Public bank sought in California by citizen activists, cannabis growers

For the last seven years, Shelly Browning and her volunteer army of community activists have tried to pitch a public bank for the city of Santa Rosa.

The task is the political policy equivalent of the Greek myth of Sisyphus, who pushed a rock up a steep hill only to have it roll back as he neared the top. The topic is very wonky. The opponents are very powerful. The legislative and regulatory hurdles are numerous.

Yet, there have been recent breakthroughs. At the local level, a Santa Rosa City Council subcommittee this fall heard a presentation on the topic. In the U.S. Congress, the proposal is included as part of a funding mechanism for a New Green Deal offered by incoming Rep. Alexandria Ocasio-Cortez, D-New York, and other progressive lawmakers.

“I say it’s a vibrant nationwide movement. There is a lot of awareness,” Browning said. “This is not an isolated incident. It’s because the country is looking for new ways of doing business.”

The outlook is even brighter in 2019. State lawmakers in Sacramento are expected to grapple over whether a state-owned bank could help bring the multibillion-dollar cannabis industry into the financial mainstream as the sector is still a largely cash business - even almost a year after legalization for recreational use. State Treasurer John Chiang will release a feasibility study very soon on the proposal along with an analysis from the state Attorney General’s Office on the legal challenges that such a bank could face.

“There is absolutely an eagerness to flesh out these type of solutions,” said Hezekiah Allen, chairman of Emerald Grown, a Humboldt-based cooperative of cannabis growers. Allen has been a leading proponent of a public bank for his sector, where the denial of traditional banking services is a major impediment for growth.

Like many debates, the concept boils down to money and who controls it. Specifically, can a publicly owned bank play a role within a community or a sector where traditional financial institutions are not filling the void?

In the United States, the idea has been around for centuries and tried at the federal and state level. Yet until recently, the only public bank operating in modern times has been the Bank of North Dakota - where it is politically sacrosanct. The bank, which celebrates its centennial next year, was formed to help North Dakota wheat farmers who were charged exorbitant interest rates at the time from banks in Minneapolis and Chicago.

All state funds through taxes and fees are deposited into the bank, but it is not insured by the Federal Deposit Insurance Corp. The bank partners with local banks to support agriculture, commerce and industry within the state and doesn’t view itself as a competitor. It largely doesn’t venture into the retail sector and does not offer ATM cards, debit cards, credit cards or online payment for bills.

Instead, it targets broader efforts to help North Dakota residents, such as recent programs to promote rural mortgages and student-loan consolidation into a lower interest rate.

The results have been impressive. The Bismarck-based bank has $7 billion in assets and reported 14 consecutive years of profits at the end of 2017, turning over $145.3 million in net earnings for taxpayers.

For proponents, the Bank of North Dakota has become the gold standard for how public banks can benefit a community.

“That’s the best model,” said Mark Armstrong, an advocate who co-founded the Public Banking Institute in 2011. “The Republicans in North Dakota are doing a far more effective job with this public bank than many of the liberals in California could dream of.”

The push for a public bank emerged as a result of the Great Recession. Wall Street banks were at the center of the financial crisis in the late 2000s, which was sparked by a home mortgage sector that ran amok until defaults started to rise and the big bets placed on the overall market started crashing down on major banks.

The aftermath spawned the Dodd-Frank financial overhaul law as well as the Occupy Wall Street movement, where Browning started showing up locally to meetings. She owns a sign-language interpreting agency and was incensed in 2009 when she was paid in IOUs by the state of California for some of her contracts, which forced her to borrow from her father to make payroll.

“I did not feel that it was my father’s responsibility to float the state, and I did not want to ever have to ask that of him again,” she said in an email.

Browning along with a core group of supporters have formed the Friends of Public Banking Santa Rosa, lobbying City Council members, educating the public through community forums and networking other with other like-minded groups in California.

They have focused much on divestment of city funds away from large megabanks. They were pleased that Santa Rosa moved its primary banking partner away from Wells Fargo after criticism of the San Francisco-based bank’s behavior, especially after it was sanctioned by the Federal Reserve earlier this year for widespread consumer abuse. The contract expires at the end of the month.

But Santa Rosa’s winning bid went to another large bank, JP Morgan Chase, which beat out other competitors including Santa Rosa-based Exchange Bank.

Going forward, advocates are specifically targeting the city’s investment program that had almost ?$360 million in funds as of Sept. 30. The city invested 21 percent of the funds with corporate issuers of debt and another 15 percent went toward issuers of certificates of deposit. Both of those groups were comprised of large U.S. banks and foreign ones. They are particularly incensed that 15 of those banks that do business with the city also have financing ties to the fossil-fuels sector.

