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California Enacts Historic Public Banking Law to Address Community Needs

California Enacts Historic Public Banking Law to Address Community Needs

California Assembly Bill 857, effective January 1, 2020, enacts a Public Banking Law, making California just the second state in the United States to authorize the formation of a public bank. North Dakota—the first state—established a state-owned bank 100 years ago.

A public bank, according to the Public Banking Institute—a group advocating for public banking—is a bank owned by the people of a state, city, community, or nation, that serves as a depository for local government funds (such as the taxes and fees collected) and that is required to benefit the public by serving community needs.

The California public banking law allows cities and counties to establish public banks. Supporters of the law say these government-owned banks can take deposits and make loans to local agencies at rates lower than commercial banks can offer because commercial banks are formed to earn profits for their shareholders. These low-interest loans can be used to support small businesses or fund infrastructure or other projects like the construction of affordable housing.

Opponents say a government-owned bank will be expensive, risky, and vulnerable to political influence.

How Does the California Law Define a Public Bank and How Is It Formed?

A.B. 857 creates a new Division 5 in the Government Code. Most of the provisions governing public banks are found there.

Sec. 57600 of the Government Code defines a “public bank” as a corporation organized under the Nonprofit Mutual Benefit Corporation Law or the Nonprofit Public Benefit Corporation Law, for the purpose of engaging in the commercial banking business or industrial banking business that is wholly owned by a local agency or agencies. (“Local agency” as defined by Sec. 50001 of the Government Code means a county, city, or city and county.)

Like any other California nonprofit corporation, a public bank is formed by filing Articles of Incorporation with the Department of Business Oversight. The Articles of Incorporation must include a purpose clause with certain language basically stating that it is a public bank and its purpose is to engage in commercial or industrial banking.

All provisions applicable to nonprofit corporations generally apply to public banks—although, in the case of an inconsistency with a provision in new Division 5, the Division 5 provision applies.

Before engaging in business, a public bank must obtain a certificate of authorization to transact business as a public bank from the Department of Business Oversight.

Restrictions on the Number of Public Banks 

Sec. 57607 provides that the Commissioner of Business Oversight may not issue more than two public licenses in a calendar year and may not issue a license to more than 10 public banks.

In addition, the Commissioner may not issue a public bank license more than seven years after promulgating regulations as required by the new law.

Other Provisions of A.B. 857

A.B. 857 contains a number of other provisions applicable to public banks—both in new Division 5 of the Government Code and in amendments to the Corporations Code, Financial Code, and Revenue and Taxation Code.

Among other things, it requires a local agency to conduct a viability study before applying to organize a public bank, requires a public bank to obtain and maintain insurance from the FDIC, exempts public banks from state and local taxes, and provides certain exemptions from the open meetings and public disclosure of records laws. For full details, consult A.B. 857.

Will Public Banks Become a New Trend?

Will the California Public Bank Law start a nationwide trend—or will it be a unique piece of legislation?

California is certainly not unique in struggling with how to deal with the problems plaguing its cities and counties and the lack of funds to address them. It remains to be seen if other states with similar struggles will follow suit and try allowing its local governments to charter public banks as a possible solution.

If so then we can add public banks to the growing list of entities now authorized that may be used to support our local communities including, among others, the public benefit corporation and LLC, social purpose corporation, low-profit LLC, and qualified opportunity fund.

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