The public banking movment is growing

Included are: an article by Pam Martens on public banking: AB 2500, a public banking bill in the California state Legislature; and an analysis of AB2500 The bill was introduced by Assemblyman Ben Hueso, D-Chula Vista, who withdrew it from a committee hearing in April of the 2011-12 session. We don't know if he will reintroduce it in the 2013-14 legislative session.  
Badlands Journal editorial board
 
11-15-12
Wall Street On Parade
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Public Banks: Removing Job Growth From the Corrupt Jackboot of Wall Street

By Pam Martens: November 15, 2012
http://wallstreetonparade.com/2012/11/public-banks-removing-job-growth-f...
Throughout the United States there are critical functions that society deems too essential to leave to the vagaries of the profit driven marketplace.  Fire and police departments, public schools, parks, libraries, roads, tunnels and bridges – all paid for with taxpayer dollars and overseen by government.  So why shouldn’t the U.S. have a parallel system of public banks with a public mandate and accountable to the people  – especially at a time of unprecedented corruption in commercial banking under the jackboot of Wall Street.

Until the repeal of the Glass-Steagall Act in 1999, it was illegal for Wall Street firms to  own commercial banks. 

Commercial banks made loans to consumers and businesses and Wall Street investment banks were assigned the job of allocating capital to worthy business enterprises by underwriting their stock and bond offerings. Today, just five Wall Street firms, JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and  Goldman Sachs Group Inc. are not only underwriting securities, they control 48 percent of total banking system assets according to the St. Louis Federal Reserve.

At the end of 2011, these five firms controlled $8.5 trillion in assets, equal to 56 percent of the U.S. economy. The largest of the banks, JPMorgan Chase & Co., had $1.8 trillion of assets, equal to 14 percent of the total of all 7,307 FDIC insured banks.

That level of concentration should be a wakeup call to a country that was brought to the brink of financial collapse because of a systemically corrupt culture on Wall Street and  interlocking deals that tied the fate of one firm to the survival of another. (Too big to fail was also too interlocked to fail, thus the government bailout of Citigroup and AIG and the shotgun marriages of Bear Stearns and Washington Mutual to JPMorgan Chase and Merrill Lynch to Bank of America.)

Equally important, those concentrated assets are not flowing into efficient, long-term job creation.  In many cases, the assets are engaged in criminal enterprises that boost bonuses on Wall Street while leaving the unemployed and underemployed struggling to feed their families and the Nation teetering toward the next leg of the mislabeled “Great Recession.”  This was no recession; this was the inevitable economic collapse resulting from an institutionalized, corrupt, interlocked wealth transfer system.

Before we outline the critical role that public banking could play in today’s dysfunctional brand of casino finance, let’s recap how Wall Street brought the country to its knees and why we can no longer trust it with our savings or to allocate capital to essential, job producing projects: 

    Wall Street had insider knowledge that subprime loans were going to take down the housing market because Wall Street incentivized their employees to approve loans to people who could not afford the mortgage payment and, in cases like Citifinancial, also loaded up the loans with insurance products;

    After Wall Street created the bad mortgage loans, they sold loans they knew to be likely to default to Fannie Mae and Freddie Mac, knowing the firms could fail as a result;

    Wall Street hated plain vanilla products like U.S. Treasury securities because they could not hide exorbitant fees.  Wall Street created Collateralized Debt Obligations (CDOs) because it could bury its exorbitant fees and bundle up all of its bad loans and sell them off to unwary pension funds and institutional investors.  CDOs transformed Wall Street into a mafia-type warehouse and distribution system through securitization – bundling up toxic product and selling it off to others. Mortgages, credit card payments, auto loans, student loans, and dodgy debt from other financial firms were bundled and sold to yield-hungry investors;

    The rating agencies entrusted with the critical role of providing honest ratings of these CDOs were corrupted by being paid for the ratings by the Wall Street firms;

    Again, Wall Street had insider knowledge that many of these CDOs were ticking time bombs.  To profit from this knowledge, Wall Street firms bought Credit Default Swaps on the CDOs, a form of insurance that would pay off when the CDO defaulted or rise in value as the credit worthiness of the CDO declined.  AIG sold this insurance through its AIG Financial Products division. When AIG failed, the U.S. government paid 100 cents on the dollar to Wall Street firms for the Credit Default Swaps they had purchased from AIG to insure their very own toxic CDOs, clearly demonstrating to Wall Street that the taxpayer was the easiest mark of all;

    Not content with just destroying the U.S. housing market, Wall Street saw other suckers to be fleeced – public school districts, towns, counties, cities and state treasuries.  Knowing that it was only a matter of time before its massive issuance of mortgages to people who could not afford them would blow up the housing market and create a long-term downturn, bringing rates to record lows, it sold tens of billions of dollars of interest rate swaps to these public entities.  The public entities would receive a variable rate tied to Libor; Wall Street would receive a higher, fixed rate.  Wall Street then proceeded to engage in a conspiracy to rig the Libor interest rate to its advantage.  Typically, the public entity ended up receiving a fraction of one percent in interest, while contractually bound to pay Wall Street firms as much as 3 to 6 percent in a fixed rate for twenty years or longer. To get out of the deals, public entities have been forced to pay Wall Street tens of billions of dollars in termination fees.

