The County of Santa Clara


Under advisement from April 23, 2019 (Item No. 10): Consider recommendations relating to Assembly Bill 857, related to public banks. (Office of the County Executive)


Department:Office of the County ExecutiveSponsors:

Multiple Recommendations

Possible action:
a. Receive report from the Office of Intergovernmental Relations relating to Assembly Bill 857.
b. Approve a neutral position on Assembly Bill 857.
c. Approve a support if amended position on Assembly Bill 857.



The Finance and Government Operations Committee received a report on Assembly Bill 857 (AB 857) at its June 13, 2019 (Item No. 9) meeting. AB 857 provides authority for local agencies to establish a public bank. The report included Administration’s recommendation to take a neutral position on the bill. This recommendation was made after review of the benefits and the potential risks and liabilities of establishing and operating a public bank, which are described in the Reasons for Recommendation section.


The Committee forwarded the report to the Board with a recommendation to support AB 857 if it is amended to address concerns expressed by the Administration, the most significant one being the liability associated with the establishment and operation of a public bank. AB 857 raises concern about whether a public bank could be formed without running afoul of the California Constitution. The bill acknowledges this question with its requirement that any public bank study commissioned by a local agency must include a legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article XVI of the California Constitution. Amendments to the bill that address the constitutionality of a public bank or place this risk upon the state would help alleviate some of the Administration’s concerns related to the bill.



There are no fiscal implications associated with the Recommended Actions.



AB 857 was introduced by Assemblymember David Chiu (D-San Francisco) and Assemblymember Miguel Santiago (D-Los Angeles). The bill creates a process for local agencies to form a public bank. The bill defines a public bank as a corporation organized for the purpose of engaging in the commercial banking business or industrial banking business that is wholly owned by a local agency, local agencies, or a joint powers authority that is composed only of local agencies. A public bank will be required to obtain and maintain deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) and to comply with all requirements of the Financial Institutions Law and the Banking Law. The bill requires a local agency to conduct and approve a study on the viability of a public bank before moving forward with an application for a public banking charter that must be provided to the Commissioner of Business Oversight as part of an application. The study is required to be presented to and approved by the governing body of the local agency and a motion to move forward with an application must be adopted. Amendments to AB 857 made on July 9, 2019 require the motion to move forward with an application to be presented to and approved by voters at the next regularly scheduled election held at least 180 days following the vote of the governing body.


The bill states the intent of the Legislature that the purpose of a public bank is to achieve cost savings, strengthen local economies, support community development, and address infrastructure and housing needs of localities. Bill language also states it is the intent of the Legislature that public banks shall partner with local financial institutions, such as credit unions and local commercial banks, and shall not compete with local financial institutions.


The April 22, 2019 analysis of the bill by the Assembly Banking and Finance Committee states that according to the author, AB 857 provides more local control, transparency, and self-determination in how local taxpayer dollars are leveraged in the banking system by allowing local governments to charter their own public banks. The public banks would have oversight from the Department of Business Oversight (DBO), which would issue a public bank charter and provide regulatory oversight of the bank’s operations. The author also points out that in contrast to profit-driven commercial banks, the public bank’s board of directors will have a fiduciary duty to protect taxpayers’ assets. The creation of a public bank will provide that taxpayer money is held by an insured financial institution that measures its return on investment not only by profits, but also by its success in supporting communities.


According to the bill’s sponsor, the California Public Bank Alliance, many private commercial banks engage in practices that could be seen as inconsistent with the values of California communities, such as engaging in predatory lending practices, funding private prisons and detention centers, and extracting fossil fuels in environmentally unsustainable ways.


The attributes that the author highlights and the sponsor’s point of view support the establishment of a public bank. However, the substantial investment needed to start a bank, implementation issues, and the inherent risks of the banking industry are significant and raise concern about a local agency operating a public bank, particularly because the venture would be financed and operated with taxpayer money.


