Bank Holding Company Act (12 U.S. Code Section 1841 et seq.).
   
   Industrial loan companies (ILCs, also known as industrial banks) are authorized in only seven states in the United States, including California. ILCs are state-chartered and federally insured, but, unlike commercial banks, they may not accept demand deposits (i.e., offer checking accounts). Further, because their ownership has not traditionally been limited to financial firms, ILCs have long been mired in controversy over the question of whether non-financial firms should be allowed to own and control banks. In the interest of brevity, the lengthy history of allowable and prohibited ILC ownership will not be summarized here; for purposes of this analysis, it is sufficient to say that, while certain states (most notably Utah) favor ILC formation, California law is currently quite limiting toward the formation of such entities. Although this bill envisions the ILC charter as an option for local agencies wishing to establish a public bank, the ILC route poses unique challenges. At present, California has only three ILCs, a reflection of the difficulty in forming them.
   
4. Those Who Manage Local Government Funds Are Fiduciaries: In the wake of the Orange County bankruptcy of 1994, an extensive set of rules was added to statute to ensure that every individual and entity responsible for managing local agency deposits is considered a fiduciary and is held to the so-called Prudent Investor Standard. Government Code Sections 27000.3 and 53600.3 describe this standard as follows: when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the county treasurer, the board of supervisors, or the trustee of a local public agency, as applicable, shall act with care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the county, the agency, and the other depositors, as applicable.
   
   Stated more simply, those responsible for investing local agency funds are legally required to focus far more on the return of their investments than in the return on their investments. Critics of public banks have pointed to this fiduciary standard as one basis for their opposition, claiming that the cost to establish and run a public bank and the pressure to place uncollateralized or partially collateralized public funds on deposit at a public bank are inconsistent with a local agency’s fiduciary duty to safeguard public money. Supporters counter these arguments with claims that public banks will result in long-term savings and in a greater return on investment than local agencies currently receive, and point to the Bank of North Dakota as a model for a successful public bank that consistently returns a profit.
   
5. Municipal Public Banks Require Considerable Time, Money, and Expertise to Form and Operate: Two large California municipalities recently studied the idea of creating a municipal public bank. Although neither study represents the final word on public banking at the local level in California, both studies are illustrative of the challenges that face municipalities wishing to create their own public bank.
   
   In February 2018, the Chief Legislative Analyst of the City of Los Angeles presented a report to the Los Angeles City Council titled, “Public Bank Framework and Existing Housing and Economic Development Funding Programs,” Assignment No 18-02-0178. The following ideas were identified as the purpose of a Municipal Bank of Los Angeles (MBLA): decreasing City dependence on and reducing costs associated with the City’s use of commercial banking services; ensuring equitable access to banking services for all City residents and businesses; generating new revenues for the City’s General Fund; providing small business loans, job training loans, and student loans; reducing costs associated with the City’s bond issuances; and ensuring that City funds support the development of economic and housing opportunity in the City.
   
   The Los Angeles Legislative Analyst’s report concluded the following: “Formation of MBLA would require compliance with a number of State and federal regulatory requirements, principal among those being the Prudent Investor Rule. A number of criteria must be satisfied for any banks to be formed, such as adequate capital, collateral, reserves, and insurance, and the City would find it difficult to satisfy those criteria in a manner that provides security for City resources, adequate liquidity, and a sufficient rate of return. On review, the following limitations have been identified: no source of funds to capitalize the bank is available; City funds could not be deposited in MBLA for at least three years; MBLA would have difficulty providing adequate collateral to support City banking requirements; MBLA would have difficulty qualifying for insurance to protect depositors; changes to federal and State law are required to form MBLA; the City Charter would need to be amended to form MBLA; and start-up costs for MBLA are exorbitant with no available source of funds to cover those costs.”
   
   The City’s Legislative Analyst did not provide a recommendation to the City Council regarding whether to move forward to initiate necessary changes. Instead, the analyst suggested that if the Council decided to move forward, it should retain a consultant with experience in the complexities of state and federal banking laws to advise it on next steps. Separately, the voters of Los Angeles failed to approve a measure on the November 2018 Los Angeles City ballot, which would have amended the City’s charter to allow it to create a public bank.
   
   In March, 2019, the San Francisco Office of the Treasurer & Tax Collector issued a Municipal Bank Feasibility Task Force Report to “research the viability and advisability of a municipal bank as well as other opportunities to leverage the City’s banking and investment practices to promote community goals” (https://sftreasurer.org/MunicipalBank).
   
   The SF feasibility study examined three financial models: a non-depository reinvestment entity that focuses on affordable housing and small business lending to achieve community goals (Model One); a depository institution that allows the City to divest from large Wall Street banks and which performs the City’s cash management (Model Two); and a combination of the first two models (Model Three).
   
   The following table summarizes the results for each of the three models studied.
   

As shown above, both of the models that envision taking deposits (Models Two and Three) are considerably more expensive to establish than the model that envisions lending without also taking deposits. The task force study did not recommend one model over either of the others; instead, the report was intended to provide information for use by the Board of Supervisors and Mayor when deciding whether, and, if so, how, to move forward.

1. Should A Vote of the People Be Required To Authorize the Submission Of An Application for a Public Bank Charter? This bill currently requires the governing body of a local agency to formally vote to move forward with an application to form a public bank, before it may submit that application. However, this bill does not currently require voter approval from the individuals whose tax revenue will be used to apply for, establish, and subsidize the operation of the public bank. Given the significant costs and lengthy timeline associated with forming a public bank, an amendment is recommended (see Amendments, below) to require voter approval, before a local jurisdiction may move forward with an application to form a public bank.
   
2. Are There Constitutional Issues? As noted above, California’s Constitution prohibits the Legislature from authorizing the state or any political subdivision of the state to subscribe for (i.e., issue) shares or become a stockholder in a corporation. California’s Banking Law provides that a state bank is a corporation incorporated under the General Corporation Law. The General Corporation Law does not contemplate a corporate entity that lacks the ability to issue shares or have members. Thus, it is unclear how a public bank could form under California’s Banking Law without running afoul of California’s Constitution. This bill already acknowledges such a question with its requirement that any public bank study commissioned by a local agency must include a legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article XVI of the California Constitution.
   
   Amendments are not suggested to resolve this potential constitutional issue at the present time, because the most appropriate approach is unclear. Although a constitutional question exists, no court of law has ruled on it. Furthermore, if this bill’s authors wished to definitively resolve the issue through legislation, it is unclear how best to do so. A constitutional amendment revising Article XVI would likely be the cleanest approach, but would either need to be placed on the statewide ballot through initiative or through a 2/3ds vote of the Legislature; in either case, the constitutional amendment would require support by a majority of statewide voters.
   
   In the alternative, it might be possible to amend state law to authorize an entity other than a corporation to become a state-chartered bank or to eliminate the ability of a public bank to issue shares, but either amendment would create confusion about the applicability of existing Corporations Code and Financial Code provisions that reference shareholder approvals for corporate actions by a bank. Discussions are ongoing between the author’s office, DBO, and the Secretary of State’s Office regarding these issues.
   
3. Support:
   
   1. The California Public Banking Alliance (CPBA) is a statewide organization comprised of public banking advocacy groups representing San Diego, Orange County, Los Angeles, Santa Barbara, Santa Cruz, San Jose and the South San Francisco Bay Area, San Francisco, Oakland and the East San Francisco Bay Area, Santa Rosa, and Eureka. CPBA writes, “California faces related crises of underinvestment and decline of the local banking sector...Loss of local banks means a loss of options for our local governments to deposit taxpayer funds. California’s strict collateralization and shareholder equity requirements for holding public deposits further limits their banking options. As a result, California’s local governments must select from among a handful of Wall Street mega-banks. The Wall Street banks have proven that their interests are not aligned with California’s communities...AB 857 will allow local governments to disentangle from Wall Street, while re-investing in local communities and local banks.”
      
   2. A coalition of public banking advocates from a wide variety of sectors believe that public banking represents a way to establish more local control and demand for ethical, transparent use of public funds. They state: “Public banks create a stable means to divest public funds and investments from banking organizations and industries that may not align with the values of our communities. A robust public banking network in California provides strong protections against insolvency of large banks in periods of economic duress. Public banks return interest and fee revenues to the communities they serve, creating value and revenue reserves for local constituencies. Public banks bolster and enhance local bank and credit union activities, enabling lending capital for local businesses. Public banking under our legislation enables a viable means of publicly financing housing and infrastructure projects to remediate our statewide housing crisis. Public banks promote a transparent, independent and publicly governed finance system that is accountable to the people they serve.”
      