And these are just the mileposts of what we know so far.

On October 23, the Philadelphia City Council held a hearing on the interest rate swaps sold to it by Wall Street firms.  Mike Krauss, a director of the Public Banking Institute, an organization formed in January of 2011 to advocate for public banks, was one of the speakers.  Krauss testified that budget cuts that resulted from losses on the swaps were having “catastrophic effects on the city’s people and neighborhoods.”

Krauss added: “A handful of banks crashed the economy, virtually the same banks that sold the swaps. They were rescued by taxpayers and the American people – including those of this city – when they crashed their own casino. But the long recession they caused also collapsed municipal tax revenues, putting enormous pressure on municipal and school district budgets. The state cut spending and the cuts grew more severe.  Now, these same banks that caused the crash are demanding payment on their one sided interest rate deals, or huge fees to exit the swaps.”

Krauss urged the City Council to look for new banking models to replace failed systems and create a Public Bank of Philadelphia.  “A public bank will keep the taxes and other financial assets of the people of this city circulating in the city, by leveraging them to provide the sustainable and affordable credit required in a modern economy to power locally directed economic development and jobs creation,” said Krauss.

Ellen Brown, a public interest writer and attorney, is the Chairman and President of the Public Banking Institute.  The organization says its vision is to: “establish a distributed network of state and local publicly-owned banks that create affordable credit, while providing a sustainable alternative to the current high-risk centralized private banking system.

This network will act in the public interest, using its counter-cyclical credit-generating capacity to stabilize potential credit crises, maintain the floor against threats of asset devaluations, build infrastructure, and fund expansion of critical industrial productive capacity. Most important, public banking will create jobs, by partnering with local banks to fund local business, advancing credit for public infrastructure, and augmenting government revenues.”

In an article for TruthOut, Brown says North Dakota is the only U.S. state to have a public bank and it was because of this bank that North Dakota was able to escape the 2008 banking crisis, sport a sizeable budget surplus every year since then, the lowest unemployment rate in the country,  the lowest default rate on credit card debt and the lowest foreclosure rate.

Contrast that to California, says Brown: “At the end of 2010, it had general obligation and revenue bond debt of $158 billion. Of this, $70 billion, or 44 percent, was owed for interest. If the state had incurred that debt to its own bank — which then returned the profits to the state — California could be $70 billion richer today. Instead of slashing services, selling off public assets, and laying off employees, it could be adding services and repairing its decaying infrastructure.”

There’s one other positive to support the creation of public banks – competition to Wall Street.  Reforming Wall Street cannot happen under the current compromised Congress; under the current campaign financing system; under the corrupt revolving door between Washington and Wall Street; under a system that rewarded the supervisory failures of the New York Fed by giving it greater oversight of Wall Street while continuing to allow Wall Street execs and their cronies to sit on its Board of Directors.  The entire system is malignant and an insurmountable obstacle to the Nation’s economic recovery.  We have watched for four years as Congress failed to reform Wall Street.  The one thing that might actually stand a chance of reforming it is honest competition that provides an honest alternative.
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Both AB2500 and its analysis below are from leginfo.ca.gov/billinformation --bj

