California has about 1 million households that don’t have bank accounts, the majority of which are Black and Latino, according to data from the federal government.
But they could soon have access to state backed, no fee checking accounts after Gov. Gavin Newsom signed AB 1177 last week. The law will set up a commission to study the feasibility of creating so-called “CalAccounts.”
Assemblymember Miguel Santiago (D-Los Angeles) authored the new law, along with Assemblymember Lorena Gonzalez (D-San Diego), with the goal of limiting people’s reliance on payday lenders and check cashing businesses and instead providing them with safe and reliable banking services.
“I grew up in a household where they kept money at home because financial institutions were foreign,” he said. “What I know from my experience, it makes sense that we should tackle one of the biggest barriers in this fight against income inequality.”
According to a 2019 national FDIC study, the primary reason people say they don’t have a bank account is because they don’t have enough money to meet minimum balance requirements. The second most cited reason is that they just don’t trust banks to handle their money.
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Santiago thinks that CalAccounts would address those concerns. The state backed bank wouldn’t have minimums, and he believes that people will be more likely to trust it.
“This will allow consumers in the state of California to get a zero fees, zero cost, zero penalty savings account, checking account, banking account that's currently not available,” he said. “And one that they can trust that is not after creating the highest profit.”
So what does public banking really mean?
It includes public facing banks that individuals can use for normal banking business, and could also be government-owned banks that cities or state agencies could use to deposit their funds and then finance public projects like bike lands, housing, or other public goods.
AB 1177 will not create a state-run public bank, but instead examine how the state might be able to offer regulated bank accounts that the state will ensure remain accessible and have no fees. It’s a public option because the state is acting as a mediator and guarantor for people that currently don't have bank accounts.
California has been moving toward new ways of doing banking, including the creation of local public banks. Since 2019, cities in California have had a legal pathway for chartering a public bank.
But those banks can’t compete with private banks or credit unions for individual customers. A public bank that serves individuals would have to partner with another financial institution. Cities also have the option of creating a public bank that doesn’t provide services such as checking accounts and loans to individual consumers, but instead holds a city’s finances, which can then be used to fund projects like housing or bike lanes.
San Diego County Supervisor Terra Lawson-Remer still has a lot of questions about how public banking will work in practice, but she’s encouraged by the passage of AB 1177.
“We know that it's easier to get access to capital, if you already have capital,” she said. “So we're really stuck in a pretty vicious cycle of inequality, and I think we need to be looking at every tool in the toolbox to break that cycle.”
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She’s interested in seeing how a public bank could be used instead of a private bank to fund things like affordable housing.
“I think there's a real need as well to look at creating access to capital to do those kinds of investments and make those kinds of investments that we need at a larger scale to serve our community,” she said.
This month, the Los Angeles City Council passed a motion to start drafting a business plan for a public bank that would be owned by the city and hold government deposits. San Francisco is also working on a plan.
Jeff Olson, a local public bank advocate, is worried San Diego will miss out on the opportunity.
“San Diego has famously procrastinated so long on some things that we've lost out big time,” he said. “I mean, I don't have to remind anybody that we waited so long to build a stadium that we no longer have a football team.”
In the last round of budget proposals, six San Diego councilmembers said they want to explore a public bank option, but it’s not currently in the city or county’s budget.
Joel Day, a City Council candidate in District 6, included public banking as part of his housing platform.
“We need all hands on deck to deal with infrastructure, crisis and housing,” he said. “We can do that by putting public money into a public bank to then work with those public assets to address the big crises of our time, like building affordable housing. A public bank allows us to do that much more efficiently than asking Wall Street to hold our money.”
But not everyone in San Diego likes the idea. In a 2020 San Diego Union Tribune article, economists from SANDAG, and several professors from major local universities said they were against the idea.
Private sector leaders like Michael Lea, a principal at Cardiff Consulting Services and former chief economist for Freddie Mac, agrees with their concerns.
“I think a reason that a lot of advocates like the idea of a bank like this is they're going to lend to activities and individuals and entities that the private sector isn't lending to now,” he said. “Well, there's a reason why the private sector doesn't lend there, and it's oftentimes that there's more risk associated with that.”
As local leaders debate setting up a public bank in San Diego, California is pressing ahead. The statewide study has to be done by 2024.