“If Santa Rosa is going to divest from some big megabank where can it put its money?” said Philip Beard, a member of the group and an emeritus faculty member of Sonoma State University. “Why should we not have a bank of our own?”

They believe that a public bank could provide a better role in funding priorities such green energy efforts and affordable housing, arguing that low-cost loans would be cheaper than floating bonds. That pitch should resonate, they contend, after the defeat last month of Measure N, the $124 million housing bond proposal.

“The deals pencil out a lot better when you cut the interest in half,” Armstrong said of the better financing that public bank can provide to public works projects.

Incoming City Councilwoman Victoria Fleming said she is interested in learning more about the concept given the interest in the community.

“This is something we should as a city take a close look at in order to determine what the benefits and costs associated with this type of endeavor might be,” Fleming said.

The Council’s Long Term Financial Policy and Audit Subcommittee had a hearing on the topic in October. They asked city staff to monitor developments on the issue going forward, said Chuck McBride, the city’s chief financial officer.

There have been a lot of developments. The new governor of New Jersey, Phil Murphy, is an advocate. Washington state lawmakers have pushed through a $480,000 contract to develop a business plan for a public bank. Likewise, a group of East Bay advocates are pushing to develop their own business plan for Alameda County.

But there have been some setbacks. Los Angeles voters last month defeated a proposal to change the city charter to allow for the creation of a Bank of Los Angeles by a vote of 58 percent to 42 percent. In addition, a recent study for the city of Seattle found a public bank would not be able to redirect much cost savings to “public interest goals, such as additional investments in affordable housing.”

Indeed, advocates concede there are many logistical and regulatory barriers to establish a public bank, especially as California cities will have to get approval from the state Legislature to open such an institution. The California Public Banking Alliance has recently met with Assemblyman Rob Bonta, D-Alameda, to sponsor such a bill.

But the biggest obstacle in their quest is likely opposition from the politically powerful banking industry that views the campaign as a non-starter.

“The California (banking) marketplace serves their communities very well,” said Beth Mills, senior vice president of the Western Bankers Association, which represents more than 200 banks headquartered in the Golden State. “There are a multitude of choices.”

Beyond the wide array of banks, Mills added that purported cost savings for a public bank aren’t likely to emerge. “Running a bank is not inexpensive,” she said, especially with the compliance costs.

The debate, however, also has been intertwined with the push for finding a banking solution for the cannabis industry - which has made the issue much more pressing in Sacramento. Almost all banks refuse to do business with cannabis-?related companies because marijuana is still illegal under federal law and they do not want to lose their federal banking charter.

Chiang has taken a leading role in the effort “to move those in the shadows of the industry into the light by giving them safe and legal avenues to deposit their money and reduce crime on our streets.”

But that’s not happening. Allen estimated that only 20 percent of California’s growers are regulated by the state as they argue they are overly burdened by high tax rates, restrictive local ordinances, and no options for banking.

“It’s getting worse,” he said. “The unregulated market is expanding.”

Some larger cannabis companies have found partial relief. For instance, CannaCraft, a Santa Rosa-based business that produces cannabis drinks, food and oils, has recently obtained limited services from a Los Angeles-area bank that allows it to pay its vendors such as its landlord and packaging supply firms, said Tiffany Devitt, chief compliance officer. But to obtain the bank account, CannaCraft paid more than $40,000 and it took six months to complete.

“It’s still a cash business,” Devitt said of the cannabis industry.

Lawmakers will have to decide how broad the debate will be when they reconvene in January. They have to figure out if the discussions will be narrowly tailored toward cannabis and whether there will be a component for a public bank option. For instance, state Sen. Bob Hertzberg, D-Van Nuys, will again sponsor his bill that creates a limited state charter to allow private banking institutions to open accounts for cannabis companies. But the Hertzberg bill stalled last year amid concern that those banks could be ultimately stopped by federal authorities, even with a state charter.

To make matters more complicated, the federal government response is the wild card in the debate over cannabis banking. Treasury Secretary Steve Mnuchin signaled earlier this year a willingness for banks to provide services to marijuana businesses, while noted cannabis opponent Jeff Sessions resigned as attorney general last month.

While Devitt wants to see a solution to the issue, she said she is concerned that the public bank option in California may not settle the debate. She also has doubts if such a public bank would be able to function as intended.

“The bottom line is that I think the only actual solution has to take place at the federal level,” Devitt said.

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.