Twice a year, when property owners pay their local property tax bills, Alameda County Treasurer Hank Levy sees a huge influx of cash into county coffers. After paying off the county’s own bills and other expenses, there’s always some cash left over that doesn’t need to be spent right away — though it’s all earmarked for salaries, programs, projects and other costs that come up later. As do most local or state treasurers, Levy’s office invests whatever he doesn’t need to spend right away, earning some interest for the county in the meantime.

Right now, Levy’s office holds an investment portfolio of around $7 billion. About half of that is invested in U.S. Treasury Bonds or other securities backed by the Federal Government — assets that don’t earn very much interest right now but they are considered “highly liquid,” meaning Levy can sell them easily to other investors when the county needs the cash. Another 20% of the portfolio is invested in certificates of deposit at banks, which Levy can schedule out to mature on a fixed timeline that matches up with the county’s cash flow needs. Levy recently moved $200 million into certificates of deposit at 10 local banks that committed to lend at least the same amount to Alameda County residents and businesses.

A group of local activists want to give Levy a new option for the county’s portfolio — depositing some of that $7 billion in a public bank, meaning a bank that’s owned by a unit of government, holds cash from those governments, and whose lending policies and priorities are set democratically by constituents.

Friends of a Public Bank East Bay formed in 2017 to push for such a bank. It released a blueprint in March for a bank that would be jointly owned by Alameda County as well as the Cities of Oakland, Berkeley and Richmond. The blueprint envisions the bank would make loans to support more deeply and permanently affordable housing, for small businesses owned by Black, indigenous and other people of color, and potentially even do some infrastructure lending for municipalities. It would be modeled in part on the Bank of North Dakota, established in 1919 and until recently the only state-owned bank in the country. Nearly all of the Bank of North Dakota’s deposits come from the state government, which is required by law to deposit all of its revenues in the state-owned bank.

Depositing county dollars in such a bank wouldn’t be the first time Levy went where few others dared to go — he made his name as one of the first certified public accountants to do business with the cannabis industry. But even he was skeptical about the idea at first, though he’s since come around to cautiously support a public bank for the East Bay.

“Because of my training as a certified public accountant, I was a skeptic, and I still am in some ways,” Levy says. “But in this last year where the federal government has given local jurisdictions all this post-COVID recovery money and the bumps just to give it away or loan it, I’m seeing all the problems. I’ve started to think a public bank as a kind of place where money would be centralized and people could come, would be a much better idea.”

Addressing Concerns From Participants

The idea of a government-owned bank raises concerns from participants in town hall meetings, city council hearings and state agency hearings all across the country. To name just a few, there’s a common concern that politicians wouldn’t be able to resist meddling in the day-to-day affairs of a city-owned or state-owned bank, nudging loan officers to make loans to pet projects or to campaign contributors. There are also plenty of legal concerns, like whether municipalities or states have the legal authority to charter and own a bank. And there are the costs of starting up a bank. Where progress has occurred, supporters have not dismissed those concerns but rather addressed them head-on.

Philadelphia recently passed a bill 15-1 to create a public banking entity after six years of hearings and public meetings on public banking, though it’s still at least a few years from obtaining a bank charter and accepting municipal deposits. The legislation, previously covered by Next City, creates a new financial authority with three levels of oversight — a corporate board appointed by the mayor, a lending criteria-setting policy board appointed by the corporate board, and it amends the city charter specifically to grant an unprecedented level of oversight to the city’s Board of Ethics over the new Philadelphia Public Financial Authority and a potential city-owned depository institution holding municipal deposits.

In California, Friends of a Public Bank East Bay is part of a statewide coalition that drafted and pushed for the passage of municipal public bank enabling legislation in 2019. As previously covered by Next City, that legislation amended the state’s banking law specifically to give California counties and municipalities the right to pursue a banking charter from state banking regulators and lays out a process for doing so. The grassroots organizers in the coalition came from various backgrounds, including environmental justice, racial justice, organized labor and former Occupy Wall Street activists.

