San Francisco advances toward launching a public bank

Source: San Francisco Examiner

A report from The City’s Budget Analyst determined that if San Francisco were to establish a public bank, the financial benefits could create more funding for loans for affordable housing projects, small businesses and low-income households. (Jessica Christian/S.F. Examiner)

By Joshua Sabatini | December 3, 2017 

San Francisco could become the first city in the nation to launch a public bank.

Supervisors Malia Cohen and Sandra Fewer are advancing the idea of establishing a municipal bank, which would end The City’s use of profit-driven large national commercial banks for banking services.

Their efforts have led to a new city report on the idea, which was released last week. A task force to examine the idea further is expected to be assembled by late January, with a report due in six months.

The only public bank in the U.S. is the state-owned and operated Bank of North Dakota, which dates back to 1919 and remains profitable. But others may at last follow suit as Wall Street financial institutions are coming under increased criticism for banking practices and investments in fossil fuels.

Public banks are also gaining traction in the era of legalized recreational cannabis. Those in the cannabis business are unable to use banks since the drug remains illegal under federal law.

“This ongoing public banking discussion is coming at an important moment in our community,” Cohen said last week. “This month, the San Francisco Retirement Board is expected to finally discuss the vote on fossil fuel divestment. This week, in Washington, the Trump administration is working to diminish the power of the Consumer Financial Protection Bureau, thus limiting the oversight of big banks on Wall Street.”

Cohen continued, “In our long cannabis discussion, we have barely acknowledged that cannabis is currently an all-cash business — cash payroll, no banking, vaults of bills on the floors of retailers.”

Last month, California Treasurer John Chiang recommended studying opening a state bank for those in the cannabis industry to open bank accounts and pay taxes.

With the passage of Proposition 64 last year, recreational cannabis becomes legal on Jan. 1. The industry is expected to have more than $7 billion in sales and an estimated $1 billion in tax revenues.

“It is unfair and a public safety risk to require a legal industry to haul duffle bags of cash to pay taxes, employees and utility bills,” Chiang said in a Nov. 7 statement. “The reliance on cash paints a target on the back of cannabis operators and makes them and the general public vulnerable to violence and organized crime.”

Eleven other states or cities — including Santa Fe, Oakland, Philadelphia, Vermont and New Hampshire — have proposed or are studying public banks of their own.

The benefits for San Francisco were identified in a new Budget Analyst report requested by Fewer and released last week. Unlike private banks, a public bank is not motivated by profit, which means lower interest rates on loans. The return of profits would go back to The City, not shareholders, and it could mean lower costs for capital projects, which are usually funded by issuing debt through private banks.

The report said that a public bank could make more funds available for affordable housing loans and to support small business development, as well as loans to low-income households.

“Funds in the municipal bank could also be loaned and used as funding sources for city housing and infrastructure projects at lower financing costs than if such projects were to rely on debt issued through commercial banks,” the report found.

Fewer emphasized how a public bank would ensure more social responsibility with the investment of public funding, such as not having money invested with financial institutions financing the Dakota Access Pipeline for oil transport, a project opposed by Native American and environmental groups.

The report also confirmed that San Francisco has the legal authority to establish a public bank, according to the City Attorney’s Office, although it “would likely take a few years to have a city municipal bank fully up and running and able to serve as the primary financial institution for The City’s banking needs.”

The report suggested a municipal bank could launch with “its initial equity and making loans in its first year” and then “gradually build up its assets as loans are repaid with interest and new loans are originated.”

“Within a few years, the municipal bank should be able to generate sufficient revenue to be able to cover its costs and serve as the primary financial institution for The City,” the report said.

Fewer and Cohen requested a hearing last week on the report’s findings, which is expected to occur early next year in conjunction with the formation of a municipal bank city task force. The task force was called for in a resolution introduced by Cohen and approved by the Board of Supervisors in April.

While large commercial banks do offer loans to small businesses and support affordable housing, since it’s not their primary business, and San Francisco is a small part of their overall market, The City could do better to maximize use of city funds.

The application process to serve on the task force, which is under the jurisdiction the Office of Treasurer and Tax Collector Jose Cisneros, was expected to begin Dec. 1 with a Dec. 22 deadline to apply.

Even without a public bank, The City is trying to improve its banking practices.

The tax collector, which does all the banking and investment activities for The City, has also hired a new staff member who begins employment Monday to help study a public bank option and examine other investment strategies.

In October, Cisneros started a new program that could result in up to $80 million in city funds being invested in San Francisco-based banks, credit unions, and community development banks within a year, the report said. These financial services “are more consistent with serving underserved residents and community development initiatives.”

A public bank would allow the The City to increase its existing financial services provided for residents. Last fiscal year, The City spent $3.7 million on financial services for “underserved populations” — including $1.5 million for Kindergarten to College, a college savings program, and $832,000 for “smart money” coaching — and $756,000 in technical assistance services to small businesses, the report said.

The cannabis industry operates mostly in cash since financial institutions are obligated by the Bank Secrecy Act of 1970 to report suspicious activity, including marijuana financial activity. The drug remains illegal under federal law.

The report suggests the board “request an opinion from the City Attorney’s Office on legal issues regarding serving the marijuana industry” through a public bank.

The task force, which is expected to be established in late January, is charged with issuing a report within six months, including cost estimates of establishing a public bank, staffing needs and how to provide banking services for the cannabis industry.