      Further, “unlike a privately-owned bank, which prioritizes shareholder returns, public banks leverage their deposit base and lending power to benefit the public. This allows public banks to focus on pressing local needs, like affordable housing, small business loans, and public infrastructure projects such as rebuilding after wildfires. A public bank’s decisions may consider the needs of the community and leverage public funds to meet those needs at a lower cost than the private sector.”
4. Opposition:
   
   1. The California Association of Treasurers and Tax Collectors (CACTTC) states, “there is simply no question that county treasurers complying with state law cannot possibly deposit county funds into a public bank...Moving forward this legislation creates a false sense of hope for proponents who have been repeatedly advised that county pools cannot be used for these purposes, and that critical statutory protections of local dollars cannot be lightly dismissed.”
      
   2. The California Bankers Association, California Community Banking Network, and California Credit Union League oppose the bill on grounds that existing banks and credit unions offer services, at affordable rates, similar to those envisioned for a municipal public bank. All of the organizations would welcome conversations about any voids that municipalities identify in the existing financial services marketplace.
      
   3. The California Chamber of Commerce opposes this bill, because it would require a significant amount of start-up money, jeopardize taxpayer funds in politically motivated investments, and reduce, if not eliminate, the presence of community and small neighborhood banks, as well as small business’ access to these valuable financial services. “Cost estimates to start a public bank are significant with no chance of breaking even for decades...A public bank’s investments could be influenced by local government politics instead of financial stability...A public bank would compete with private local banks, potentially putting them out of business...No compelling justification exists to jeopardize taxpayer dollars...Before authorizing local agencies to develop a public bank, the Legislature should at a minimum study the potential risks and costs associated with such a proposal.”
5. Amendments: The following amendments are recommended:
   
   1. Page 14, strike lines 15 through 23 and insert the following:
      
      (a) Before engaging in business, a public bank shall obtain a certificate of authorization to transact business as a bank pursuant to Division 1.1 of the Financial Code (commencing with Section 1000).
      (b) A local agency shall comply with the requirements of Section 53638 with respect to its deposits in a public bank, unless the public bank and the local agency depositor agree otherwise, with the prior approval of the Commissioner of Business Oversight.
   2. Page 14, line 36, strike “services” and insert: activities
      
   3. Page 16, revise lines 16 through 24 as follows:
      
      (c) The study required by subdivision (a) shall be presented to and approved by the governing body of the local agency, and a A motion to move forward with an application for a public banking charter shall be approved by a majority vote of the governing body at a public meeting and shall be subject to voter approval at the next regularly scheduled election held at least 180 days following the vote of the governing body, before prior to the local agency may submit submitting an application pursuant to Section 1020 of the Financial Code.
      (d) In addition, the The local agency shall include a copy of the study required by subdivision (a) in the application submitted to the Commissioner of Business Oversight.
      
6. Prior and Related Legislation:
   
   1. SB 528 (Hueso), 2019, would have convened a task force to study the workability, potential costs, and estimated time frame to transition the California Infrastructure and Economic Development Bank into a depository institution to accept deposits from the state and local governments and to lend money to local governments for their infrastructure needs. Held on the Senate Appropriations Committee Suspense File.
      
   2. AB 750 (Hueso), 2011, would have established the Investment Trust Blue Ribbon Task Force to consider the viability of establishing the California Investment Trust, which would have been a state bank receiving deposits of state funds. Vetoed by Governor Brown.

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

California Public Banking Alliance (sponsor)

350 Bay Area Action

350 Chico

350 Conejo San Fernando Valley

350 Riverside

350 Santa Cruz

350 Silicon Valley

350 Sonoma

350 South Bay Los Angeles

5 individual city councilmembers from the cities of San Jose, Berkeley, Oakland, Los Angeles, and San Francisco

550 Delegates of the California Democratic Party and two other individuals

Act LA

Active San Gabriel Valley

AFSCME California

AFSCME Council 57

Alliance for Community Transit – Los Angeles

Alliance for Democracy

Alliance of Californians for Community Empowerment (ACCE) Action

American Federation of Teachers Guild, Local 1931

American Federation of Teachers Local 2121

American Indian Movement SoCal

American Postal Workers Union, AFL-CIO

Asian Pacific Environmental Network

Backbone Campaign

Beneficial State Foundation

Beverly-Vermont Community Land Trust

California American Postal Workers Union, AFL-CIO

California Association for Micro Enterprise Opportunity

California Community Land Trust Network

California Environmental Justice Alliance

California Faculty Association – San Francisco State University

California Labor Federation

California Nurses Association/National Nurses United, AFL-CIO

California Progressive Alliance

California Reinvestment Coalition

California State Board of Education

Campaign for Sustainable Transportation – Santa Cruz

Center for Community Action and Environmental Justice

Center for Farmworker Families

City and County of San Francisco

City of Berkeley

City of Eureka

City of Huntington Beach

City of Long Beach

City of Los Angeles

City of Oakland

City of Richmond

City of San Diego

City of San Jose

City of Santa Cruz

City of Watsonville

Coleman Advocates for Children

Committee for Better Banks

Common Defense

Commonomics USA

Communities for a Better Environment

Community Financial Resources

Conejo 350 San Fernando Valley

Consumers for Auto Reliability and Safety

Cooperation Humboldt – Eureka

Cooperative Center Federal Credit Union

County of Santa Cruz

Courage Campaign

Democratic Party of San Fernando Valley

Democratic Socialists of America – Los Angeles

Divest LA

Food & Water Watch

Fossil Free California

Friends of Public Banking Santa Rosa

Friends of the Earth

Friends of the Santa Rosa Climate Action Plan

Green America

Green Party of California

Green Party of Santa Clara County CA

Greenpower

Healthcare for All – California

Housing and Economic Rights Advocates

Idle No More

Idle No More – San Francisco Bay

Indivisible Alta Pasadena

Indivisible CA

Indivisible CA – 33

Indivisible California Green Team

Indivisible East Bay

Indivisible Los Angeles, CA – 43

Indivisible San Jose

Indivisible Sonoma County

Indivisible South Bay

Lakota People’s Law Project

Lawyers’ Committee for Civil Rights of the San Francisco Bay Area

Leadership Council for Justice and Accountability

Local Clean Energy Alliance

Los Angeles County Democratic Party

Media Alliance

Monterey Bay Central Labor Council

NAACP – Santa Cruz Chapter

National Organization for the Advancement of Colored People

North Bay Labor Council, AFL-CIO

Northridge Indivisible

Oakland Educators Association

OC Racial Justice Collaborative

Orange County Green Party

Orange County Poor People’s Campaign

Our Green Challenge

Our Revolution

Our Revolution Long Beach

Our Revolution Los Angeles

Peace and Freedom Party

People Demanding Action --CA

People for Public Banking Santa Cruz

People Organizing to Demand Environmental and Economic Rights

Progressive Asian Network for Action

Public Bank East Bay

Public Bank Los Angeles

Public Bank San Diego

Public Bank Santa Barbara

Public Banking Institute

Public Banking Institute for Action Backbone Campaign

Resistance – Northridge, Invisible

Revolution LA

Romero Institute

Rooted in Resistance

San Francisco Berniecrats

San Francisco Board of Supervisors

San Francisco Public Bank Coalition

Santa Cruz Climate Action Network

Santa Cruz County Democratic Central Committee

Santa Cruz County Democratic Party

Santa Cruz for Bernie

Santa Monica Democratic Club

SEIU California

SoCal 350 Climate Action

Sonoma County Climate Action Network

South Bay Progressive Alliance

Sunrise Movement – Los Angeles

Sustainable Economies Law Center

Teamsters Local 665

The Future Left

United Educators of San Francisco

United Food and Commercial Workers Western States Council

Urban Habitat

We the People

Windsor Democratic Club

Women’s International League for Peace and Freedom

YIMBY Democrats

YIMBY Democrats of San Diego County

Opposition

Bay Area Council

California Association of County Treasurers and Tax Collectors

California Bankers Association

California Chamber of Commerce

California Community Banking Network

California Credit Union League

CalTax

Howard Jarvis Taxpayers Association

Southwest California Legislative Counsel

-- END --

1. As used by the authors of the SF report, the “size” of a bank refers to its outstanding loans plus its cash and securities on hand. For a depository, this sum should equal the bank’s deposits plus capital. ↑

ASSEMBLY THIRD READING

ATR Bill Id:AB 857

Author:(Chiu and Santiago)

As Amended Ver:May 17, 2019

Majority vote

SUMMARY:

Provides for the establishment of a public bank by a local agency. The public bank would generally be required to comply with all requirements in state law that apply to commercial banks.

Major Provisions

1. Defines public bank as 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, local agencies, or a joint powers authority that is composed only of local agencies. A local agency located within a county with a population of less than 250,000 may organize a public bank if it does so as part of a joint powers authority formed for those purposes.
2. Requires a public bank to obtain and maintain deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC).
3. Requires a public bank to comply with all requirements of the Financial Institutions Law and the Banking Law, except to the extent that a requirement of those laws is inconsistent with a requirement proposed by this bill, in which case the requirement of this bill shall prevail.
4. Requires a local agency to conduct a study of the viability of a proposed public bank and for the governing body of the local agency to approve a motion to prior to moving forward with an application for a public banking charter.

