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California Breathes New Life Into Public Banking Movement

Jan. 2, 2020, 10:45 AM

A California law allowing municipalities to create public banks has given energy to lawmakers and activists around the country looking to set up their own local financial institutions in 2020.

Lawmakers in New York that in past years have pursued legislation to study the feasibility of public banks plan to move a bill that would set the stage for their creation in the next year.

Activists in New Mexico, Pennsylvania, and at least six other states are pushing to get their lawmakers to move on legislation that would allow for public banks. While public banking legislation may face a long road to becoming law in those states, California’s experience has given activists hope.

“That California law was valuable as a sign to other states that the public banking franchise is viable,” said Walt Mcree, the former chairman of the Public Banking Institute.

Old Idea

Public banking is an old concept. North Dakota, which has operated one since 1919, transfers all of its funds—such as tax collection and fees—to the public bank. Those funds are then lent out to small businesses and infrastructure projects through partnerships with community banks.

“They’re not a competitor to us. They are a partner, so to speak,” said Tom Stennes, president and CEO of Harwood State Bank in Harwood, N.D.

Community banks take the lead on loans to local businesses, and the Bank of North Dakota can add significantly more money to those loans, Stennes said.

The Bank of North Dakota also serves as a sort of central bank and provides financial stability by buying up bad loans from banks that need more liquidity or help on their balance sheet. No North Dakota banks failed during the 2008 financial crisis with the Bank of North Dakota playing a role, Stennes said. He added that he’s not sure the model could be replicated in part because other states might not have enough patience.

The Bank of North Dakota is a for-profit institution, plowing money into the state’s coffers. But that took a long time to achieve, and Stennes said he fears other states may not give public banks time to mature.

“My concern is that they’re going to get too impatient,” he said.

California Dreaming

Even with that success, no other state has created a public bank.

That could soon change after California Gov. Gavin Newsom (D) signed a law allowing cities and other local governments to create public banks.

San Francisco and Los Angeles are already moving forward despite restrictions including oversight from the state’s Department of Business Oversight and a limit to two applications at a time.

Los Angeles voters defeated a 2018 referendum to create a public bank.

California lawmakers’ successful effort to create the conditions for public banking has given a boost to their New York counterparts, and fueled their competitive juices.

“If I had my way, New York would have beat out our colleagues on the West Coast, but that wasn’t the case,” Sen. James Sanders, a Queens Democrat who chairs the New York Senate’s Committee on Banks, said in a Dec. 10 interview.

New York’s Senate passed legislation in 2019, to study the creation of public banks in the state. In the upcoming session, Sanders said attention will turn to a different bill, which would allow for the creation of public banks to lend out taxpayer funds for infrastructure, housing, and other community development projects.

Like California, the New York bill wouldn’t allow individuals to open accounts at public banks, and municipal financial institutions would be limited to areas where they wouldn’t compete with existing banking services.

Sanders added that while California is a model, the bill will have changes to make it work for New York.

“We are going to look to see what we can learn from what California has done,” he said.

Different Models

Other states are also looking to boost public banking.

New Jersey Gov. Phil Murphy, a Democrat, created a task force to study the feasibility of a public bank in the fall. Philadelphia’s city council made a similar move in February.

Public banking advocates in Pennsylvania plan to make it a state-level issue in the legislature in the coming year, as well as an issue in state senate elections set for next year.

New York’s legislators can talk about using the public bank to fund things like the Green New Deal or student loan forgiveness. In Pennsylvania, where the legislature is under Republican control, public bank backers need to pitch the idea as a way to help balance out state finances, according to Mike Krauss, chairman of the Pennsylvania Public Bank Project.

“We need a bipartisan effort,” Krauss, former chairman of the Pennsylvania Republican Party, said.

Activists in New Mexico have a different pitch.

Much like North Dakota, New Mexico is a largely agrarian state with a population of around 2 million, and little access to big banks. So a public bank that looks like the Bank of North Dakota is the goal for supporters in New Mexico, said Angela Merkert, executive director of the Alliance for Local Prosperity.

“We’re saying that’s where we need to start given the size of the state, the demographics of the state,” Merkert, who expects a big legislative push in 2021, said.

The Bank of North Dakota is overseen by the Industrial Commission, made up of the state’s governor, agriculture commissioner, and attorney general that appoints a seven-member advisory board.

Seasoned bankers manage day-to-day operations. The legislature can require the bank to carry out some mandates, like student lending, but even those requests are meant to fill gaps left open by local banks.

Bumpy Road

Independence is essential, Krauss said.

“There must be some accountability to elected authorities. There can be no participation from the elected authority over day-to-day lending decisions,” he said.

Opposition from local bankers is another potential pitfall.

Despite strong reviews from North Dakota bankers, community banks worry that public banks, like credit unions and nonbank lenders, would operate with less regulation, said Aaron Stetter, vice president for policy and political operations at the Independent Community Bankers of America.

“It’s ‘unlevel playing field’ fatigue,” Stetter said.

Given that opposition, the legislative efforts for public banking face potentially long odds.

In New York, where Sanders and his Senate colleagues are gearing up for a public banking push, their colleagues in the state Assembly, also run by Democrats, appear to be a little less sure.

“I don’t think the Assembly is ready to go full steam,” Assemblywoman Sandy Galef, a Democrat representing parts of Westchester and Putnam counties, said.

But with California providing an example, public banking advocates at least see a path forward.

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Alexis Kramer at akramer@bloomberglaw.com

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