BILL NUMBER: AB 2500 INTRODUCED BILL TEXT INTRODUCED BY Assembly Member Hueso FEBRUARY 24, 2012 An act to add Part 9.5 (commencing with Section 17750) to Division 4 of Title 2 of the Government Code, relating to state government, and making an appropriation therefor. LEGISLATIVE COUNSEL'S DIGEST AB 2500, as introduced, Hueso. State government: California Investment Trust: state bank. Existing law authorizes the Infrastructure and Economic Development Bank to enter into loan agreements with a sponsor or a participating party in order to finance a project related to infrastructure or economic development. Existing law provides that all money in the possession of, or collected by, any state agency or department is state money and is subject to provisions governing its deposit and handling in trust accounts. Existing law authorizes the Pooled Money Investment Board to invest surplus state money held in the Pooled Money Investment Account in accordance with certain procedures. This bill would establish the California Investment Trust within state government, and would authorize the trust to exercise various powers and duties relating to banking, including, among others, receiving and managing deposits from public funds, loaning money, engaging in financial transactions, and buying and selling federal funds. The bill would require all state money, as defined, to be deposited into the California Investment Trust. The bill would establish a California Investment Trust Board to be chaired by the Treasurer, and would establish an advisory board for purposes of advising the board. The bill would establish the California Investment Trust Fund for deposit of all state moneys, and would continuously appropriate those moneys to the board for expenditure, thereby making an appropriation of General Fund moneys. The bill would require the State Auditor to make specified audits of the trust, and require the State Auditor, Department of Finance, and the Controller to make specified reports to the Legislature with regard to the trust. The bill would exempt certain documents of the trust from public disclosure. Existing constitutional provisions require that a statute that limits the right of access to the meetings of public bodies or the writings of public officials and agencies be adopted with findings demonstrating the interest protected by the limitation and the need for protecting that interest. This bill would make legislative findings to that effect. Vote: 2/3. Appropriation: yes. Fiscal committee: yes. State-mandated local program: no. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Part 9.5 (commencing with Section 17750) is added to Division 4 of Title 2 of the Government Code, to read: PART 9.5. California Investment Trust CHAPTER 1. FINDINGS AND DECLARATIONS 17750. The Legislature finds and declares all of the following: (a) California communities have suffered greatly since the financial crisis of 2007. During the last several years, monthly unemployment levels have remained above 10 percent leaving millions of Californians out of work. Bankruptcies among small businesses and individuals are up, capital markets are tight, and local communities have limited resources to address their economic and community development challenges. (b) Independent analysis has shown that a state bank can do all of the following: (1) Support in-state economic development by increasing access to capital for businesses in the state. (2) Support job creation and retention through increased and sustained business lending. (3) Provide stability to the local financial sector. (4) Reduce the cost paid by state government for banking services. CHAPTER 2. DEFINITIONS 17751. For the purposes of this part, the following terms have the following meanings: (a) "Advisory board" means the advisory board of the trust. (b) "Board" means the board of directors of the trust. (c) "California Investment Trust" or "trust" means the California Investment Trust established pursuant to this part. (d) "California Investment Trust Fund" or "fund" means the fund established by Section 11757 for the deposit and appropriation of state money. (e) "Financial institutions" means banking or savings organizations, including, but not limited to, banks, savings and loan associations, and credit unions authorized to conduct business in California, and state-chartered commercial banks, trust companies, and savings and loan associations. (f) "Public funds" means public funds of any local entity or financial bank. (g) "State-chartered bank" means a corporation incorporated under Division 1 (commencing with Section 100) of Title 1 of the Corporations Code that is, with the approval of the commissioner, incorporated for the purpose of engaging in, or that is authorized by the commissioner to engage in, the commercial or industrial banking business, and, in that capacity, may carry out various powers and duties, including, among others, the receipt of private deposits, and the loaning and investment of money. (h) "State money" means all general fund money in the possession of, or collected by, any state agency or department that is not otherwise restricted for expenditure by the California Constitution. . CHAPTER 3. THE CALIFORNIA INVESTMENT TRUST 17752. (a) The California Investment Trust is hereby established within state government as an independent entity. (b) The purposes of the California Investment Trust are all of the following: (1) Supporting the economic development of the state by increasing access to capital for businesses and farms within the state in partnership with local financial institutions. (2) Providing stability to the local financial sector without entering into competition with community banks, credit unions, or other financial institutions. (3) Reducing the cost paid by state government for banking services. (4) To return profits, beyond those necessary to accomplish the mission and sound operations of the trust, to the General Fund. CHAPTER 4. THE CALIFORNIA INVESTMENT TRUST BOARD 17753. (a) The California Investment Trust Board is hereby established within the trust. The board shall operate, manage, and control the California Investment Trust. The board shall locate and maintain places of business of the trust. The board shall adopt and enforce orders, rules, and bylaws for the transaction of the trust's business. (b) The board shall consist of all of the following: (1) The Governor or his or her designee. (2) The Treasurer. (3) The Controller or his or her designee. (4) One member appointed by the Senate Committee on Rules and having a background in one or more areas of finance, including, but not limited to, individuals working in for-profit and nonprofit financial and academic institutions and economic development practitioners. (5) One member appointed by the Speaker of the Assembly and having a background in one or more areas of finance, including, but not limited