COMMENTS:

On the heels of the 2007-08 financial crisis, renewed interest in public banking has sparked legislation or feasibility studies in state and local governments around the United States. To date, no state or local government has established a public bank, and feasibility studies often find significant start-up costs and high levels of financial and operational risk associated with public banks.

Except for public ownership, other features and purposes of public banks are not universally agreed upon. When voicing support for public banks, proponents have cited the following potential benefits:

1. The opportunity to invest public funds in a way that reflects the values of some of the electorate,
2. The ability to divest public funds from commercial banks that provide financing to industries that advocates do not like (e.g., fossil fuel producers, prison operators, gun manufacturers),
3. Providing capital at a lower cost than the private sector for preferred uses (e.g., public infrastructure projects, affordable housing, small businesses, unbanked/underbanked),
4. Reducing costs to the government for banking services.

This bill would specify a process for a local agency to apply for a public bank charter from the Department of Business Oversight (DBO). The local agency would need to meet the same general requirements and criteria for approval as existing law requires of a private sector applicant. By requiring regulation of a public bank by DBO, this bill provides protection against a local agency starting a public bank without adequate capitalization, a viable business plan, and experienced management. The bill also requires a public bank to maintain deposit insurance provided by the FDIC, which protects depositors from loss up to $250,000 per depositor.

Under the proposed bill and existing law, both the DBO and FDIC would provide routine supervision and examinations of a public bank to evaluate the nature of the bank's operations, the adequacy of the bank's internal controls and its internal audit function, and the bank's compliance with laws and regulations. If weaknesses are identified, the regulators have tools to correct deficiencies in the bank's risk management practices and address weaknesses in the bank's operations.

In the context of a public bank, the FDIC could serve as a critical backstop in preventing undue political influence on the decisions of the bank. A public bank raises unique concerns around how elected officials in local or state government could pressure the bank to give special treatment to political supporters. While it is likely that DBO examiners would identify bad behavior, it is important for a regulator outside of the California political process to also serve in an oversight role and be empowered to use enforcement authority over a public bank that was corrupted by undue political influence. Oversight by the FDIC helps to mitigate the risk of loss of taxpayer funds due to risky decisions by a public bank.

In addition to FDIC insurance, existing law provides protections for taxpayer dollars that may be deposited in a public bank. After the bankruptcy of Orange County in the mid-1990s, the Legislature passed laws requiring that funds deposited by a local agency must be protected with special collateral requirements. These requirements ensure that taxpayer funds are backed up, even if the size of the local agency's deposit account is greater than the FDIC protection limit of $250,000. This bill does not exempt a public bank from these collateral requirements.

While collateral requirements protect local government deposits, any capital provided to a public bank by the local government as shareholder equity or as a non-deposit liability may be exposed to losses. Additionally, a local agency may expend significant taxpayer funds in studying the viability of a public bank and in organizational start-up costs, only to later find that the public bank proposal does not meet the requirements of the DBO or FDIC. As fiduciaries and trustees of taxpayer funds, local government officials should carefully consider the cost and risks involved with public bank proposals, particularly in light of their responsibilities under the prudent investor rule.

According to the Author:

This bill provides more local control, transparency, and self-determination in how local taxpayer dollars are leveraged in the banking system by allowing local governments to charter their own public banks. These public banks would have oversight from the DBO and a separate, professional board. In contrast to profit-driven commercial banks, the public bank's board of directors will have a fiduciary duty to protect taxpayers' assets. By creating a public bank, taxpayer money will be held by an insured financial institution that measures its return on investment not only by profits, but also by its success in supporting communities.

Arguments in Support:

According to the California Public Bank Alliance, "Unlike a privately-owned bank, which prioritizes shareholder returns, public banks leverage their deposit base and lending power to benefit the public. This allows public banks to focus on pressing local needs, like affordable housing, small business loans, and public infrastructure projects such as rebuilding after wildfires. A public bank's decisions may consider the needs of the community and leverage public funds to meet those needs at a lower cost than the private sector."

Arguments in Opposition:

According to the California Bankers Association, "AB 857 infers that banks are not serving their communities, an argument repeatedly made by public bank activists in a variety of forums…Proponents for the creation of a public bank have failed to identify how the current marketplace is not meeting the public's financial needs…Commercial banks, particularly community banks, will be harmed by the taking of local agency deposits which would otherwise be used as a source of liquidity by these banks to make loans into their communities. The notion that the public bank will cooperate with local financial institutions is illusory and this measure forces community banks to compete on an unlevel playing field."

FISCAL COMMENTS:

According to Assembly Appropriations Committee, significant costs to DBO to process and review applications for a public bank. These costs are subject to significant uncertainty and depend on the number of public bank applications. If 50 applications were submitted to DBO in initial years, personnel and legal costs could exceed $800,000 (for three attorneys and three support staff).

VOTES:

ASM BANKING AND FINANCE: 7-3-2

YES: Limón, Bauer-Kahan, Burke, Gabriel, Mark Stone, Weber, Wicks

NO: Chen, Choi, Melendez

ABS, ABST OR NV: Cervantes, Grayson

ASM LOCAL GOVERNMENT: 5-2-1

YES: Aguiar-Curry, Bloom, Boerner Horvath, Luz Rivas, Robert Rivas

NO: Lackey, Voepel

ABS, ABST OR NV: Ramos

ASM APPROPRIATIONS: 11-5-2

YES: Gonzalez, Bloom, Bonta, Calderon, Carrillo, Chau, Eggman, Gabriel, Eduardo Garcia, Quirk, Robert Rivas

NO: Bigelow, Brough, Diep, Fong, Obernolte

ABS, ABST OR NV: Maienschein, Petrie-Norris

UPDATED:

VERSION: May 17, 2019

CONSULTANT: Michael Burdick / B. & F. / (916) 319-3081 FN: 0000919

Date of Hearing: May 8, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 857

Author:(Chiu) – As Amended Ver:April 29, 2019

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill authorizes local agencies to create and operate publicly owned banks. Specifically, this bill:

1. Defines a public bank as a corporation, organized for the purposes of engaging in the commercial banking business or industrial banking business that is wholly owned by a local agency, local agencies, a joint powers authority that is composed only of local agencies, or a special district.
2. Places a range of restrictions on a public bank, including that it must: (a) identify in its articles of incorporation either a social purpose or a specific public benefit; (b) obtain and maintain deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC); (c) Conduct retail services in partnership with financial institution, when possible; and (d) comply with all the requirements of the Financial Institutions Law and the Banking Law.
3. Requires a local agency to conduct a viability study of a proposed public bank prior to submitting an application to the Department of Business Oversight (DBO).
4. Exempts a public bank from state and local taxes, with specified exceptions.

FISCAL EFFECT:

Significant costs to DBO to process and review applications for a public bank. These costs are subject to significant uncertainty and depend on the number of public bank applications. If 50 applications were submitted to DBO in initial years, personnel and legal costs could exceed $800,000 (for three attorneys and three support staff).

The above scenario is likely conservative. Given that AB 857 authorizes thousands of public agencies to form a public bank, there could be hundreds of applications in initial years. Such a surge in applications would require DBO to add a large number of new legal staff, resulting in millions of dollars in personnel costs for DBO.

COMMENTS:

1. Background and purpose. Public banks are financial institutions owned by a governmental identity, such as a state or municipality. The idea behind a public bank is to remove banking from profit motives and instead focus on community goals. A number of local governments, including Oakland and Los Angeles, have started studying the potential benefits of a public bank.

This bill authorizes a local government to establish a public bank. The author argues this will “provide more local control, transparency, and self-determination in how local taxpayer dollars are leveraged in the banking system.” The California Public Banking Alliance, writing in support, argues public banks “can leverage their deposit base and lending power to benefit the public.”

1. Recent amendments and staff comment. Recent policy committee amendments add new requirements for local agencies seeking to start a local bank. First, the bill no longer allows for self-insurance and instead requires public banks to receive FDIC insurance. Second, a local agency must now conduct a robust viability study.

The required study is an important and welcome amendment. However, as drafted, AB 857 does not require the study be part of the application process to DBO. The committee may wish to consider a more explicit linkage.

1. All eyes on DBO. There remain some important questions about the long-term viability of a local public bank. How will the governance structure of a public bank work, and how will it protect itself from undue political influence? How will a public bank achieve its public benefit goals while remaining financially viable? While a local agency will attempt to answer these questions through the required viability study, DBO will ultimately be the entity that decides whether these questions have been sufficiently answered.

