BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
AB 750 (Hueso) Hearing Date: July 6,
2011
As Amended: May 27, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would establish the Investment Trust Blue Ribbon Task
Force, as specified, to study the creation of a state bank.
DESCRIPTION
1. Would establish the Investment Trust Blue Ribbon Task Force
(task force), for the purpose of considering the viability
of establishing the California Investment Trust, which would
be a state bank receiving deposits of state funds.
2. Would require the task force to be convened by the
Secretary of Business, Transportation, and Housing (BT&H),
and would provide it with a 13-person membership, including
all of the following:
a. The Secretary of BT&H or his/her designee.
b. Nine individuals representing 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; these nine would
include two appointed by the Senate Rules Committee, two
appointed by the Speaker of the State Assembly, and five
appointed by the Governor.
c. The State Controller, Treasurer, and Governor, or
their designees.
3. Would require the task force to convene its initial meeting
on or before February 1, 2012.
4. Would require the task force to do all of the following:
AB 750 (Hueso), Page 2
a. Undertake a general assessment of the state's
current network of public and private financial resources
for the purpose of identifying potential areas of state
trust focus. At a minimum, the task force would have to
consider how a state trust could be designed to
strengthen the economic and community development needs
of California, provide greater financial stability to
individuals and businesses, reduce the cost paid by state
government for banking services, and generate earnings
beyond those necessary for continued operation of the
trust, which could be used to supplement the General
Fund.
b. Consider the types of financial products that could
be offered to address currently unmet financial needs and
more efficiently deliver existing financial resources and
products.
c. Examine various administrative and operational
structures for organizing a trust, including, but not
limited to, boards of directors, sources of deposits,
oversight and audit of financial activities, and
guarantees of financial products.
d. Consider options for integrating a state trust model
into the existing state financial resource network,
including, but not limited to, ideas such as lending
capital to banks, credit unions, and nonprofit community
development financial institutions.
5. Would require the task force to select a nonprofit
corporation or other private organization with specific
expertise in public finance and public institutions models
to staff the task force, and would authorize the task force
to establish an advisory committee to help it in creating
its final report. The final report would have to be
submitted to the Legislature by December 1, 2012, and would
have to include all of the following, at a minimum:
a. A recommendation on the viability of establishing
the California Investment Trust.
b. A list of the issues identified during its work and
its findings, if any, related to those issues.
c. To the extent the task force is supportive of
AB 750 (Hueso), Page 3
establishing the California Investment Trust, information
on all of the following, at a minimum: the
administrative structure of the trust, the capital
requirements for the trust's initial capitalization and
for ongoing operations, how the initial capitalization
can be achieved and how operating costs could be paid,
how the trust can protect the interests of the state and
the rights of individuals and entities that access
products or services of the trust, transition actions
necessary to establish the trust, and statutory and
constitutional changes that may be necessary to establish
the trust.
EXISTING LAW
6. 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, and allows for the operation of
federally-chartered depository institutions and foreign
(out-of-state) depository institutions in California, as
specified.
7. Provides for the California Infrastructure and Economic
Development Bank (I-Bank), within BT&H (Government Code
Section 63000 et seq.). The I-Bank is headed by a
five-member Board of Directors that includes the Secretary
of BT&H, State Treasurer, Secretary of the State and
Consumer Services Agency, and Director of the Department of
Finance, or their designees, and a Governor's appointee. 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 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 (see
http://www.ibank.ca.gov/about_us.htm for more details).
AB 750 (Hueso), Page 4
COMMENTS
1. Background and Discussion: This bill is sponsored by the
author, to study the viability of creating a California
state bank other than the I-Bank. To date, thirteen other
states have introduced legislation to create a state bank or
to study the creation of a state bank. With AB 750,
California became the fourteenth such state.
Much of the push to create state banks traces to the Public
Banking Institute, based in Sonoma. According to its
Internet web site, "PBI is a non-partisan think-tank,
research and advisory organization dedicated to exploring
and disseminating information on the potential utility of
publicly-owned banks, and to facilitate their
implementation. PBI was formed in 2011 as an educational
non-profit organization by a group of citizens including
past and present community and civic leaders,
businesspeople, educators, political economists, writers,
and banking and other professionals. The group shares a
concern over the destabilizing actions of a private banking
industry that, through its corporate business model, has
precipitated the economic imbalances now witnessed across
the US economy.
"PBI's mission is to analyze U.S. and global financial events in
order to explore and facilitate implementation of public
banking options. In the process, we are looking to quantify
the true costs of financing government and public services,
including the costs of potential systemic risk, business
cyclicality, and monetary instability imposed by particular
methods of banking and government financing.
"Our goal is to leverage the historic role of publicly-owned
banks nationally and internationally in fostering access to
cheap and readily available credit, particularly as used for
increasing productive capacity."
In March 2011, representatives of PBI made a presentation in the
State Capitol, touting the benefits of a state bank. During
their presentation, they described the success of the only
state bank in the country (the Bank of North Dakota, which
was formed in 1919 with $2 million in capital, and which now
operates with more than $270 million in state capital, and
runs a profit used to augment North Dakota's General Fund).
