Public Banks – Yes or No?

A bill establishing a process for local agencies to create a public bank continues to move through the Legislature.  Several amendments have been taken to more closely align private bank regulatory requirements to public banks.  However, a few questions remain unanswered: (1) What need is not being met by private banks?  And (2) How will the author/sponsor ensure that the public banks will be protected from political influence in their investments?

The author of AB 857, Assembly Member David Chiu, maintains that a public bank could invest in more community-minded projects like affordable housing, which more closely aligns with local sentiment rather than investments in fossil fuels.  One of the main duties of a bank is to grow investments for its shareholders, or in the case of a public bank, the taxpayer.  Affordable housing projects or low-cost small business or startup loans may not turn a profit for many years or may default.  Private bank shareholders absorb the costs of defaulting loans, whereas, taxpayers will be responsible for public bank losses.

And then there’s the matter of taxes.  AB 857 explicitly exempts public banks from the state’s Corporation Tax which private banks pay at the rate of 10.84%, automatically granting a competitive advantage to a government-run enterprise entering a field occupied by private enterprise.  The author points to language that encourages public banks to partner with local financial institutions when it is feasible but does not mandate it.

Cost estimates to start a public bank are significant with no hope of breaking even for decades (10 to 56 years).  That is the conclusion of the “Municipal Bank Feasibility Task Force Report” conducted by San Francisco’s Office of the Treasurer and Tax Collector. The Los Angeles Chief Legislative Analyst’s report referenced that “startup costs” for a municipal bank would be “exorbitant with no available source of funds to cover those costs.”  During the last hearing on AB 857, the representative from the California Association of County Treasurers and Tax Collectors stated, “no county funds would be available to put into a public bank . . ..”  Part of the problem is the best-case scenario for profitability of a new public bank is 10 years when the maximum maturity for county investments is 5 years.

Amendments have improved the bill.  Now before forming a public bank, a local agency would have to conduct a study to assess its viability, purpose, estimate of initial amount of capital needed, financial projections under a variety of economic conditions, estimated time to reach solvency, and compliance with state and federal regulations.  Once a local agency performs the study, adopts the study in a public form, gets a charter from the Department of Business Oversight then the proposal goes before the voters, except in charter cities which are exempt, like San Francisco, which Assembly Member Chiu represents.

The CalChamber continues to oppose AB 857.

Valerie Nera, Policy Advocate