DBO reviews applications for new banks to determine if the new bank will meet basic requirements that allow it to service its community. These examinations tend to look at a bank’s capital, asset quality, management expertise, earnings potential and sensitivity to market risk. This process is intensive and thorough.

There is no guarantee DBO would grant a state charter to a public bank. Given the uncertainty around the public bank model, it may be years until DBO approves such an institution. And, it is unlikely a public bank that ultimately receives a charter will resemble the kind of entity envisioned by supporters.

1. Local fiscal concerns. Local costs are beyond the purview of this committee if they do not result in a state reimbursable mandate. However, it is notable that the California Association of County Treasurers and Tax Collectors (CACTTC) opposes this bill because of its implications for local finances. CACTTC notes in its opposition letter it is unlikely a county treasurer would ever utilize a public bank because of the potential risk doing so could endanger a county treasury’s ability to pay near-term obligations.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 24, 2019

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Cecilia Aguiar-Curry, Chair

ABPCA Bill Id:AB 857 (

Author:Chiu and Santiago) – As Amended Ver:March 19, 2019

SUBJECT: Public banks.

SUMMARY: Authorizes local agencies to create and operate publicly owned banks. Specifically, this bill:

1. Defines “local financial institution” to mean a certified community development financial institution, a credit union, or a small bank or intermediate small bank, as specified.
2. Defines “public bank” to mean 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, local agencies, a joint powers authority that is composed of local agencies, or a special district.
3. Defines “self-insurance” to mean deposits guaranteed by the owners of the public bank in an amount approved by the Commissioner of Business Oversight.
4. Specifies that a public bank shall identify in its articles of incorporation either a social purpose or a specific public benefit. Examples of a social purpose or a specific public benefit include, but are not limited to, strengthening local economies, supporting community economic development, addressing infrastructure and housing needs for localities, and providing banking services to the unbanked or underbanked.
5. Provides that a public bank may, but is not required to, incorporate as a benefit corporation or a social purpose corporation and shall comply with existing law when doing so.
6. Requires a public bank to obtain and maintain deposit insurance approved by the Commissioner of Business Oversight, either by the Federal Deposit Insurance Corporation (FDIC), private share insurance, or self-insurance.
7. Specifies that in seeking and retaining insurance, a public bank may do all things and assume and discharge all obligations required of it that are not in conflict with state law.
8. Requires a public bank to comply with all requirements of the Financial Institutions Law and the Banking Law, except to the extent that a requirement of those laws is inconsistent with this bill, in which case the provisions of this bill shall prevail.
9. Provides that a public bank shall comply with existing deposit limitations.
10. Authorizes a county to lend its credit to any public bank.
11. Provides that a local agency may invest in commercial paper, debt securities, or other obligations of a public bank.
12. Specifies that any local agency that does not pool money in deposits or investments with other local agencies that have separate governing bodies may invest in debt securities or other obligations of a public bank.
13. Provides that any local agency that pools money in deposits or investments with other local agencies, including local agencies that have the same governing body, may invest in debt securities or other obligations of a public bank.
14. Authorizes a public bank to be eligible to receive local agency money.
15. Requires that wherever possible, any retail service of a public bank shall be conducted in partnership with local financial institutions.
16. Provides that a public bank may do both of the following:
17. Engage in banking activities, including but not limited to, infrastructure lending, wholesale lending, and participation lending; and,
18. Engage in retail activities that are not provided by local financial institutions in the jurisdiction of the local agency or agencies that own the public bank.
19. Specifies that any person or entity, including a local agency, that owns, controls, or holds ownership interest in a public bank is not a bank holding company by reason of that ownership interest.
20. Exempts a public bank from all other taxes and licenses, state, county, and municipal, imposed upon a public bank, except taxes upon its real property, local utility user taxes, sales and use taxes, state energy resources surcharges, state emergency telephone surcharges, motor vehicle and other vehicle license fees, and any other tax or license fee imposed by the state upon vehicles, motor vehicles, or the operation thereof.

EXISTING LAW:

1. Gives the Department of Business Oversight (DBO) jurisdiction over banks, industrial banks, trust companies, credit unions, money transmitters, issuers of payment instruments and traveler’s checks, savings associations, business and development corporations, premium finance companies, and a variety of nondepository unsecured and secured lenders, broker-dealers, and investment advisers.
2. Provides for the formation of a corporation for the purpose of conducting a commercial banking business.
3. Requires a corporation to apply for a charter with the Commissioner of Business Oversight in order to become a bank.
4. Specifies that banks must secure specified collateral to protect deposits received from local agencies.
5. Requires specified banks to insure deposits with the FDIC.
6. Establishes the California Infrastructure and Economic Development Bank (IBank) with the authority to issue bonds, provide guarantees, and leverage state and federal funds using techniques that target public investment to facilitate economic development.
7. Authorizes state-chartered banks to join the Federal Reserve System in existing federal law.

FISCAL EFFECT: This bill is keyed fiscal.

COMMENTS:

1. Local Government Finances. Local elected and appointed officials are charged with a fiduciary duty to the public. They are responsible for guiding multi-million dollar county and municipal agencies that depend on numerous sources of revenues and have multiple layers of policy and management responsibilities. Understanding their financial fiduciary responsibilities is one of their most important duties.
   

Many factors dictate how a local agency manages its funds, including: the amount of revenue the agency receives annually; the source of the revenue, whether it be property taxes, sales taxes, fee-based revenue, utility taxes, grants, loans, bond funding, etc.; restrictions on how these funds can be used; and, many other dynamics in which each local agency is accountable. No two local agencies manage their finances in the same way. In order to balance the individual agency needs, the state, both constitutionally and statutorily, has provided local agencies with decision-making flexibility in how finances can be managed.

Traditionally, large, commercial banks provide most of the banking services for local agencies. Agencies with larger budgets often require the services of these national banks due to the size and complexity of their banking needs. These banks are for-profit entities, and services are not free. Some local governments also receive banking services from credit unions and community banks. However, the amount that can be deposited in these entities is strictly limited, often making it more difficult and less efficient for local agencies to utilize the services provided by credit unions and community banks.

Banks are subject to a number of requirements when they receive funds from local agencies. Requirements, such as federal insurance and collateralization, decrease the amount of risk local agencies assume when making investments. Local agencies are authorized to invest surplus revenues in many different types of financial mechanisms. However, due to the financial fiduciary duty that local officials carry, they are obligated to make reliable investments.

Investing public dollars carries risk. For example, Orange County filed for federal bankruptcy protection in 1994 because of a $1.7 billion loss to its investment pool, a depository for County surplus and borrowed funds and funds of 196 other cities, school districts and special districts. Subsequent hearings of the Senate Special Committee on Local Government Investments brought to light questionable investment practices and lack of prudent oversight on the part of some local officials.

As a result of the hearings, the Legislature enacted a number of bills to increase protections and address these problems, including SB 866 (Craven), Chapter 784, Statutes of 1995, and SB 109 (Kopp), Chapter 749, Statutes of 1996, which, among other requirements:

1. Provided that a county treasurer is a trustee and fiduciary subject to the prudent investment rule;
2. Established a local investment oversight committee;

1. Called for treasurers to render annual investment policy statements to their governing boards required to be considered at a public meeting; and,
2. Defined the permitted investment instruments that local agencies can invest in.
3. Orange County Bankruptcy. On December 6, 1994, Orange County became the largest municipality in U.S. history to declare bankruptcy at the time. The county treasurer had lost $1.7 billion of taxpayers’ money through investments in risky Wall Street securities. In 1994, the Orange County investment pool had about $7.6 billion in deposits from the county government and almost 200 local public agencies (cities, school districts, and special districts). Borrowing $2 for every $1 on deposit, the County Treasurer increased the size of the investment pool to $20.6 billion. While in bankruptcy, every county program budget was cut, about 3,000 public employees were discharged, and all services were reduced. Orange County did not make its final payment on the $1 billion bond that helped it get out of bankruptcy until 2017.

In 1998, the Public Policy Institute of California shared recommendations that may help prevent, or at least ameliorate, future crises:

1. Local governments need to maintain high standards for fiscal oversight and accountability;
   
2. State government should closely monitor the fiscal conditions of its local governments, rather than wait for serious problems to surface; and,
   
3. Local officials should be wary about citizens’ pressures to implement fiscal policies that are popular in the short run but financially disastrous over time.
4. What is Public Banking? A “public bank” is a national or state-chartered depository institution owned by a government entity. Except for public ownership, other features and purposes of public banks are not universally agreed upon. When voicing support for public banks, proponents have cited the following potential benefits:
   
5. Providing capital at a lower cost than the private sector to preferred uses (e.g., public infrastructure projects, affordable housing, small businesses, unbanked/underbanked);
   
6. Reducing costs to the government for banking services;
   
7. The opportunity to invest public funds in a way that reflects the values of the electorate; and,
   
8. The ability to divest public funds from commercial banks that provide financing to industries that advocates do not like (e.g., fossil fuel producers, prison operators, gun manufacturers).
9. Public Banks in Operation. There is only one public bank operating at scale in the United States – the Bank of North Dakota (BND). BND was founded in 1919 by the state legislature to support the state’s farmers. BND is the state’s exclusive depository institution and also serves local governments, which can voluntarily elect to deposit funds in the bank. Importantly, BND does not compete with private financial institutions. Rather, it partners with local banks and credit unions. These private financial institutions originate the loans, apply to participate in one of BND’s programs, and then BND provides capital to participate in the loan with the private financial institution.
   