“For me and maybe some others, it felt like a response to the 2016 election,” says Debbie Notkin, board member at Friends of a Public Bank East Bay. “There was so much to resist and be afraid of, to push back against, I knew I had to be building something that would last, or I would just fall into despair.”

A Broader Push for Public Banks

A handful of California cities over the past few years have produced studies looking into municipally-owned banks, including a 2018 feasibility study for a multi-city public bank in the East Bay. While lengthy and chock-full of information on the potential of such a bank to address unmet credit needs in the region, that earlier study lacked two key components that local legislators said they were looking for — a viable financial model for a proposed multi-city public bank, and a clear legal and financial roadmap to obtain a charter and launch such a bank.

The 2019 enabling legislation established a clear answer to the legal roadmap question. The new blueprint produced by the Friends of a Public Bank East Bay, known under the legislation as a “viability study,” is the first step. It’s the first such study to be drafted according to the requirements outlined in the legislation — including a financial model for a would-be multi-city public bank serving Alameda County (which contains Oakland and Berkeley) and Richmond (located in neighboring Contra Costa County). Several other California cities are at various stages of their public bank viability studies, including San Francisco, San Jose, Los Angeles, Long Beach and San Diego.

The proposed Public Bank East Bay financial model includes what kinds of loans the bank would make, how much demand for those loans there is in its target area, where the bank will get its startup capital, and how it will raise deposits or other funds to back its loans. It also offers ten years of financial projections and details assumptions made to generate those projections. The assumptions are based on information gathered from public sources as well as conversations with professionals in banking, renewable energy, community development and affordable housing. The viability study also details risks to the bank, as well as offering strategies or suggestions to mitigate those risks.

“We’re not saying this is the only path for a viable public bank to take, we’re just saying that there is a viable path here,” says Tom Sgouros, a banking and public finance policy consultant from Rhode Island. Friends of a Public Bank East Bay contracted him to direct the viability study research after finding him through connections fostered by the Public Banking Institute, a national organization that promotes public banks across the U.S.

Supporting Affordable Housing, Small Businesses and Green Energy?

The viability study identifies four lines of lending business for a Public Bank East Bay — affordable housing, small business, green energy and municipal bonds.

On affordable housing, the proposed multi-city/county public bank could provide short-term predevelopment loans to allow more community-oriented developers such as community land trusts to acquire properties. On green energy, Sgouros and his team interviewed renewable energy consultants about transactions where current lenders could work with a public bank to share risk or support more favorable loan terms for borrowers. By avoiding typical bank costs like branches and marketing, a public bank can pass those savings along to borrowers in the form of lower interest rates.

On small business loans, Friends of Public Bank East Bay commissioned the Bay Area Organization of Black-Owned Businesses to do a survey of borrowing needs of Black-owned businesses. The study found a need for smaller loans on more favorable terms. The viability study envisions Public Bank East Bay would partner with federally-certified Community Development Financial Institutions in the region, using loan participation to support more loans at the smaller amounts that entrepreneurs of color need but struggle to get elsewhere — an average of $40,000 per loan.

In a loan participation, a local lender originates the loan but another lender comes in behind the scenes to supply part of the borrowed amount, and the lenders share the loan repayments as they come in. The Bank of North Dakota mainly works through loan participations, in addition to student loans which it offers directly to borrowers. In a typical year, the Bank of North Dakota says it does about 800 loan participations in support of businesses and farmers across the state of around 760,000 residents. Alameda County is more than twice that size, with 1.6 million residents.

“With each program area, we tried to make sure demand seemed adequate to fill out the fraction of the portfolio we assigned to it,” Sgouros says.

For startup capital, the viability study proposes Oakland, Berkeley, Richmond and Alameda County would invest a total of $40 million to become owners of the bank. The $40 million would be held in non-interest-bearing accounts at the proposed bank and would stay there permanently as “pledged deposits.” This kind of ownership structure is known as a “mutual bank,” and while it used to be more common, there are still 449 mutual banks across the country. Since the pledged deposits would be permanent, they would be the only real startup cost for the bank to the three cities and Alameda County, assuming the bank meets its projections and starts generating positive income from year four onward.