A significant and unanswered question is the constitutionality of a public bank. The required study that local governments must conduct to assess the viability of a proposed public bank must address six elements that are specified in AB 857, one of which is “a legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article XVI of the California Constitution, but nothing herein shall compel the waiver of any attorney-client privilege attaching to that legal analysis.”  Section 6 of Article XVI (Attachment A) on its face prohibits the giving or lending of the County’s credit to any person, association, or corporation, whether municipal or otherwise. It also prohibits the making of gifts of public funds.


AB 857 does not amend the Constitution to ensure the legality of a public bank. Rather it directs the question to local agencies to analyze and address. This places the legal risk on local agencies that are considering the establishment of a public bank.


In balancing the benefits of a public bank with its posed risks, the Administration recommends that the County take a neutral position on AB 857. If the bill is enacted into law, the Administration will prepare a report relating to the legal, fiscal, and policy implications around municipal public banking for the Board of Supervisors’ consideration.



The recommended action will have no/neutral impact on children and youth.



The recommended action will have no/neutral impact on seniors.



The recommended action will have no/neutral sustainability implications.



The term public bank is used to describe a bank owned by a public entity. The concept of public banking is not new. In recent years, the California Legislature considered two bills that proposed establishing a public bank that would be owned and operated by the state, but neither bill was enacted into law. In the past ten years, nine different cities and states conducted studies on public banks. One study is ongoing, but no new state or local public banks have been established. There are currently few public banks in the United States, with the most prominent being the Bank of North Dakota.


The Bank of North Dakota (BND) was established in 1919 to help area farmers have access to banks when private banks were too few in the area. It operates one branch office in Bismarck and all state funds must be deposited with BND unless specific authority allows for outside investment. Most of its deposits come from the state’s collection of taxes and fees, with the balance of deposits coming from corporate accounts, North Dakota city and county government entities, and North Dakota residents. BND maintains strong relationships with financial institutions in the state and does not compete with them. While individuals receive student loans directly from BND, they are not targeted for other loan or retail accounts. BND does not offer credit card or automated teller machine (ATM) services to the general public. Individuals and businesses must work with their local financial institution for business, residential, and most agriculture loans. Requests from a local bank or credit union to participate on a loan with BND or access to BND programs must come through the lead financial institution, not the borrower.


A substantial investment is needed to start a bank, and this is one reason that states and local agencies have yet to form a public bank. In 2018, the Office of the State Treasurer in the State of Washington reviewed and summarized the most current studies that states and municipalities completed regarding public banking (Study of the Studies: A comprehensive review of state, municipal, city and public banking). Most of the studies concluded that a significant investment is needed to start a public bank. Estimated costs ranged from a very small public bank of $15 million to a large institution of $3.6 billion. In one example, the State of Oregon study and the State of Washington study completed by The Center for Innovation indicated that a state bank would need $100 to $300 million, with sources including bonds, general fund revenue, bank stock initial public offering (IPO), and the states’ pension funds. The City and County of San Francisco estimates approximately $15 to $50 million would be needed:  $1 million regulatory startup costs, $10 to $30 million for capital, $500,000 to $1 million in information technology (IT) and data systems, and 15 employees with salaries totaling about $2 million per year.


Bank formation and operation requires consideration of wide-ranging implementation issues. If a local agency desires to form a public bank, AB 857 requires a local agency to conduct a study of the viability of a proposed public bank. The local agency is also required to apply for a bank charter with the Department of Business Oversight (DBO) through the same process provided for traditional commercial banks. Under existing law, the Commissioner of DBO cannot approve the application until he or she has ascertained to his/her satisfaction that, among other findings:


a)     The proposed bank will have a reasonable promise of successful operation.

b)    The proposed capital structure is adequate.

c)     The proposed officers and directors have sufficient banking experience, ability, and standing to afford reasonable promise of successful operation.