There are several examples of public banks operating outside of the United States. Germany’s Sparkassen and Landesbanken networks serve consumers, businesses, and governments. The Japan Finance Organization for Municipalities provides funds to local governments in Japan. While international examples show that public banks are possible, the differences in regulatory and legal frameworks between countries may inhibit these examples from providing much information for how public banking could work in California.

Recent Efforts on Public Banking. On the heels of the 2007-08 financial crisis, renewed interest in public banking has sparked legislation or feasibility studies in state and local governments around the United States. Except for the BND, no state or local government has established a public bank. Feasibility studies often find significant start-up costs and high levels of financial and operational risk associated with public banks.

1. California.
   Two bills were introduced in the 2011-12 legislative session. AB 750 (Hueso) would have created a task force to study a public bank at the state level. The bill was approved by the California Legislature but vetoed by Governor Brown who said the matter was “well within the jurisdiction and competence of the Assembly and Senate Banking Committees.” AB 2500 (Hueso) would have established a public bank at the state level. The bill was never heard in policy committee by request of the author.
   
2. Los Angeles.

In 2017, the City Council of Los Angeles requested a report on the feasibility of a Municipal Bank of Los Angeles. The report was written by the Chief Legislative Analyst and submitted to the Council in February 2018. The report identified a number of risks associated with establishing and operating a municipal bank and necessary legislative changes prior to establishing a bank. Following this report, Council placed an initiative on the November 2018 ballot to amend the city charter as a first step to establishing a public bank. The initiative was rejected by voters with 44% voting “yes” and 56% voting “no”.

1. San Francisco.

The City and County of San Francisco established a task force in 2017, facilitated by the County Treasurer and Tax Collector’s Office, to investigate the feasibility of a municipal bank owned by the City. The task force has convened stakeholder meetings and solicited opinions from banking experts to inform its analysis and recommendations. The final report was published in March of this year. The task force investigated three different models of potential public banks, including a bank to only provide loans (option one),


a bank to provide cash management and investment services (option two), and a bank that provides both (option three).

1. Seattle.

The City of Seattle commissioned a feasibility study that was published in October 2018. The report concluded that “creating a public bank in Seattle would be at best a long-term process, requiring numerous layers of regulatory review and eventual compliance with a restrictive slate of limitations on its capacity to lend and raise capital.”

1. Washington.

The Washington State Legislature provided $480,000 in 2018 to fund a feasibility study, which is ongoing. Separate from the feasibility study, the State Treasurer conducted a “study of studies” which analyzed twelve studies that had been produced by cities and states around the country. Based on that study, the Treasurer concluded that he does “not support public banking because of the higher risk and lower return on investment compared to the current private banking system.”

1. Bill Summary. This bill allows local agencies to establish a public bank that can provide cash management, commercial banking, and lending services. This bill requires a public bank to follow the requirements of the Financial Institutions Law and the Banking Law. This bill specifies that a public bank must obtain and maintain deposit insurance, approved by the Commissioner of Business Oversight, either by the FDIC, public share insurance, or self-insurance. Lastly, this bill allows a public bank to incorporate as a benefit corporation or a social purpose corporation. This bill is sponsored by the California Public Banking Alliance.
   
2. Author’s Statement. According to the author, “AB 857 provides more local control, transparency, and self-determination in how local taxpayer dollars are leveraged in the banking system by allowing local government to charter their own public banks. These public banks would have oversight from the DBO and a separate, professional board. In contrast to profit-driven commercial banks, the public bank’s board of directors will have a fiduciary duty to protect taxpayers’ assets.
   

“AB 857 also requires partnerships between a public bank and existing local financial institutions to provide retail services, enabling public banks to provide affordable loans and lines of credit to local businesses and nonprofits, and increase the lending capacity of the local banking system. By creating a public bank, taxpayer money will be held by an insured financial institution that measures its return on investment not only by profits, but also by its success in supporting communities.”

1. Policy Considerations. The Committee may wish to consider the following:
2. Divestment. Supporters state that, “Since the financial crisis, the country’s largest banks paid a total of $321 billion in fines in response to bad banking practices. Yet, fines do little to dissuade banks from predatory practices. Since the adoption of the Paris agreement, big banks have financed fossil fuels with $1.9 trillion, in increasing amounts each year, accelerating climate disaster at a rapid rate. Additionally, big banks have provided $3.4 billion in current debt financing to the two leading companies in the
   
   
   private prison industry.” The Committee may wish to consider the partnerships that public agencies have with these banks and the impacts of financing of certain industries.
   
3. Local Banking. One of the supporting arguments for the creation of public banks is the potential impact on small, local banks. Supporters proclaim that public banks will revive the local banking sector by purchasing local bank stock, partnering with them on large loans, and providing other support, citing that the state of North Dakota, which has a public bank, has six times as many local banks and credit unions per capita as the rest
   of the country.

However, the opposition claims the contrary saying, “The public bank would take away the local agency deposits from these private community banks, upon which they depend to issue loans and lines of credit to businesses within the community. AB 857 could ultimately eliminate community banks, which provide a valuable resource of capital, revenue, and jobs for the communities they serve.” There is a stark contrast in views on how the local banking sector will be impacted. The Committee may wish to consider the effect public banks may have on small, community banks and credit unions.

1. FDIC Insurance. Establishing a public bank is likely a long-term commitment. Taxpayer dollars that are deposited in commercial or locally owned banks are protected
   if there is another economic downturn or other factors by FDIC insurance and collateral requirements. If accepted by the FDIC, the public bank would be subject to its supervision and regulation. A public bank without this insurance could expose local agency deposits (up to the FDIC insurance amount of $250,000) to a greater risk of loss. This bill authorizes the DBO to approve the type of deposit insurance a public bank must acquire including, FDIC insurance, private share insurance, or self-insurance. Although DBO makes the final decision on insurance requirements, operating a public bank without FDIC protection could be risky. The Committee may wish to consider if FDIC deposit insurance should be a requirement of any public bank performing commercial banking functions.
   
2. Present Versus Future. As discussed in the San Francisco Task Force’s report, starting a bank and keeping it operational is not a cheap endeavor. San Francisco studied three different models for a public bank. San Francisco estimated that a public bank that accepts deposits, performs cash management and commercial banking services, as well as provides affordable housing and small business lending (option three), will take an estimated 56 years to break even operationally. To achieve financial sustainability, it was estimated that $119 million in start-up costs and $2.2 billion in subsidies from the City would be needed to maintain operations until the public bank can break even. The task force did not specify where these funds would come from but did note that General Fund appropriations would likely be critical to its success. Any funds dedicated to funding a public bank could otherwise be used in a myriad of different ways, whether it be social programs, affordable housing or other infrastructure development, or even economic development programs. The Committee may wish to consider the long-term benefit of establishing a public bank versus the immediate needs of California’s communities.
   
3. Public Study. San Francisco conducted a very thorough financial and economic analysis to determine the benefits and potential fiscal impact of creating a public bank. However, this bill does not require a local agency to perform a comparable analysis to determine whether establishing a public bank is the right decision for a particular entity. While the DBO must also approve any application to form a bank, the Committee may wish to consider if a local agency should be required to conduct an in-depth, public analysis prior to applying for a state license.
   
4. Fiscal Commitment. San Francisco noted in its report that the model that provides cash management, commercial banking, and lending services (option three):
   

“Struggles to achieve sustainability because it combines the high start-up and overhead costs of performing the City’s cash management with the reduced profit resulting from a lower-margin but high-impact lending portfolio. The slowness of Model Three’s path to profitability increases the operational, political, and regulatory risks. Each year, there is a concern that the bank will lose political support and thus its subsidy or that regulators will intervene. Over the course of 56 years, economic conditions may force the bank to change its business model or may stymie its growth. Additionally, the longer the time frame modeled, the less reliable the model results.”

The Committee may wish to consider if the potential social and financial benefits outweigh the risk of such a long-term commitment.

