SAN DIEGO AND THE RISE OF PUBLIC BANKING

By Brian Schrader

Photo: County administration building, from Flickr by Tony Webster

November 1, 2021 (San Diego) -- Everything old is new again, and California seems likely to revive an old idea to solve its modern challenges. Public banking isn’t a well-known or often discussed subject, but proponents believe that it might just be the catalyst of much needed reform in California.

In general, there are two kinds of public banks: investment banks and deposit-taking banks. The latter is the kind that most of us are familiar with—those that offer checking and savings accounts—and while there is an ongoing discussion about public deposit-taking banks, it’s the investment banks that are currently getting the most attention in San Diego and in Sacramento.

Investment banks lend money to other companies and earn money by charging interest on those loans. Crucially investment banks hold the power to decide what kinds of projects deserve investment and at what interest rate.

Public banking is pretty simple in concept. Cities, counties, and state governments need to put their reserves somewhere, and most choose a private bank. The city of San Diego for example keeps its reserves at Bank of America and US Bank. Those reserves are counted in the hundreds of millions of dollars and earn interest for the city, just at a very low rate typical of those offered by commercial banks. B of A and US Bank then use that money to invest in whatever they want.

A public bank, by contrast, could be chartered and owned by San Diego County and could invest its money in ways that benefit the region directly, loan the county money at a low interest rate, and then provide the county with a higher interest rate on its accounts. The bank wouldn’t have a profit motive, so the rates it offers could be significantly better for the County. This would have the double impact of not only giving the county a higher return on investment on its reserves, but it would also allow the county to borrow from the bank in lieu of issuing bonds.

Additionally, supporters of public banking argue that, "just like a traditional bank, the county’s public bank could lend money in the form of property mortgages, capital needed for housing developments or loans to nonprofits and other businesses," according to the Union Tribune.

In this way, public banks could allow cities and counties to better stave off cutbacks during recessions and accelerate the building of green infrastructure and affordable housing projects.

While there is some risk to the county taking on its own banking, proponents argue that the county is currently taking risks with for-profit banks. Jeff Olson, a local public bank advocate, explained in an interview with East County Magazine that corporate banks often aren’t willing to fund large-scale and low-profit municipal projects like building affordable housing, nor are they willing to lend for low interest rates and long-time horizons. Cities and counties are around for a long time, and public banks can take advantage of that fact, and so such terms greatly increase the region’s ability to invest in long-term, low return projects.

Under a state law that took effect in 2020, California will allow up to seven cities and regions to establish a public bank. While Oakland and Los Angeles are leading the pack, Olson hopes that San Francisco and San Diego are not far behind. He says we should expect to see the first public banks being established in the coming years. 

According to the Union Tribune, the city of San Diego is currently exploring the idea of creating a public bank.   KPBS reports that County Supervisor Terra Lawson-Remer has expressed interest in the idea as well, specifically to finance affordable housing projects.

At the state level, Los Angeles Assembly-member Miguel Santiago introduced a bill in 2019 to convert the California Infrastructure and Economic Development Bank from an infrastructure loan fund into a state-level depository bank for local governments and small businesses. The proposal failed to garner enough support to become law, but it demonstrates the continued interest in the idea of public banks in California.

While public banking has garnered a cult following in recent years, the idea is not without its critics. According to the Independent Community Bankers of America certain public banks compete with and could crowd out already ailing community banks. This criticism isn’t relevant to California’s proposed public banks, largely because these public banks would not accept consumer deposits and so don’t compete with traditional checking and savings banks. 

The banks under consideration in California right now are, "more like our own mini Federal Reserve," according to Jeff Olson. They exist to help the city finance projects and manage its money, not to provide checking and savings accounts to the public. Olson further explained that the city of San Diego’s bank would have exactly one client: the city. These kinds of public banks are closer to private investment banks, albeit with a single client.

The risks to these kinds of public banks are very different. According to Rob Nichols in an article on The Hill, "the risks of public banks are many, but a scattered business focus, undue political influence and lack of oversight top the list." He explains that public banks, with their close ties to the city, are ripe for corruption and political influence. "Nearly all failed, usually because of political interference that resulted in making risky loans or operating with too little capital (or both), then collapsing when boom times ended." He goes on to criticize the North Dakota public bank, the last remaining public bank of its kind in the United States and an institution that is both praised by its proponents as a possible example to emulate and criticized by its opponents as an antiquated remnant of a bygone era unfit to solve current problems.

As for deposit-taking public banks, the U.S. once had a robust public banking system that served every American via the postal service. So called Postal Banking allowed USPS to offer small-dollar savings accounts and check caching at token rates. The program was phased out starting in 1967.

In 2019, the FDIC found that an estimated 5.4% of Americans, and 5.6% of Californians, were unbanked meaning, that no one in the household had a checking or savings account at a bank or credit union," largely due to the fact that they lacked the money to meet minimum balance requirements.

In October, USPS began a pilot program offering check cashing for a flat fee at some post offices, exchanging the check for a prepaid gift card. While proponents of Postal Banking would like to see USPS go even further and offer full banking services, such a program would require Congressional approval.

Once again at the state level, California is investigating its own solution to help the unbanked. The passage of AB 1177 this earlier this year paved the way for California to study the impact of collaborating with private, commercial banks to help low-income households and the unbanked.  According to the Sacramento Bee, "California set a course to offer the nation’s first zero-cost, public option platform for personal financial services." The bill calls for an analysis of market feasibility for a state-backed program that would, "give Californians a public option for banking services like debit cards." Though this kind of deposit-taking program may revive the concerns of organizations like the ICBA that such a program could crowd out already ailing community banks.

The relatively recent movement to revive public banking has garnered significant success in a short period of time. Olson commented on the recent successes of the public banking movement in California saying, the movement "is unlike any project I've worked on before. It's a wave that's cresting."

It’s probably safe to say that San Diegans are set to hear a lot more about public banks in the years to come.