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Once an idea batted around mostly in Occupy Wall Street circles, public banking is attracting a surge of interest among policymakers in several states, including California.

“We must break Wall Street’s chokehold on state finance and develop our own state bank,” Gov.-elect Gavin Newsom said on the campaign trail.

If California had a bank controlled by the government rather than profit-hungry shareholders, public banking advocates argue, the state could fund social goods that often get the cold shoulder from commercial institutions: infrastructure projects, low-interest student loans and affordable housing. California’s treasurer and attorney general just published two studies that look at whether a state bank could help the newly legal weed industry by providing a safe repository for cash that major banks won’t accept.

Both reports gave the idea a hard “no”.

“No state-backed financial institution designed to support the cannabis industry is feasible. All alternatives fail on both risk and financial grounds,” said the report commissioned and then released by the Treasurer’s office Thursday.

Banking industry representatives, not surprisingly, also voice skepticism. “Banking is complex,” said Beth Mills, a spokesperson for the California Bankers Association. “It’s not something you can just set up overnight.”

But what precedent is there for a state bank in California? How would it work? Here are five things to know:

1) North Dakota has been doing it since 1919.

Riding a populist wave a century ago, farmers who organized into the Nonpartisan League decided they’d had enough with big-city banks raising interest on agricultural loans. They took control of state government and started the Bank of North Dakota.

“We were formed at a very special time in history, when 95 percent of the state was farmers, and the other five percent made their living off of farmers,” said bank spokesperson Janel Schmitz.

Today, the Bank of North Dakota offers student loans at interest rates lower than those available on the private market—but higher than the federal government—and subsidizes lending to farmers and small businesses. All state tax revenue flows into the bank, which earned a 17 percent return on its investments last year. When the state suffered a drought in 2017, the bank developed a disaster relief loan program to help ranchers rebuild their herds and buy feed.

Schmitz said the bank gets hundreds of calls a month from reporters and activists wondering if its model can be replicated elsewhere. Key to its success, she said, is that most of its loans are offered in collaboration with private community banks, with Bank of North Dakota funds serving as collateral, allowing the smaller bank to offer a better interest rate.

“We work with banks, we don’t work against banks,” she said. “That has been, in this day and age, critical.”

Like the Bank of North Dakota, Newsom has argued, a California state bank could invest in areas the private market eschews, such as low-interest student loans and affordable housing. But some question the scale of the benefits.

Bank of North Dakota student loans, for example, are marketed to those who have already exhausted their federal loan eligibility, said Debbie Cochrane of the Institute for College Access and Success. “If students are typically needing to borrow more than $31,000, the state shouldn’t be solving that problem with more student loan debt,” she said. “It should be solving the problem by funding the colleges and need-based financial aid to reduce students’ need to borrow.”

2) Other states are pondering public banking, too.

Lawmakers in New Jersey, Washington and Michigan are all considering creation of a state bank.

And American Samoa established its own bank in 2016 after commercial banks shut down lending to the island, a U.S. territory that subsists mostly on income from the fishing industry. Residents looking for small loans were going to a local car dealership, payday lenders or traveling to neighboring islands.

“The idea was to have a private bank start,” said the Territorial Bank of Samoa’s president, Drew Roberts, a Utah transplant and former banking industry consultant. But that effort failed when it couldn’t get backing from the Federal Deposit Insurance Corporation, which insures banks. “So the governor of the territory said, ‘We’re going to have to figure out what to do.’”

It took the bank 18 months to get a Federal Reserve account, which it needed to clear checks and electronic payments, Roberts said.

“It’s an onerous process,” he said. “There’s no question California is going to have an uphill battle, but that’s what they told us, and we did it.”

No U.S. state or territory, however, has tried public banking at the scale California likely would. The entire population of American Samoa—about 60,000—would fit into a small California city; North Dakota’s GDP, while bolstered by the state’s oil industry, is about 1/100th of the Golden State’s.

3) Banking the cannabis industry? Easier said than done

Most federally regulated banks don’t want to touch cannabis-sourced cash as long as the drug is still classified as a Schedule I controlled substance. That means the entire marijuana supply chain—from growers to dispensaries to tax collectors—is swimming in loose dollar bills. Managing all of that is a sizeable business cost, and a public safety liability.

One proposed solution: If the private bank won’t take all the weed money, why not a public bank?

As one of his final acts as California’s Treasurer, John Chiang released a report this week that sought to answer that question.

A state-run bank serving the cannabis industry would face far too many financial and legal risks and do relatively little good, said the study, which was written by a consultant. As a facilitator of a drug trade that California regards as legal but the federal government still considers criminal, the report argues that a bank’s employees could be prosecuted and its assets could be seized. And because the bank’s financial fortunes would be tied to the booms and busts of a single, nascent industry, such a bank would likely have a hard time getting its deposits insured and getting access to the federal money transfer system.