A public bank must be a member of the Federal Reserve System to access the critical systems and networks that connect the commercial banking system. The law grants discretion to the Board of Governors of the Federal Reserve System to accept or reject an application based on, among other factors, the financial condition of the applying bank, the general character of its management, and whether or not the corporate powers exercised are consistent with the Federal Reserve Act. Even if state and local laws permit the establishment of a public bank, it would still need approval from the Federal Reserve to connect with the rest of the banking system. Failure to receive this approval would severely impact a public bank’s ability to operate.


Another implementation issue is the Federal Reserve Bank’s requirement that banks maintain a reserve against deposit liabilities in very safe, secure assets. If a bank’s reserve liabilities exceed $124.3 million, it must maintain a reserve of 10 percent of those liabilities.


A depositary bank requires a complex administrative infrastructure to provide a full scope of services. Store-front locations and business offices would be needed for a retail operation, as would skilled staff to provide services to both bank customers and to fulfil the full range of regulatory and administrative requirements associated with bank operations. One of the most critical needs of any bank is a software system that would record all bank transactions. A software system would need elements associated with security, auditing, and regulatory compliance and reporting.


The banking industry faces numerous risks and the number of banks that fail is notable. The FDIC is often appointed as receiver for failed banks. According to its failed bank list on its website, 555 banks in the United States have failed since 2000. Of this number, 38 were in California. On risk, banks face the following types: credit, market, operational, liquidity, business, reputational, systemic, and moral hazard. Of these, the major challenges that banks face are credit risk, market risk, and operational risk. Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers, including the risk of delayed payments, and results in cash flow problems. Market risk is the possibility of loss to a bank caused by the changes in the market variables. It is the risk that the value of on/off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates, and commodity prices. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. This includes human error, fraud and malice, and failures of information systems.


The County’s Finance Agency is responsible for managing revenue and cash flow for the County, determining the appropriate daily cash needs of the organization, and ensuring that sufficient liquid assets are available for the County to pay its obligations. State law permits the investment of surplus funds not required to meet the daily cash needs and prescribes the way funds may be invested while considering the safety of principal, liquidity, and yield.


The Finance Agency has developed a system that ensures careful management of the County’s financial resources. The County’s banking needs are considerable. Approximately $14.3 billion in deposits are collected yearly and as of April 30, 2019 the County Investment Pool had $9.054 billion in assets under management. The County’s investments are safekept by a custodial bank. A separate bank provides commercial banking services, which include processing payroll and vendor payments for the County, schools, and special districts; servicing 173 bank accounts; and conducting daily reconciliations of all receipts and balances.




Support:  Many unions, nonprofit organizations, and local governments have expressed support for AB 857. These includes the following: California Nurses Association, American Federation of State, County and Municipal Employees (AFSCME) Council 57, Fossil Free California, Healthcare for All, South Bay Progressive Alliance, City and County of San Francisco, City of Los Angeles, and City of Oakland.


The City of San José has a support if amended position. It would like the bill to be amended to create a state public bank in addition to providing the framework for local government public banks.


Opposition:  The following organizations oppose AB 857:  Bay Area Council, California Association of Treasurers and Tax Collectors, California Bankers Association, California Chamber of Commerce, California Community Banking Network, California Credit Union League, California Taxpayers Association, and Howard Jarvis Taxpayers Association.


AB 857 is in the Senate Appropriations Committee and is scheduled to be heard on August 12, 2019.



Failure to approve the recommended action will prevent the County of Santa Clara from expressing a position on AB 857.

Meeting History

Aug 13, 2019 9:30 AM Video Board of Supervisors Regular Meeting

Three individuals addressed the Board.

Supervisor Wasserman moved to approve a neutral position on Assembly Bill 857 (AB 857). The motion failed for lack of a second.

The Board received the report and approved a support if amended position on AB 857.

MOVER:Dave Cortese, Supervisor
SECONDER:Cindy Chavez, Vice President
AYES:Cindy Chavez, Dave Cortese, Susan Ellenberg, S. Joseph Simitian
NAYS:Mike Wasserman