1. Political Influence. The political structure of a public bank has been identified as an important factor when it is created. The FDIC has expressly noted that applications from public banks will be examined closely because public banks present “unique supervisory concerns that do not exist with privately owned depository institutions.” The Los Angeles Times proclaimed that, “A public bank runs the risk of political interference, as elected officials might put pressure on the bank to make risky loans to and investments in favored individuals, causes, and communities.” Ensuring a public bank is properly insulated from political pressures may be important to its success. The Committee may wish to consider if this bill should include safeguards to avoid such political pressures.
   
2. Investment Restrictions. The supporters of this bill argue that the creation of a public bank allows for the investment of public funds in a way that reflects the values of the electorate, and provides the ability to divest public funds from commercial banks that provide financing to controversial industries. However, this bill does not expressly limit the types of industries a public bank can invest in. The Committee may wish to consider if certain investments should be explicitly restricted and enumerated in this bill.
3. Committee Amendments. In response to the policy considerations above, the Committee may wish to amend the bill in the following ways:
   
4. Require FDIC insurance:

57602. (a) A public bank shall obtain and maintain deposit insurance approved by the Commissioner of Business Oversight, either provided by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act (12 U.S.C. Sec. 1811 et seq.), private share insurance, or self-insurance.

(b) In seeking and retaining insurance, a public bank may do all things and assume and discharge all obligations required of it that are not in conflict with state law.

1. Delete the definition of “self-insurance”:

57600. (c) “Self-insurance” means deposits guaranteed by the owners of the public bank in an amount approved by the Commissioner of Business Oversight.

1. Add a requirement that the local agency conduct a study prior to applying to the DBO:

Government Code Section 57606. (a) Prior to submitting an application to organize and establish a public bank pursuant to Section 1020 of the Financial Code, a local agency shall conduct a study to assess the viability of the proposed public bank. At a minimum, the study shall include the following elements:

(1) A discussion of the purposes of the bank which may include achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities.

(2) A fiscal analysis of costs associated with starting the proposed public bank.

(3) An estimate of the initial amount of capital to be provided by the local agency to the proposed public bank.

(4) Financial projections, including pro forma balance sheet and income statement, of the proposed public bank for at least the first five years of operation. The financial projections shall include an estimate of the time period for when expected revenues meet or exceed expected costs and an estimate of the total operating subsidy that the local agency may be required to provide until the proposed public bank generates sufficient revenue to cover its costs. In addition to projections that assume favorable economic conditions, the analysis shall also include a downside scenario that considers the effect of an economic recession on the financial results of the proposed public bank. The projections may include the downside scenario of continuing to do business with the local government’s current banker(s).

(5) A legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article 16 of the California Constitution, provided that nothing herein shall compel the waiver of any attorney-client privilege attaching to such legal analysis.

(6) An analysis of how the proposed governance structure of the public bank protects the bank from unlawful insider transactions and apparent conflicts of interest.

(b) The study may include any of the following elements:

(1) A fiscal analysis of benefits associated with starting the proposed public bank, including but not limited to cost savings, jobs created, jobs retained, economic activity generated, private capital leveraged.

(2) A qualitative assessment of social or environmental benefits of the proposed public bank.

(3) An estimate of the fees paid to the local agency’s current banker(s).

(4) A fiscal analysis of the costs, including social and environmental, of continuing to do business with the local agency’s current banker(s).

(c) The study required by subdivision (a) must be presented and approved by the governing body of the local agency at a public meeting prior to the local agency submitting an application pursuant to Section 1020 of the Financial Code.

(d) The local agency shall make available to the public the financial models and key assumptions used to estimate the elements described in paragraphs (2) through (4) of subdivision (a) prior to presenting the study to the governing body of the local agency as required by subdivision (c).

1. Arguments in Support. Supporters argue, “Currently, California does not have any public banking options. As a result, many California local governments must hold their assets with large out of state commercial banks. Additionally, billions of taxpayer dollars are invested with commercial banks that have little incentive to use their assets for the betterment of the local community. Many of these private commercial banks engage in practices that may be inconsistent with the values of California communities, such as engaging in predatory lending practices and funding private detention centers. AB 857 would address this by providing more local control and transparency in how local taxpayer dollars are leveraged in the banking system and by allowing local governments to charter their own public banks. The DBO would have oversight over the public banks and the banks’ board of directors would have a fiduciary duty to protect taxpayer’s assets. By creating a public bank, taxpayer money will be held by an insured financial institution that invests in the local community.”
   
2. Arguments in Opposition. Opponents argue the bill, “Proposes a radical change in the financial market, not justified by any unmet need. The bill would authorize the creation of a ‘public bank’ that would require a significant amount of start-up money (presumably from the local agency general fund), jeopardize taxpayer funds in politically motivated investments, and would likely reduce, if not eliminate, the presence of community and small neighborhood banks, as well as small businesses’ access to these valuable financial services. Two recent studies concluded that a municipal bank is a risky financial endeavor. Voters in Los Angeles recently rejected a proposal to establish a public bank.”
   
3. Double-Referral. This bill was heard in the Banking and Finance Committee on
   April 22, 2019, and passed with a vote of 7-3.

REGISTERED SUPPORT / OPPOSITION:

Support

California Public Banking Alliance [SPONSOR]

AFSCME Council 57

Alliance for Community Transit, Los Angeles

Alliance of Californians for Community Empowerment Action

American Indian Movement SoCal

Asian Pacific Environmental Network

Backbone Campaign

Beneficial State Foundation

California Democratic Party Delegates (97)

California Environmental Justice Alliance

California Faculty Association, San Francisco State University

California Nurses Association

California Progressive Alliance
California Reinvestment Coalition

Support (continued)

Campaign for Sustainable Transportation, Santa Cruz

Center for Community Action and Environmental Justice

City and County of San Francisco

City of Berkeley Mayor Jesse Arreguin

City of Los Angeles

City of Oakland

City of San Jose

Coleman Advocates for Children and Youth

Commonomics

Communities for a Better Environment
Community Financial Resources

Cooperation Humboldt, Eureka
Courage Campaign

Democracy Collaborative

Democratic Party of the San Fernando Valley

Democratic Socialists of America, Los Angeles

Divest LA

Friends of the Earth

Friends of Public Banking Santa Rosa
Fossil Free California

Green Party of California

Green Party of Santa Clara County

Healthcare for All

Hollywood NOW

Home It

Hubert H. Humphrey Democratic Club

Idle No More – San Francisco Bay

Indivisible, CA-33

Indivisible California Green Team

Indivisible California: StateStrong

Indivisible East Bay

Indivisible Los Angeles, CA-43

Lawyers’ Committee for Civil Rights of the San Francisco Bay Area

Local Clean Energy Alliance

Los Angeles County Democratic Party

Media Alliance

McGee-Spaulding Neighbors in Action

NAACP, Santa Cruz Chapter

National Nurses United

Orange County Poor People’s Campaign

Our Revolution Long Beach

People for Public Banking Santa Cruz

People Organizing to Demand Environmental and Economic Rights

Progressive Asian Network for Action

Public Bank East Bay

Public Bank Los Angeles

Support (continued)

Public Bank San Diego

Public Bank Santa Barbara

Public Banking Institute

Resistance – Northridge, Indivisible

Revolution LA

San Francisco Berniecrats

San Francisco Living Wage Coalition

San Francisco Public Bank Coalition

San Francisco Rising

Santa Cruz Climate Action Network

Santa Cruz for Bernie

Service Employees International Union, California

SoCal 350 Climate Action

South Bay Progressive Alliance

Sunrise Movement Los Angeles

Sustainable Economies Law Center

Unites Educators of San Francisco

Women’s International League for Peace and Freedom

350 Bay Area Action

350 Conejo San Fernando Valley

350 Riverside

350 Santa Cruz

350 Silicon Valley

350 South Bay Los Angeles

38 Individuals

Opposition

Bay Area Council

California Association of Treasurers and Tax Collectors

California Bankers Association

California Chamber of Commerce

California Community Banking Network

California Credit Union League

California Taxpayers Association

Howard Jarvis Taxpayers Association

Analysis Prepared by: Jimmy MacDonald / L. GOV. / (916) 319-3958

Date of Hearing: April 22, 2019

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Monique Limón, Chair

ABPCA Bill Id:AB 857 (

Author:Chiu) – As Amended Ver:March 19, 2019

SUBJECT: Public banks

SUMMARY: Provides for the establishment of a public bank, as specified, by a local agency. The public bank would generally be required to comply with all requirements in state law that apply to commercial banks.

