California Public Banking Act (AB 857) Brief

On October 2, 2019, Governor Gavin Newsom signed AB 857, known as the Public Banking Act, into law. This bill, passed by the California state legislature on September 13, 2019, enables cities, counties, and joint powers authorities to establish their own public banks. This historic move allows for the redirecting of taxpayer money towards local communities rather than increasing profits for Wall Street shareholders. The California Public Banking Act marked the nation’s first step in allowing cities and municipalities to establish public banks.

How public banks serve communities

Public banks, unlike privately-owned Wall Street banks that prioritize returns for shareholders, will use their deposits to make loans that directly benefit the local community. These institutions will be able to focus on addressing specific community needs such as providing affordable housing, supporting small businesses, and financing public infrastructure projects, including post-disaster rebuilding. Not only do these investments improve the lives of community members, but they also demonstrate fiscal responsibility.

The Public Banking Act requires that public banks must obtain a banking charter from the California Department of Financial Protection and Innovation (DFPI) and adhere to the same financial and regulatory standards as commercial banks. Furthermore, these institutions will be subject to transparency laws such as the Brown Act and Public Records Act, which ensure good governance and a dedication to serving the public interest.

How the banks will be formed

The legislation mandates that cities and counties develop a business plan, which must be presented to the public and subsequently approved by their local legislature. Public banks will be established as a nonprofit public benefit or mutual benefit corporations, owned solely by cities and counties, and governed by independent boards of directors and professional bankers. In response to the Orange County bankruptcy in the mid-1990s, California enacted laws that mandate additional collateral requirements for funds deposited by local agencies. AB 857 extends these collateral protections to public deposits in public banks.

AB 857 will be initially rolled out as a pilot program, with a maximum of two licenses issued annually, up to a total of ten licenses over a seven-year period. Upon completion of the pilot program, the DFPI will conduct an evaluation of the effectiveness of California public banks. The pilot program aims to showcase the advantages of public banks for California’s local communities and governments. If the pilot program is successful, the law may be extended permanently, allowing all California communities to benefit from public banks.

Public banks will be mandated to collaborate with local community banks and credit unions to offer retail services within their jurisdiction, which will help bolster local financial institutions and enable them to make loans that benefit the local economy. Like credit unions, public banks will be exempt from taxes and, similar to public agencies, will be subject to the Brown Act and the Public Records Act. This ensures that the public has access to information about the bank’s operations and decision-making processes.

In January 2022, California’s regulatory agency, the DFPI, established the legal code and regulations for public banks. With these regulations in place, advocates are now collaborating with local governments to implement city- and region-owned public banks that cater to the specific needs of their communities.

How transparency and safety will be assured

Public bank oversight will be conducted at multiple levels to ensure transparency and accountability:

1) An independent board of directors will govern the management and operations of the bank.
2) The city or county owner of the bank will ensure alignment with their strategic goals and objectives.
3) The Department of Financial Protection and Innovation (DFPI) will oversee compliance with state laws and regulations, and ensure safe and sound operations.
4) The Federal Deposit Insurance Corporation (FDIC) will provide deposit insurance and ensure compliance with federal banking laws and regulations.

Community support

AB 857 was introduced to the State Legislature by lead authors Assemblymember David Chiu and Assemblymember Miguel Santiago. The bill is endorsed by over 100 organizations representing 3.3 million members in California including the California Labor Federation, AFL-CIO, SEIU California, California Democratic Party, California Nurses Association (CNA), National Nurses United (NNU), American Postal Workers Union, UFCW Western States Council, AFSCME California, American Federation of Teachers CFT/AFT Local 1931 and Local 2121, Our Revolution, Fossil Free California, Courage Campaign, Los Angeles County Democratic Party, Green Party of California, United Educators of San Francisco, Healthcare for All – California.

Read the bill language and accompanying resources:

AB 857 Legislation Brief
AB 857 Fact Sheet
AB 857 Flyer
AB 857 Major Endorsers
Advantages and Benefits of Public Banking Bill AB 857
AB 857 Public Bank Information & FAQs
AB 857 Bill Language