to, individuals working in for-profit and nonprofit financial and academic institutions and economic development practitioners. (c) The Treasurer shall act as chairperson of the board. The board shall establish rules requiring the holding of regular meetings and specifying the means for providing notice of the meetings consistent with Article 9 (commencing with Section 11120) of Chapter 9 of Part 1 of Division 3. (d) The powers of the board and the functions of the trust shall be implemented through actions taken and policies and rules adopted by the board, subject to Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 and Section 11758. (e) Three members of the board shall constitute a quorum to transact business and exercise all rights, duties, and powers of the board. (f) The board shall appoint a president of the trust. The person appointed as president shall have extensive experience in banking. The board may appoint and employ any subordinate officers, employees, and agents as the board considers necessary, and shall define the duties, designate the titles, and fix the compensation of all those persons. The board may designate the president or other officers or employees as its agent in respect to the functions of the trust, subject to the supervision, limitation, and control of the board. (g) The board may remove and discharge any and all persons under subdivision (f) or Section 11754. CHAPTER 5. ADVISORY BOARD 17754. (a) To enlist the help of private enterprise and to encourage more active use of the purposes for which the California Investment Trust is established, the board shall appoint an advisory board of directors that consists of seven members. (b) The members of the advisory board shall include: (1) One representative of this state's financial industry sector. (2) One representative of this state's small business sector. (3) One representative of this state's agricultural sector. (4) One representative of this state's labor groups. (5) At least two members shall be officers of state-chartered banks who do not maintain offices outside the boundaries of this state. (c) The board shall appoint a chairman, vice chairman, and secretary of the advisory board. The term of office of directors shall be set by the board, but may not exceed four years. (d) The advisory board shall do all of the following: (1) Meet regularly with the management of the trust to review the trust's operations and finances to determine whether recommendations should be made by the advisory board to the board relating to improved management performance, better customer service and overall improvement in internal methods, procedures and operating policies of the trust. (2) Make recommendations to the board relating to the establishment of additional objectives for the operation of the trust. (3) Make recommendations to the board concerning the appointment of officers of the trust. (4) Meet every annual quarter with the board to present recommendations concerning the trust. (5) Participate on loan committees, if created by the board. CHAPTER 6. STATE MONEYS 17755. (a) The California Investment Trust may accept deposits of public funds. The trust may not accept deposits of private funds. (b) All state moneys shall be deposited in the California Investment Trust Fund. All income earned by the trust for its own account on state moneys that are deposited in, or invested with, the trust to the credit of the state shall be credited to, and become a part of, the revenues and income of the trust. (c) Whenever any public funds are deposited in the trust, the official having control of the public funds and the sureties on the bond of the official shall be exempt from all liability by reason of loss of any of the funds deposited in the trust. (d) The trust shall pay interest on public deposits at a rate comparable to average statewide rates paid by private depositories of public funds and may offer other financial products to state entities on a competitive basis. CHAPTER 7. POWERS 17756. The California Investment Trust may do all of the following: (a) Make loans in the form of participation loans in which the originator of the loan is a financial institution doing business in this state that meets safety and performance standards that are generally accepted by state or federal financial regulatory agencies and the purpose of the loan is for operation or expansion of a qualified business located in California. (b) Purchase participation interests in loans made or held by financial institutions doing business in this state and that meet safety and performance standards that are generally accepted by state or federal financial regulatory agencies where the purpose of the loan is for operation or expansion of a qualified business located in California. (c) Purchase, guarantee, or hold loans originated by financial institutions doing business in this state that meet safety and performance standards that are generally accepted by state or federal financial regulatory agencies. (d) Purchase or hold loans that are insured or guaranteed in whole or in part by the United States, its agencies, or instrumentalities. (e) Make, purchase, guarantee, or hold loans of instrumentalities of this state. (f) Purchase or hold loans that are obtained as security pledged for, or originated in the restructuring of, any other loan properly originated or participated in by the trust. (g) Invest its funds in conformity with policies of the board. (h) Buy and sell federal funds. (i) Act as a custodian bank for financial institutions organized under the laws of this state and accept deposits from the financial institutions in connection with this function. (j) Issue bank stock loans to financial institutions organized under the laws of this state and doing the majority of their business in this state. (k) For financial institutions that make the trust a reserve depository, perform the functions and render the services of a clearinghouse, including all facilities for providing domestic and foreign exchange and may rediscount paper, on terms prescribed by the board. (l) Perform all acts and do all things necessary, convenient, advisable, or desirable to carry out the powers expressly granted or necessarily implied in this act through or by means of its president, officers, agents, or employees or by contracts with any person, firm, or corporation. (m) The bank may not make a loan to any board member, the president, or any officer of the bank. CHAPTER 8. CALIFORNIA INVESTMENT TRUST FUND 17757. (a) The California Investment Trust Fund is hereby established in the State Treasury for use by the trust. Notwithstanding Section 13340, all money held in the fund is continuously appropriated to the trust for purposes of this part. (b) As soon as possible after the end of each calendar year, the board shall determine the amount of income, if any, earned by the California Investment Trust in that calendar year