Specifically, this bill:

1. Defines public bank as 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, local agencies, a joint powers authority that is composed only of local agencies, or a special district.
2. Requires a public bank to identify in its articles of incorporation either a social purpose or specific public benefit, as specified, and to comply with reporting and transparency requirements related to benefit corporations or social purpose corporations.
3. Requires a public bank to obtain and maintain deposit insurance approved by the Commissioner of Business Oversight, either provided by the Federal Deposit Insurance Corporation (FDIC), private share insurance, or self-insurance.
4. Requires a public bank to comply with all requirements of the Financial Institutions Law (Division 1 (commencing with Section 99) of the Financial Code) and the Banking Law (Division 1.1 (commencing with Section 1000) of the Financial Code), except to the extent that a requirement of those laws is inconsistent with a requirement proposed by this bill, in which case the requirement of this bill shall prevail.
5. Requires a public bank, wherever possible, to conduct retail services in partnership with local financial institutions, as specified.
6. Notwithstanding the requirement to partner with local financial institutions, authorizes a public bank to engage in banking activities, including, but not limited to, infrastructure lending, wholesale lending, and participation lending.
7. Provides exceptions related to a local agency’s ability to deposit funds in or purchase debt securities from a public bank, as specified.
8. Provides that a local agency that owns or controls a public bank is not considered a bank holding company pursuant to state law.
9. Exempts a public bank from state and local taxes, with specified exceptions.

EXISTING LAW:

1. Provides for the Department of Business Oversight (DBO) and authorizes DBO to administer the Financial Institutions Law (Financial Code Section 99 et seq.).
2. Provides for the Banking Law (Financial Code Section 1000 et seq.) as a division within the Financial Institutions Law. Specifies authorizations, requirements, and restrictions that govern how a corporation may engage in commercial banking activity in the state.
3. Specifies requirements and restrictions related to the management of financial affairs by a local agency (Government Code Section 53600 et seq.). Local agency means county, city, city and county, including a chartered city or county, school district, community college district, public district, county board of education, county superintendent of schools, or any public or municipal corporation. Requirements and restrictions relevant to this bill include, but are not limited to, the following:
   1. Provides that all governing bodies of local agencies are trustees and therefore fiduciaries subject to the prudent investor standard. Requires a trustee to act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency.
   2. Establishes that the primary objective of a trustee shall be to safeguard the principal of the funds under its control. The secondary objective shall be to meet the liquidity needs of the depositor. The third objective shall be to achieve a return on the funds under its control.
   3. Declares that the deposit and investment of public funds by local officials and local agencies is an issue of statewide concern.
   4. Provides a specified list of relatively low-risk securities that a local agency may purchase or obtain (Government Code Sections 53601 and 53635).
   5. Provides for how a depository institution, including a bank authorized pursuant to the Banking Law, must protect deposits received from a local agency (Government Code Section 53630 et seq.).

FISCAL EFFECT: Unknown

COMMENTS:

1. PURPOSE

According to the authors:

AB 857 provides more local control, transparency, and self-determination in how local taxpayer dollars are leveraged in the banking system by allowing local governments to charter their own public banks. These public banks would have oversight from the Department of Business Oversight (DBO) and a separate, professional board. In contrast to profit-driven commercial banks, the public bank’s board of directors will have a fiduciary duty to protect taxpayers’ assets.

AB 857 also requires partnerships between a public bank and existing local financial institutions to provide retail services, enabling public banks to provide affordable loans and lines of credit to local businesses and nonprofits, and increase the lending capacity of the local banking system.

By creating a public bank, taxpayer money will be held by an insured financial institution that measures its return on investment not only by profits, but also by its success in supporting communities.

1. BACKGROUND

The concept of public banking is not new. In fact, the California Legislature considered two bills in recent years that proposed establishing a public bank that would be owned and operated by the state, but neither bill was enacted into law.^[1] Except for public ownership, other features and purposes of public banks are not universally agreed upon. When voicing support for public banks, proponents have cited the following potential benefits:

• The opportunity to invest public funds in a way that reflects the values of some of the electorate,
• The ability to divest public funds from commercial banks that provide financing to industries that advocates do not like (e.g., fossil fuel producers, prison operators, gun manufacturers),
• Providing capital at a lower cost than the private sector for preferred uses (e.g., public infrastructure projects, affordable housing, small businesses, unbanked/underbanked),
• Reducing costs to the government for banking services.

There is only one public bank operating at scale in the United States: the Bank of North Dakota (BND). BND was founded in 1919 by the state legislature to support the state’s farmers. BND is the exclusive depository institution for state government funds and also serves local governments, which can voluntarily elect to deposit funds in the bank. Importantly, BND does not compete with private financial institutions. Rather, it partners with local banks and credit unions. The initial underwriting, risk assessment, and credit approval decision are made by the private sector banks. These private financial institutions then originate the loans, apply to participate in one of BND’s programs, and BND provides capital to participate in the loan with the private financial institution.

On the heels of the 2007-08 financial crisis, renewed interest in public banking has sparked legislation or feasibility studies in state and local governments around the United States. To date, no state or local government has established a public bank, and feasibility studies often find significant start-up costs and high levels of financial and operational risk associated with public banks.

On February 4, 2019, the Assembly Committees on Banking and Finance and Local Government held a joint informational hearing on public banking at the local level. The committees heard testimony from the Commissioner of Business Oversight, the State Treasurer, county treasurers, supporters of public banks, and representatives of existing commercial banks. A background document and testimony submitted by witnesses can be found on the Assembly Banking Committee’s website, along with a link to a video of the hearing.

1. BIG BANK TAKE LITTLE BANK

The ongoing consolidation of the banking industry may contribute to a feeling that the private banking system is not fulfilling the needs of local communities. According to the FDIC, the number of banking institutions in the United States has declined by more than two-thirds since 1990. There were more than 18,000 banks operating in the 1980s. In 2017 there were fewer than 5,000. Over the same period, total assets held by commercial banks increased by more than fivefold from $3 trillion to over $17 trillion, according to the Federal Reserve. This trend was driven by merger and acquisition activity where larger banks purchased smaller banks to increase their geographic reach, leverage economies of scale, or expand into new products or services.

1. SERVING LOCAL NEEDS

According to the authors and supporters, one of the motivations for this bill is to support local communities. In concept, a public bank may be structured to respond better to the needs of people in a local area than a large, publicly-traded bank that has a broader customer, employee, and investor base distributed across the country and around the globe. Although this bill requires a public bank to identify in its articles of incorporation either a social purpose or a specific public benefit, the bill does not specify how a public bank shall be governed or if and how a public bank should reflect the demands of a local community.

What if members of a community have conflicting demands of a public bank? Should a public bank operate under democratic principles? If so, how should minority groups be protected from the tyranny of the majority? Establishing an effective governance structure to guide the decision-making process of a public bank will be a critical element that shapes whether a public bank could better meet the needs of a community than existing private sector banks.

Even if a public bank establishes an effective governance structure, the question remains whether such a public bank would better serve community needs than existing private institutions. As of 12/31/2018, there were 243 state-chartered banks and credit unions operating in California. Nearly all of these institutions held assets of less than $10 billion, placing them in the category of “community banks” according to the Federal Reserve. Many of these smaller financial institutions generate business primarily, sometimes solely, through serving customers in their local geographic regions. In order to better serve its community, a public bank would likely need to offer products and services at a lower price or higher quality than existing institutions that serve the area.

1. SEEKING POLICY OUTCOMES THROUGH PUBLIC BANKING

Supporters of the bill identify an array of policy outcomes that they hope public banking will facilitate or values that can be expressed by a public bank’s activities, including, but not limited to, the following:

• Investments in climate change mitigation, renewable energy, affordable housing, public infrastructure, and small businesses.
• Divestment from the fossil fuel industry, providers of private prisons and detention centers, and gun manufacturers.
• Moving local government funds out of large commercial banks that provide financing to aforementioned industries.

This bill provides flexibility for a local government to decide which, if any, of these objectives to pursue through the establishment of a public bank. In considering these objectives, the Legislature and local governments may identify alternative paths to achieve these goals at a lower cost, both in terms of government expenditures and total societal resources.

1. DBO and FDIC: HOW TO PROTECT A PUBLIC BANK FROM FAILING

Banking is inherently risky. Making loans and managing deposits expose a bank to potential financial losses, liquidity constraints, and even failure. During the last financial crisis, 440 banks were closed by the FDIC from 2009-2012, or approximately 5-6% of the total banks in operation. The failure of a public bank – capitalized with taxpayer funds and holding tax receipts as deposits – could cause significant damage to a local government’s ability to engage in normal operations (e.g., paying public employees, making payments on outstanding bonds and debt, paying city contractors and non-profits).

This bill, as proposed to be amended, provides protections of taxpayer funds by requiring a public bank to be regulated and supervised by the DBO and FDIC. While private banks under the supervision of the DBO and FDIC have failed, these regulators provide two critical areas of protections to avoid potential losses: initial review of a bank charter application and ongoing supervision for safety and soundness.

Initial Review

If a local agency desires to form a public bank, this bill requires the local agency to submit an application for a bank charter with DBO through the same process provided for traditional commercial banks. Under existing law, the Commissioner of DBO cannot approve the application until he or she has ascertained to her satisfaction that:

1. The proposed bank will have a reasonable promise of successful operation.
2. The proposed capital structure is adequate.
3. The proposed officers and directors have sufficient banking experience, ability, and standing to afford reasonable promise of successful operation.