“It would have no ability to accept and clear customer checks drawn on other banks; no ability to issue checks or otherwise make payments other than in cash; and no ability to transfer funds to other banks,” the report said. “In short, it would be in the same predicament currently faced by the cannabis businesses that it is supposed to help.”

And in the years it would take a state bank to get up and running, cannabis could be legalized nationwide, making a state weed bank unnecessary.

Meanwhile Sen. Bob Hertzberg, a Los Angeles Democrat, introduced legislation earlier this month to allow the state to approve private “limited charter banks,” which would be disconnected from the rest of the financial system. Growers and other cannabis businesses could deposit cash into these quasi-banks, which would be permitted to issue checks. These checks couldn’t be deposited at non-cannabis banks, but businesses could use them to pay state taxes, buy state bonds and pay business expenses (though not wages and salaries, which are subject to federal taxes).

But there’s a hitch: If someone who receives one of those checks actually wanted to use it for anything else, they would have to go to the cannabis bank and physically haul the cash to their own branch.

“It’s not a perfect solution, it’s a partial solution,” said Hertzberg.

4) California already has a public bank … sort of

The state’s Infrastructure and Economic Development Bank loans money to local governments, nonprofits and businesses to build roads, hospitals, parks, cultural centers and other projects. The I-Bank can issue its own bonds, and in 2015 started funding renewable energy projects to help reduce the state’s carbon footprint. But with just over $1 billion in financing last fiscal year, its impact has been limited.

Allowing local governments to deposit their tax revenue in the I-Bank, some public banking advocates say, would create a bigger piggy bank to fund the state’s priorities. The bank could use the extra reserves to make more loans, at lower interest rates, they argue—and would likely choose wisely because it would be dealing with clients it already knows.

“You’re not making risky loans,” said Ellen Brown, board chair of the Public Banking Institute, a nonprofit that backs campaigns for public banks. “You’re already making those loans. But you’re refinancing at a lower interest rate and the reason you can do that is (the deposits).”

It’s an idea that shows up in the California Democratic Party’s 2018 platform, and Newsom has said he wants to directsome of the state’s $15 billion surplus towards rebuilding the I-Bank. That plan could address one of the main critiques of public banks—that new ones are costly and complicated to create.

Still, allowing the I-Bank to accept deposits “would be a pretty dramatic change,” said Nancee Trombley, the bank’s chief deputy executive director. It would likely raise a host of questions: Who would insure the deposits, the federal government or the state of California? How would taxpayers’ investments be protected?

“We don’t have the authority, the staff, or the equipment,” said Trombley. “We don’t have a trustee structure in place, we don’t have things that regular commercial banks have like safes and cash tills.”

5) Some cities are considering pint-sized public banks

If a publicly owned bank spanning the world’s fifth largest economy seems a tad ambitious, many advocates are pushing for a more modest alternative: municipal and regional banking.

Local banking would allow cities to save on the fees they currently send to Wall Street while also ensuring that taxpayer dollars are spent in a way that reflects local values, said Sylvia Chi, a representative with the California Public Banking Alliance. “People in the East Bay have different priorities than people in Orange County and Fresno.”

Advocates like Chi point to Germany, where a network of city-owned savings banks has offered small loans and other banking services across the country since the 18th century.

But even in the most progressive enclaves of California, the idea has been a hard sell. When Los Angeles voters were asked to amend their city’s charter to make way for a public bank last month, they turned down the offer 56 to 44 percent.
Other cities across the country, including Santa Fe and Seattle, have explored the possibility. The pattern: a wave of enthusiasm spurs lawmakers to call for a study, which later pours cold water on the idea.

Northern California may prove to be the exception. San Francisco is currently studying the issue and a feasibility report on a possible regional bank in the East Bay was more optimistic (though that analysis was later picked apart by Oakland’s treasurer’s office).

Why all the concern?

First, there are legal issues. California law requires banks to be insured and the Federal Deposit Insurance Corporation does not provide insurance to the nation’s two existing public banks. State regulations also require banks to be extra careful with public money; for every infusion of taxpayer dollars an asset of at least equal value has to be set aside. That would make it difficult for an institution serving as a city’s banker to actually do very much with its deposits.

The California Public Banking Alliance plans to sponsor legislation this year that would exempt public banks from these collateral requirements. But even if the state gives local banks the go-ahead, there’s the price tag. A preliminary estimate put the upfront capital cost of getting a San Francisco public bank operational at $75 to $170 million—about a quarter of the city’s rainy day fund. That’s on top of any ongoing losses that may arise if the bank’s social mission gets in the way of its ability to stay out of the red.

Assemblywoman Monique Limón hopes to answer some of these questions at a joint committee hearing she will be organizing in the coming months.

“This is the fifth largest economy in the world,” she said. “We can’t afford to get this wrong.”

CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.