Gov. Gavin Newsom signed AB 857 to allow California cities and counties to establish public banks. A political agenda was behind the move to public banking and in the end it could be extremely costly and unmanageable for taxpayers.

Los Angeles city, in particular, may be a test case for the validity of public banks since the voters soundly turned down the idea for public banks less than two years ago. 

Supporters of public banks claim such institutions would reinvest local tax dollars in needed community projects that private bankers often ignore such as affordable housing. But the anti-Wall Street rhetoric of supporters also spells out a liberal political agenda. 

A principal author of the bill, Assemblyman David Chiu of San Francisco said that public banks means municipalities don’t have to deal with private banks that loan to “industries not in line with the values of most Californians,” such as oil and gas industry, private prisons and gun manufacturers.

More evidence of the political attitude toward private banks was on display by backers of the failed attempt to pass the Los Angeles public bank charter amendment. A website set up in support of Measure B stated: “Taxpayer dollars held in the public bank will not be invested in fossil fuels, private prisons, immigrant detention centers, the war machine, or other destructive industries.”

The question about establishing public banks was presented to the voters of Los Angeles as Measure B in the 2018 election. Voters turned thumbs down: 44% Yes, 56% No.

Yet, Los Angeles city officials supported AB 857, the public bank bill signed by the governor. Los Angeles is predicted to be one of the first cities to take advantage of the governor approving the bill. That would be a clear snub of the will of the voters and possibly could face a legal test.

The Los Angeles City Charter states that, The City shall not engage in any purely commercial or industrial enterprise, except upon a majority vote of the voters of the City voting on the question.” A state statute does not override the power of a city charter and the public bank is certainly a commercial enterprise that did not receive a vote of the people. One taxpayer group is interested in taking a closer view at this issue.

Whether a city bank would be a successful commercial enterprise is doubtful.

At the time Measure B was on the ballot, the Los Angeles Times editorialized: Charter Amendment B is one of the most ill-conceived, half-baked ballot measures to come out of City Hall in years, and that’s saying something.

The editorial went on to report, “Setting up a bank requires a huge up-front investment — a study for the proposed Massachusetts state bank estimated it would take $3.6 billion just to provide the bank enough capital to get started.”

More recently, the San Francisco Treasurer amassed a report on a city bank. It part the report stated: Divesting from Wall Street entirely would cost about $1.6 billion and take 31 years to break even.

Taxpayers will be at risk if public banks are created. The Los Angeles Community Development Bank, a quasi-public institution, was established to stimulate economic development in the wake of the 1992 city riots. It went insolvent within ten years. As reported by the L.A. Times, “according to an evaluation, the bank made high-risk loans to well-connected borrowers.”

Public banks are susceptible to political interference from elected officials pressuring public banks to favor certain projects and individuals with high-risk loans.

Private banks, which need to make a profit to survive, study the viability of projects presented to the banks. If the criteria for a loan change to an agenda driven process with less scrutiny to the business side, the results could leave the loan makers in a hole and with public banks that problem ends up in the taxpayer’s lap.