In reaching its decision, DBO considers:

1. The character, reputation, and financial standing of the organizers or incorporators and their motives in seeking to organize the proposed bank.
2. The character, financial responsibility, banking experience, and business qualifications of the proposed officers of the bank.
3. The adequacy of capitalization to support the projected volume and type of business.
4. The reasonableness to achieve and maintain profitability.
5. The viability of the Business Plan given the economic condition, growth potential, and competition of the proposed market area.
6. Whether the bank is free from abusive insider transactions and apparent conflicts of interest.

This initial review process could serve to protect a local agency from starting a public bank without appropriate personnel and financial support in place or from starting a public bank with an unviable business plan.

Ongoing Supervision

Under the proposed bill and existing law, both the DBO and FDIC would provide routine supervision and examinations of a public bank to evaluate the nature of the bank’s operations, the adequacy of the bank’s internal controls and its internal audit function, and the bank’s compliance with laws and regulations. If weaknesses are identified, the regulators have tools to correct deficiencies in the bank’s risk management practices and address weaknesses in the bank’s operations.

In the context of a public bank, the FDIC could serve as a critical backstop in preventing undue political influence on the decisions of the bank. A public bank raises unique concerns around how elected officials in local or state government could pressure the bank to give special treatment to political supporters. While it is likely that DBO examiners would identify bad behavior, it is important for a regulator outside of the California political process to also serve in an oversight role and be empowered to use enforcement authority over a public bank that was corrupted by undue political influence. Oversight by the FDIC helps to mitigate the risk of loss of taxpayer funds due to risky decisions by a public bank.

1. COLLATERAL REQUIREMENTS: HOW TO PROTECT TAXPAYER FUNDS IF A PUBLIC BANK FAILS

Existing law provides protections for taxpayer dollars that may be deposited in a public bank. After the bankruptcy of Orange County in the mid-1990s, the Legislature passed laws requiring that funds deposited by a local agency must be protected with special collateral requirements. These requirements ensure that taxpayer funds are backed up, even if the size of the local agency’s deposit account is greater than the FDIC protection limit of $250,000. This bill does not exempt a public bank from these collateral requirements.

While collateral requirements protect local government deposits, any capital provided by the local government as shareholder equity or as a non-deposit liability to a public bank may be exposed to losses. As fiduciaries and trustees of taxpayer funds, local government officials should carefully consider the risks involved with public bank proposals, particularly in light of their responsibilities under the prudent investor rule.

1. ARGUMENTS IN SUPPORT

The California Public Banking Alliance writes:

Unlike a privately-owned bank, which prioritizes shareholder returns, public banks leverage their deposit base and lending power to benefit the public. This allows public banks to focus on pressing local needs, like affordable housing, small business loans, and public infrastructure projects such as rebuilding after wildfires. A public bank’s decisions may consider the needs of the community and leverage public funds to meet those needs at a lower cost than the private sector.

AB 857 provides more local control, transparency, and self-determination in how local taxpayer dollars are leveraged in the banking system by allowing local government to charter their own public banks. These public banks would have oversight by the DBO and a separate, professional board. In contrast to profit-driven commercial banks, the public bank’s board of directors will have a fiduciary duty to protect taxpayers’ assets.

Fossil Free California writes:

Fossil Free California supports and endorses AB 857 “Public Banks”, which could provide a stable alternative to megabanks that provide financing for fossil fuels and fossil fuel infrastructure projects. Over the last three years the world’s biggest banks have poured more than $1.9 trillion into extreme fossil fuel projects. Finding a public alternative to these banks is consistent with our mission of ending financial support for fossil fuels and promoting a just transition to a low-carbon economy.

1. ARGUMENTS IN OPPOSITION

The California Bankers Association writes:

AB 857 infers that banks are not serving their communities, an argument repeatedly made by public bank activists in a variety of forums. There are 155 banks operating in California, which combined, originate more than $100 billion in new loans annually. Proponents for the creation of a public bank have failed to identify how the current marketplace is not meeting the public’s financial needs…

While AB 857 attempts to achieve partnership with local financial institutions, the measure creates a tax advantaged entity that will directly compete with community banks. This measure does not preclude a municipal bank from engaging in retail banking services or from offering commercial loans…Commercial banks, particularly community banks, will be harmed by the taking of local agency deposits which would otherwise be used as a source of liquidity by these banks to make loans into their communities. The notion that the public bank will cooperate with local financial institutions is illusory and this measure forces community banks to compete on an unlevel playing field.

The California Association of County Treasurers and Tax Collectors writes:

While CACTTC certainly understands the motivation to move public dollars away from certain private, commercial banks, there is simply no question that country treasurers complying with state law cannot possibly deposit county funds into a public bank. We have communicated this directly to the public bank advocates and have also provided them our policy statement on the matter, which was developed prior to the introduction of [AB 857]. Moving forward this legislation creates a false sense of hope for proponents who have been repeatedly advised that county pools cannot be used for these purposes, and that critical statutory protections of local dollars cannot be lightly dismissed.

1. DOUBLE-REFERRAL

This bill is double-referred. If passed by the Assembly Banking and Finance Committee, the bill will advance to the Assembly Local Government Committee. This analysis does not opine on whether a public bank is within the scope of services that a local government should consider providing.

1. PROPOSED AMENDMENTS

Amend proposed Government Code Section 57602 to read:

A public bank shall obtain and maintain deposit insurance approved by the Commissioner of Business Oversight, either provided by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act (12 U.S.C. Sec. 1811 et seq.), private share insurance, or self-insurance.

(b) In seeking and retaining insurance, a public bank may do all things and assume and discharge all obligations required of it that are not in conflict with state law.

Amend proposed Government Code Section 57600 to read:

 For purposes of this division:

(a) “Local financial institution” means a certified community development financial institution, a credit union, or a small bank or an intermediate small bank, as defined in Section 25.12 of Title 12 of the Code of Federal Regulations.

(b) “Public bank” means 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, local agencies, a joint powers authority formed pursuant to the Joint Exercise of Powers Act (Article 1 (commencing with Section 6500) of Chapter 5 of Division 7 of Title 1) that is composed only of local agencies, or a special district.

(c) “Self-insurance” means deposits guaranteed by the owners of the public bank in an amount approved by the Commissioner of Business Oversight

Add new section in Government Code requiring a local agency to conduct a study prior to submitting an application to organize and establish a public bank pursuant to Section 1020 of the Financial Code. At a minimum, that study shall include:

1. A fiscal analysis of costs associated with starting the proposed public bank.
2. An estimate of the initial amount of capital to be provided by the local agency to the proposed public bank.
3. Financial projections, including pro forma balance sheet and income statement, of the proposed public bank for at least the first five years of operation.
4. A legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article 16 of the California Constitution.
5. An analysis of how the proposed governance structure of the public bank protects the bank from abusive insider transactions and apparent conflicts of interest.

REGISTERED SUPPORT / OPPOSITION:

Support

350 Bay Area Action
350 Silicon Valley
Alliance For Community Transit - Los Angeles
Asian Pacific Environmental Network
California Nurses Association
California Public Banking Alliance
California Reinvestment Coalition
City And County Of San Francisco, Board Of Supervisors
Coleman Advocates For Children & Youth
Commonomics Usa
Community Financial Resources
Democracy Collaborative
Democratic Party Of The San Fernando Valley
Divest La
Fossil Free California
Friends Of The Earth U.S.
Green Party Of Santa Clara County Ca
Home It
Hubert H. Humphrey Democratic Club
Indivisible Ca: Statestrong
Indivisible East Bay
Local Clean Energy Alliance
Los Angeles County Democratic Party
Mcgee-Spaulding Neighbors In Action
Media Alliance
Orange County Poor Peoples Campaign
People For Public Banking
Poder
Public Banking Institute
San Francisco Living Wage Coalition
San Francisco Rising Alliance
Seiu State Council
South Bay Progressive Alliance
Sunflower Alliance

79 delegates of the California Democratic Party

Oppose

Bay Area Council
California Association Of County Treasurers & Tax Collectors
California Bankers Association
California Chamber Of Commerce
California Community Banking Network
California Credit Union League
Howard Jarvis Taxpayers Association

Analysis Prepared by: Michael Burdick / B. & F. / (916) 319-3081

1. Two bills were introduced in the 2011-12 Legislative Session. AB 750 (Hueso) would have created a task force to study a public bank at the state level. The bill was approved by the California Legislature but vetoed by Governor Brown who said the matter was “well within the jurisdiction and competence of the Assembly and Senate Banking Committees.” AB 2500 (Hueso) would have established a public bank at the state level. The bill was never heard in policy committee by request of the author. ↑