that is in excess of amounts necessary to pay for expenses of administering the activities of the trust and shall, in consultation with the Legislature, determine how much of the excess shall be transferred to the General Fund, if not constitutionally restricted with regard to the transfer of those funds. CHAPTER 9. RULES AND REGULATIONS 17758. The California Investment Trust Board shall adopt rules and regulations to do all of the following: (a) Ensure the safety and soundness of the California Investment Trust, adhere to sound underwriting practices, avoid excessive risk and, to the extent possible, reflect applicable standards for safety and soundness set forth in Part 364 of Title 12 of the Code of Federal Regulations. (b) Specify the trust's powers and permissible investments and activities. (c) Authorize specific services that the trust may provide. (d) Specify limits for loans and other obligations the trust makes or undertakes. (e) Specify reserve requirements consistent with federal law. (f) Set other requirements that the board considers necessary to administer the trust under this act. CHAPTER 10. AUDIT 17759. (a) The State Auditor shall contract with an independent certified public accounting firm for an annual audit of the trust in accordance with generally accepted government auditing standards. (b) The State Auditor shall audit annually or contract for an annual audit of the separate programs and funds administered by the trust. On request of the State Auditor, the board shall assist the State Auditor in the auditing firm selection process, but the selection of the auditing firm is the State Auditor's responsibility. The auditor selected shall prepare an audit report that includes financial statements presented in accordance with the audit and accounting guide for banks and savings institutions issued by the American Institute of Certified Public Accountants. The auditor also shall prepare audited financial statements for inclusion in the comprehensive annual financial report for the state. (c) The State Auditor may conduct performance audits of the trust, including the separate programs and funds administered by the trust. (d) The auditor shall report the results of the audit to the board and to the Legislature. (e) The trust or its separate programs and funds shall pay the costs of the audit, which shall be expended from the fund. (f) The Department of Finance and the Controller shall examine the bank at least once every 24 months and conduct any investigation of the trust that may be necessary. (g) The Treasurer shall report the examination results, and the results of any necessary investigation, to the board and to the Legislature as soon as practicable. (h) The Department of Finance and the Controller may charge a fee for any examination or investigation at an hourly rate to be set by the Treasurer, sufficient to cover all reasonable expenses of the department and the Controller associated with the examinations and investigations provided for by this section, which shall be expended from the fund. CHAPTER 11. REPORT 17760. (a) Immediately following the close of each calendar month, the Treasurer shall prepare a report on the General Fund, the trust, and every other fund under his or her control itemized as to all of the following: (1) The amount in the fund at the close of business at the end of the preceding month. (2) The amount of revenue deposited or transferred to the credit of each fund during the current month. (3) The amount of withdrawals or transfers from each fund during the current month. (4) The amount on hand in each fund at the close of business at the end of the current month. (b) One copy of the report shall be provided promptly to those requesting the report, so long as the supply lasts. The report shall also be posted on the Internet Web site of the Treasurer. CHAPTER 12. TITLE 17761. (a) All business of the California Investment Trust shall be conducted under the name of the "California Investment Trust." Title to property pertaining to the operation of the trust shall be obtained and conveyed in the name of the "California Investment Trust, doing business as the California Investment Trust." (b) Instruments shall be executed in the name of the State of California within the scope of authority granted by the California Investment Trust Board. The president of the trust may execute instruments on behalf of the trust, including any instrument granting, conveying, or otherwise affecting any interest in or lien upon real or personal property. (c) Other officers or employees of, and legal counsel to, the trust may execute instruments on behalf of the trust when authorized by the board. CHAPTER 13. RECORDS 17762. (a) The following records of the California Investment Trust are confidential and shall not be disclosed to the public: (1) Commercial or financial information of a customer of the trust, whether obtained directly or indirectly, other than routine credit inquiries concerning information that is required to be disclosed in accordance with due legal process. (2) Internal or interagency memoranda or letters that would not be available by law to a party other than in litigation with the trust. (3) Except as provided in Section 11759 or 11780, information that is contained in, or related to a report of, an examination or operating or condition reports prepared by, on behalf of or for the use of a state or federal agency responsible for the regulation or supervision of any trust activity, unless the state or federal agency is required by law to make the report open to the public. (b) As used in this section, "customer" means any person that has transacted or is transacting business with, or has used or is using the services of, the California Investment Trust, or for which the trust has acted or is acting as a fiduciary with respect to trust property. SEC. 2. The Legislature finds and declares that Section 1 of this act, which adds Section 11762 to the Government Code, imposes a limitation on the public's right of access to the meetings of public bodies or the writings of public officials and agencies within the meaning of Section 3 of Article I of the California Constitution. Pursuant to that constitutional provision, the Legislature makes the following finding to demonstrate the interest protected by this limitation and the need to protect that interest: In order to protect the confidentiality of the internal records of persons doing business with the California Investment Trust and to ensure effective administration of the California Investment Trust, it is necessary that certain records be exempt from disclosure. BILL ANALYSIS Ó AB 2500 Page 1 Date of Hearing: April 23, 2012 ASSEMBLY COMMITTEE ON BANKING AND FINANCE Mike Eng, Chair AB 2500 (Hueso) - As Introduced: February 24, 2012 SUBJECT : State government: California Investment Trust: state bank. SUMMARY : Creates a State Bank in California. Specifically, this bill : 1)Establishes the California Investment Trust (Trust) within state government as an independent entity 2)Defines "advisory board" as the advisory board of the trust. 