In addition to raising $40 million in pledged deposits, the proposed Public Bank East Bay would initially sell around $100 million in short-term bonds, certificates of deposit or other conventional investments to Levy’s office and his counterparts in the three cities. This $100 million would bear interest and could eventually return to the cities and county coffers if they need the cash. The Public Bank East Bay’s financial projections envision selling investments in 1, 3, and 5-year terms, paying 0.5%, 1.0%, and 1.5% interest, respectively. The initial amount, $100 million, is based on each government placing around 1% of their investment portfolios into the Public Bank East Bay.

The projections envision the bank growing over time as each government’s investment portfolio grows and so that 1% would also grow in dollar amount terms. The projections also assume that the Public Bank East Bay will eventually be able to raise a small portion of its deposits from foundations or nonprofits — but not from individuals. The state-level enabling legislation prohibits public banks from competing with local financial institutions, which makes it very hard, if not impossible, for public banks to hold deposits from individuals. While it’s holding these dollars, the Public Bank East Bay would leverage them to support a portfolio of loans that starts out at $75 million in its first year and grows to $210 million by the end of year 10.

When it’s eventually submitted to the state’s banking regulatory agency, the California Department of Financial Protection and Innovation, the Public Bank East Bay charter application must include a much more detailed business plan based on its financial model. State as well as federal banking regulators would independently scrutinize the public bank’s full business plan before approving a charter, just as they do with private bank charter applications. It’s typical for private bank charter applications to take one or two years before approval, and it’s not unusual to take longer.

Ultimately, state or federal banking regulators would be one of the biggest guardrails against politicians interfering with bank lending decisions. They would examine public banks just like private banks on an annual or bi-annual basis for safe and sound lending practices. They would have the power to sanction or even close public banks for mismanagement, such as politicians interfering with lending decisions. In North Dakota, the state’s Department of Financial Institutions examines the Bank of North Dakota every two years, just like it does every other bank chartered in that state.

A public bank may have a different ownership structure that isn’t driven to maximize shareholder profits. Because of that, it may have different incentives for its loan officers, but professional banking staff would be responsible for day-to-day lending decisions as they do at private banks. Any departure from that would raise red flags with bank regulators.

Why Let the City Lend the City’s Own Money?

“One question we get a lot from a person on the street is, ‘Why would I let city [officials] lend the city’s own money?’” Notkin says. “But it’s not; it would be professional bankers making [lending] decisions.”

Board members may need to approve some loans above a certain threshold, but their primary responsibility will be shaping the loan programs and criteria that bank staff will use to make loans on a day-to-day basis.

Friends of a Public Bank East Bay is already inviting potential community representatives to submit their names to the nonprofit for consideration as public bank board members. Still, the exact process for selecting those directors is not yet completely clear to all involved or who want to be involved. In a Richmond City Council hearing earlier this month on the Public Bank East Bay viability study, several public commenters and council members expressed concerns that the board selection and the overall public bank formation process need to have more transparency and connection to a wider spectrum of their community.

Nothing about the Public Bank East Bay’s financial model or governance is really final until it receives a banking charter, which is far from guaranteed. Regulators may require changes to business plans, board members or governance structures in the process of approving a bank charter application. It’s only after granting a bank charter that bank regulators generally expect new banks to stay their course for at least three years before making any major changes to lending products or lines of business.

Even after participants raised their concerns at the April hearing, Richmond City Council became the first to endorse the 2022 Public Bank East Bay viability study by a 3-1 vote, with two abstentions. Endorsement doesn’t mean Richmond will start moving city deposits into the bank. What it means is that Richmond is committed to joining the bank’s application for a banking charter as a founding member, and it designated a city council member to serve as its designated Public Bank East Bay board member.

The Richmond endorsement resolution also amended the city investment policy to allow the city treasurer to invest in the bank as well as make deposits in the bank once it obtains a banking charter from state banking regulators. Oakland, while it has yet to endorse the viability study, went ahead last June and amended its city investment policy to allow for investments into a public bank.