California cities could open their own public banks under new law meant to fund housing

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California cities could start their own public banks under a new law Gov. Gavin Newsom signed Wednesday in an effort to make it easier for projects in the public interest, like affordable housing, to access capital.

The measure lays out a process for local agencies to create their own public banks that would likely take years.

Opponents argue such ventures are risky and impractical. Supporters say public banks could provide an easier avenue than private banks to secure loans for projects in the public interest that may not be commercially attractive, such as affordable housing developments or small businesses.

“The public’s money should serve the public’s purpose, not line the pockets of Wall Street investors,” said the bill’s author Assemblyman David Chiu, D-San Francisco. “This is about giving local communities the option to bank elsewhere and make our tax dollars work for our communities.”

Activist movements in support of public banks have cropped up in various areas of California, including in San Francisco and Los Angeles. In Los Angeles, voters last year rejected a proposal that would have allowed the city to start its own bank.

The new law, Assembly Bill 857, would require voter approval before an agency can apply to the Department of Business Oversight to start a public bank. Agencies would need to study whether a public bank would be feasible in their community, develop a business plan, and have collateral and insurance to protect investments.

Chiu said it would likely take years to open a public bank under the bill. He noted that the law was amended to limit its scope. It allows for a maximum of 10 public banks in California and will be in effect for seven years.

Public banks wouldn’t have to pay franchise taxes, which analyses of the bill by fiscal committees in the Legislature determined could reduce state tax revenue.

There’s just one public bank operating in the United States: the Bank of North Dakota, which often partners with local banks and credit unions. Chiu said he hopes any California public banks established under the new law would do the same.

California Bankers Association opposed the bill, arguing public banks could actually harm local banks by taking away some of their business. Beth Mills, a spokeswoman for the group, also noted that public banks would need to be established with large sums of public money.

“We felt that it would potentially put taxpayer dollars at risk,” Mills said. “Public banks aren’t always in the best interest of the public.”

The new law isn’t aimed at cannabis businesses, which currently can’t do business with commercial banks under federal law. Chiu said he’s leaving that issue to his colleagues in the Legislature to address.

Jon Coupal, President of the Howard Jarvis Taxpayers Association, said he believes the commercial banking industry is already providing the services that public banks would be able to under the bill.

“If there is a service that’s being adequately provided by the private sector, the threshold should be why would government get involved?” Coupal said. “Government tends to mess up most of the things it touches.”

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