3)Defines "board" as the board of directors of the trust. 4)Defines" California Investment Trust Fund" as a fund established for the deposit and appropriation of state money. 5)Defines "financial institutions" as a bank or savings organization, including, but not limited to, banks, savings and loan associations, and credit unions authorized to conduct business in California, and state-chartered commercial banks, trust companies, and savings and loan associations. 6)Defines "public funds" as any public funds of any local entity or financial bank. 7)Defines "state-chartered bank" as a corporation incorporated, with the approval of the commissioner, incorporated for the purpose of engaging in, or that is authorized by the commissioner to engage in, the commercial or industrial banking business, and, in that capacity, may carry out various powers and duties, including, among others, the receipt of private deposits, and the loaning and investment of money. 8)Defines "state money" as all general fund money in the possession of, or collected by, any state agency or department that is not otherwise restricted for expenditure by the California Constitution. AB 2500 Page 2 9)Provides the purpose of the trust is to: a) Support the economic development of the state by increasing access to capital for businesses and farms within the state in partnership with local financial intuitions. b) Provides stability to the local financial sector without entering into competition with community banks, credit unions, or other financial institutions. c) Reduce the cost paid by the state government for banking services. d) To return profits, beyond those necessary to accomplish the mission and sound operations of the trust to the General Fund. 10)Creates a board of directors with the following members: the Governor, or his or her designee, the Treasurer, The Controller, or his or her designee, one member appointed by Senate Rules and one member appointed by the Speaker of the Assembly. a) The Treasurer shall act as the chairperson of the Board. b) Provides that three members constitute a quorum. c) Allows the board to appoint a president of a trust who will be allowed to hire others. 11)Creates an advisory board to the board with the following members: a representative from the state's financial industry sector, a representative from the state's small business sector, a representative from the state's agricultural sector, a representative from the state's labor groups, and at least two members shall be officers of state-chartered banks who do not maintain offices outside the boundaries of this state. a) Specifies that the board will appoint positions that shall not exceed 4 year terms. b) Requires the advisory board to do the following: meet regularly to review the trust's operations and finances, AB 2500 Page 3 make recommendations, and meet with the board. 12)Allows the trust to accept deposits of public funds but does not allow the trust to accept deposits of private funds. a) Requires all state moneys to be deposited in the Trust. b) Requires all income earned to become part of the revenues and income of Trust. c) Requires the Trust to pay interest on public deposits at a rate comparable to average statewide rates paid by private depositories of public funds. d) Allows the Trust to offer other financial products to state entities on a competitive basis. 13)Allows the Trust to do the following: a) Make loans in the form of participation loans. b) Purchase participation interests in loans made or held by financial institutions doing business in this state. c) Purchase, guarantee, or hold loans originated by financial institutions d) Purchase or hold loans that are insured or guaranteed in whole or in part by the United States. e) Make, purchase, guarantee, or hold loans of instrumentalities of this state. f) Purchase or hold loans that are obtained as security pledged for or originated in the restructuring, of, any other loan properly originated or participated in by the trust. g) Invest its funds in conformity with policies of the board. h) Buy and sell federal funds. i) Act as a custodian bank for financial institutions AB 2500 Page 4 organized under the law of this state. j) Issue bank stock loans to financial institutions organized under the laws of this state and doing the majority of their business in this state. aa) For financial institutions that make the trust a reserve depository, perform the functions and render the services of a clearinghouse, including all facilities for providing domestic and foreign exchange. bb) Perform all acts and do all things necessary, convenient, advisable, or desirable to carry out the powers expressly granted. cc) The bank may not make a loan to any board member, the president, or any officer of the bank. 14)Establishes the trust fund in the State Treasury for use by the trust. 15)Provides that the board will determine how much of the excess money earned by the trust shall be transferred to the General Fund. 16)Requires the board to adopt rules and regulations. 17)Requires the State Auditor to contract with an independent auditor for an annual audit of the trust and report to the legislature and the board. 18)Requires the Department of Finance and the Controller to examine the bank at least once every 24 months. 19)Requires the Treasurer to prepare a report of each calendar month on the General Fund, the trust and every other fund under his or her control, as specified. 20)Requires all business of the California Investment Trust to be conducted under the name of the California Investment Trust. 21)Specifies that records, as specified, of the trust are confidential and shall not be disclosed to the public. AB 2500 Page 5 22)Makes various findings and declarations. AB 2500 Page 6 EXISTING LAW 1)Authorizes the establishment and operation of state-chartered banks, state-chartered credit unions, state-chartered industrial loan companies, and state-chartered savings associations, all of which are overseen by the California Department of Financial Institutions (DFI), and allows for the operation of federally-chartered depository institutions and foreign (out-of-state) depository institutions in California. 2)Creates the California Infrastructure and Economic Development Bank (I-Bank), within Business Transportation and Housing (BTH). I-Bank is located within the BTH Agency and is governed by a five-member Board of Directors. The I-Bank was created in 1994 to promote economic revitalization, enable future development, and encourage a healthy climate for jobs in California. The I-Bank operates pursuant to the Bergeson-Peace Infrastructure and Economic Development Bank Act. The I-Bank has broad authority to issue tax-exempt and taxable revenue bonds, provide financing to public agencies, provide credit enhancements, acquire or lease facilities, and leverage State and Federal funds. The I-Bank's current programs include the Infrastructure State Revolving Fund (ISRF) Program, 501(c)(3) Revenue Bond Program, Industrial Development Revenue Bond Program, Exempt Facility Revenue Bond Program and Governmental Bond Program. ÝGovernment Code Section 63000 et seq.]. 3)Requires the Treasurer to receive and keep in the vaults of the Treasury or to deposit in banks or credit unions all moneys belonging to the state. 4)Requires the Controller to account for all expenditures as scheduled in the Budget Act including providing a monthly comparison between actual and estimated revenues. 5)Establishes various financing programs relating to housing, small business, infrastructure and schools. These programs are administered through multiple agencies under differing goals, processes and reporting requirements. FISCAL EFFECT : Unknown. COMMENTS : AB 2500 Page 7 AB 2500, if enacted, would create a State Bank in California. The measure creates a board of directors, an advisory board to the board of directors, and specifies that all state moneys shall be deposited into the Investment Trust Fund. The measure also requires the state bank to be audited, adopt rules and regulations, and submit and prepare reports. According to the measure, the purpose of the State Bank is to support economic development, provide stability, and reduce the cost paid by state government for banking and return profits. Banks are entities that accept deposits and make loans. State governments in 49 states except North Dakota deposit their cash reserves in private institutions that also serve a wide array of other customers. These private depositories are subject to federal and state regulations and oversight, but their lending and investment decisions are based on their own independent assessments of risks and returns and are not under the direct control of public officials. As of December 31, 2011, California has 178 state-chartered banks and 158 state-chartered credit unions. These numbers do not include federally chartered institutions but poses the question of what can a state bank provide that these institutions cannot? BANK OF NORTH DAKOTA (BND) The only example of a state bank is the BND. In 1919, the state legislature established BND with $2 million of capital. BND was charged with the mission of "promoting agriculture, commerce and industry" in North Dakota. It was never intended for BND to compete with or replace existing banks. Instead, Bank of North Dakota was created to partner with other financial institutions and assist them in meeting the needs of the citizens of North Dakota. The State of North Dakota began using bank profits in 1945 when money was first transferred into the General Fund. Since that time, capital transfers have become the norm to augment state revenues. To this point, BND is perceived to be a success. Today, BND has total assets of $4 billion and total deposits of $3.1 billion. It is comparable in size to the 180th largest private bank in the nation. Roughly 50% of the bank's loan portfolio consists of loan participations and loan purchases AB 2500 Page 8 from community banks. BND is overseen by the Industrial Commission of North Dakota, composed of the governor, the attorney general, and the agriculture commissioner. The governor also appoints an advisory board of seven banking and finance experts. BND deposits are backed by the full faith and credit of the state of North Dakota and are not insured by the Federal Deposit Insurance Corporation (FDIC). BND is examined annually by an independent auditor and every 24 months by the North Dakota Department of Financial Institutions. BND's budget including decisions on salaries, employee headcount and major capital projects are controlled by the legislature. In May of 2011, the Federal Reserve Bank of Boston released a report titled, "The Bank of North Dakota: A model for Massachusetts and other states?" This report makes several findings which include: Financial difficulties of a state bank can exacerbate state fiscal problems. North Dakota views the BND as a revenue source rather than a fiscal stabilization tool. BND is a tax exempt institution and a state with a public bank forgoes the tax revenues it would otherwise collect from any banks the public bank displaces. State should recognize that the benefits of a publicly owned bank are hard to quantify, depend on the bank's specific objectives, and likely vary depending on the structure of a state's economy and banking system. North Dakota's recent economic resilience can be attributable to the strong performance of industries such a as agriculture and energy, which play a much more important role in North Dakota than in most other parts of the United States. Creating a state bank would entail significant startup costs. Massachusetts estimated for their state that an amount of $3.6 billion would be necessary. California's economy is much larger. Beyond the initial capitalization, the state would need to AB 2500 Page 9 determine a schedule for depositing funds in the newly created public bank. The recently enacted Dodd-Frank Act gives federal agencies new authority over large and systematically important institutions (Too BIG To Fail). Due to its potential size, a fully capitalized state-owned bank in Massachusetts likely poses supervisory and regulatory challenges. BND's most important role in 2011 was serving as a lending partner for North Dakota's numerous small banks. The willingness and capacity of a state-owned bank to offset a serious credit crunch has not been shown. With the possible exception of the Great Depression, BND's contributions to stabilizing the state's economy and finances appear to have been relatively minor. NEED FOR THE BILL : According to the Author, "AB 2500 is modeled after the Bank of North Dakota and seeks to run a similar program in California to build a strong resilient economy and use the people's collective resources for their own benefit. The mission of the investment trust is to foster growth in agriculture, education, community development, economic development, housing, and industry in the state. Specifically, AB 2500: Provides stability to the local financial sector without competing against community banks, credit unions or other financial institutions. Augments the state's general fund with profits earned. Makes participation loans in conjunction with financial institutions doing business in the state. Accepts deposits of public funds, not private funds." OTHER STATES According to the U.S. Census Bureau, the population size of North Dakota as of 2011 is 683,932. To compare, California has a population size as of 2011, of 37,691,912. This is a drastic difference. California also has the 8th largest economy in the AB 2500 Page 10 world. In 2011, at least 11 states looked into creating state banks. These states included Illinois, Virginia, Hawaii, Oregon, Washington, Massachusetts, Maryland, Arizona, Vermont, California and Maine. Most of these states introduced measures to study the concept of a state bank. Not one State has been successful in creating a State Bank except for the BND in 1919. In the 1970's at least six states explored starting a state-owned bank; these states were Colorado, Maine, New York, New Jersey, Oregon and Washington. At that time, as well, not one state was successful in creating a state-owned bank. MASSACHUSETTS In 2010, Massachusetts introduced SB 2331 which created a study on whether to implement a state owned bank. Massachusetts was successful in creating a study of a State Bank. Following the study in 2011, Massachusetts decided not to pursue a state-owned bank following the study because the study found: It would require significant initial capital investment without a proven need to justify the investment. Given the vast differences in the banking industries and economies of North Dakota and Massachusetts, the only existing model is inadequate to provide guidance. The bank's public funds would be exposed to an unacceptably high risk, would be used to provide risky gap financing, and would need to match the current rate of return earned under the management of the treasurer. Infrastructure investment in Massachusetts is much more established than in North Dakota. Massachusetts already has a large network of public and quasi-public agencies and nonprofits that offer various lending programs and services, including lending to support infrastructure. CALIFORNIA AB 2500 Page 11 In 2011, Assemblymember Hueso introduced AB 750 which would have created a task force to look into the feasibility of a State Bank. AB 750 passed out of the Assembly Banking and Finance Committee with a 10-1 vote. The Governor stated in his veto messages that "This bill would mandate yet another "blue ribbon" task force: in this case to examine whether California should establish a state bank. This is a matter well within the jurisdiction and competence of the Assembly and Senate Banking Committees." Although AB 750 was vetoed, it is the opinion of the Committee that a study still needs to take place prior to the creation of a State Bank. The Legislature does not have enough information and data relevant to California as to the benefits and/or consequences to creating a State Bank. POOLED MONEY INVESTMENT ACCOUNT (PMIA) The PMIA, created in 1955, governed by the Pooled Money Investment Board (PMIB) has the responsibility for administering an effective cash management and investment program. The PMIA manages all monies flowing through the accounts in the State Treasury and keeps all available funds invested consistent with and subject to the goals of safety, liquidity and yield. The PMIA has three primary sources of funds: State general fund, special funds held by state agencies, and moneys deposited by local jurisdictions in the Local Agency Investment Fund (LAIF). Moneys in the PMIA can only be invested in U.S. government securities, securities of federally-sponsored agencies, domestic corporate bonds, interest bearing time deposits in California banks, savings and loan associations and credit unions, prime-rated commercial paper, repurchase and reverse repurchase agreements, security loans, banker's acceptances, negotiable certificates of deposit and loans to various bond funds. ARGUMENTS IN SUPPORT According to the Public Banking Institute, "The California Investment Trust will strengthen economic and community development. By providing loans in partnership with community banks to individuals and businesses, the California Investment Trust will eliminate fees currently paid by state government for banking services, and will combine these savings with additional revenue generated through various operating activities. AB 2500 Page 12 AB 2500 will create the California Investment Trust and model it after the highly successful Bank of North Dakota. In response to current economic challenges, several states, including Maine, Oregon, Washington and Rhode Island, have considered the creation of a state bank" ARGUMENTS IN OPPOSITION According to the California Treasurer, Bill Lockyer, "AB 2500 would detrimentally overlay the current centralized treasury system as well as requiring capitalization and long-term investments which would further complicate the state's ability to meet its obligations, especially while the state continues to suffer from structural imbalance of revenues and expenditures, resulting in chronic shortages of cash and scarce reserves. In addition, the types of investing proposed as permissible for the Investment Trust would significantly increase the risk of losses to earnings and principal, losses that would be shouldered by the General Fund." QUESTIONS : 1)What information exists that establishes that California needs a state bank? AB 750 (Hueso) of 2011 was on the right track with trying to gather the necessary information to support or not support a State Bank in California. 2)What problem exists that a state bank will cure? Considering California's budget shortfall and the state's credit rating, should California take on the responsibilities of having its own State Bank? According to the S&P, California has an A- rating, S&P's fourth-lowest investment grade and the lowest of any state. 3)Where would California get the money to capitalize a State Bank? 4)How would AB 2500 save California money? The measure creates a new entity, with new positions and responsibilities. 5)Considering a state bank may not be FDIC insured, what happens if the bank fails? 6)Should California be encouraging private financial institutions to establish branches that provide tax revenue to AB 2500 Page 13 the state rather than establish a tax-exempt state bank that will compete with local, established financial institutions? AMENDMENTS : Should this measure move forward as currently drafted, the author will need to make several technical and substantive amendments to clarify and clean up the language. The Committee is recommending that the contents of AB 2500 be deleted and language creating a study be implemented to further look into whether a state bank should be established in California. Evidence from the Massachusetts study shows that it is very important to study the feasibility before investing energy into building a state bank which is not a small task for any state to take on. REGISTERED SUPPORT / OPPOSITION : Support Contra Costa Interfaith Supporting Community Organization Hollywood Adventist Church PICO California Public Banking Institute Most Holy Trinity Church - PACT Town of Fairfax 6 Individuals Opposition California Bankers Association (CBA) California Independent Bankers (CIB) California State Treasurer Analysis Prepared by : Kathleen O'Malley / B. & F. / (916) 319-3081