They also made several claims that warrant further
AB 750 (Hueso), Page 5
investigation, such as the claim that a state bank can
"create money" by leveraging its deposits and that a state
bank has access to nearly unlimited borrowing through the
Federal Reserve Bank's overnight lending window.
This bill would form a task force to study the idea of creating
a state bank, and would require the task force to select a
non-profit or other private organization to provide it with
staff support.
2. Summary of Arguments in Support:
a. The California Association of County Treasurers and
Tax Collectors (CACTTC) believes that the concept of a
state bank merits serious consideration and study. A
state bank could offer a new option for county
treasuries, and could also be a major partner to local
treasurers. CACTTC believes that a county treasurer
could bring an important local agency perspective to the
task force and requests that the author consider
including a county treasurer on the task force.
b. The California Professional Firefighters, California
Labor Federation, California School Employees
Association, SEIU California, and other labor groups
believe that AB 750 will serve as an important tool for
the state in its efforts to examine how best to fund
needed services in these tight budget times. For example,
the California State Employees Association writes that
"We applaud your effort to explore the feasibility of a
state bank that can help individuals and our small
businesses to get credit or to start a new venture that
private banks may be against due to the current economic
downturn. A state bank could strengthen economic and
community development, provide financial stability to
individuals and businesses, reduce the cost paid by state
government for banking services, and provide for excess
earning to be used to supplement General Fund purposes."
3. Summary of Arguments in Opposition:
a. The California Bankers Association (CBA) believes
that the bill is unnecessary and harmful, and that it
fails to direct the task force to study all of the
operational challenges and risks associated with
operating a bank.
AB 750 (Hueso), Page 6
Among CBA's arguments in opposition: 1) AB 750 directs the
task force to study the viability of a state bureaucracy
to offer retail banking products. This could lead to the
state issuing checking and savings accounts, mortgage and
auto loans, credit cards, and other lines of credit,
which could, in turn, require the General Fund to cover
inevitable credit losses. 2) The bill ignores safety and
soundness policies, regulatory compliance, and
examinations. It does not address which Federal Reserve
regulations and operational standards a state bank would
have to comply with, does not address who would be
responsible for regulating and examining a state bank,
and does not address what the potential conflicts of
interest would be if a state entity were responsible for
examining a state bank. 3) The bill mistakenly focuses
on the costs paid by state government for banking
services, yet ignores the General Fund cost savings
associated with contracting out for banking services.
The state has partnered with banks to provide services
where the state lacks expertise, and where contracting
out for banking services can save the state money. Banks
provide cash management services, clearinghouse
functions, and short-term lending, issue state credit
cards, and help the state sell state-issued bonds. Banks
also save the state money by providing services such as
child support delinquency collections, financial
institution data match services to aid in the location of
delinquent taxpayers, electronic benefit transfer cards,
and unemployment and disability insurance debit cards.
Not only would the state risk the loss of financial
industry expertise if it created a state bank, but could
also incur significant General Fund costs. 4) Finally,
AB 750 could lead to the creation of a state banking
entity that would crowd out commercial banking services.
A state bank has the ability to use the enormous
resources of the state to nearly monopolize the market
and create an unfair advantage over commercial banks.
The unlevel playing field created by a state bank will
result in less competition and a reduction in consumer
choice.
4. Amendments:
a. The author is proposing several technical
amendments, which would make minor changes to the
AB 750 (Hueso), Page 7
findings and declarations section of the bill and to the
goals of the task force. The author is also proposing to
change the bill's requirement that a nonprofit or private
organization be used to staff the task force into an
option for the task force to use a nonprofit or private
organization to satisfy its staffing needs. (Page 5,
line 11, delete "shall" and insert: may)
Committee staff is concerned that the amendments being
proposed by the author could result in considerable costs
to the state, if the task force opts to use state workers
to fulfill its staffing needs. An Assembly
Appropriations Committee analysis of AB 750 estimated
costs of between $660,000 and $700,000, if the task force
is staffed by BT&H employees. The concept of using a
private organization or nonprofit to staff the task force
was added to the bill by the Assembly Appropriations
Committee, to reduce state costs.
b. In addition to the author's amendments above, staff
recommends amendments to clarify several aspects of the
task force's report, and to clarify the duties and
responsibilities of the nonprofit corporation or private
organization that will/may be brought on to staff the
task force.
i. First, it is unclear whether the
author intends the task force to produce a consensus
report or one that represents the views of a
majority of its members. The author has indicated
his preference for the latter option.
Page 5, line 29, after "shall" insert: represent the
views of a majority of the task force members and
shall
ii. Second, the bill is silent regarding
whether the nonprofit corporation or private
organization that will/may staff the task force will
be compensated for its efforts, or whether this
entity is expected to volunteer its time. If
compensated, the bill is unclear where the money to
provide this compensation will come from.
The author does not wish to clarify these issues at
the present time.
AB 750 (Hueso), Page 8
iii. Third, the mechanism for selecting this
nonprofit corporation or private organization is
unclear. How many members of the task force must
approve the selection of the entity that will staff
the task force, and what criteria will they use to
ensure that they are selecting an unbiased group?
The author has agreed to the following amendments,
which are silent regarding the procurement rules
that will be used to solicit bids from qualified
entities, but which attempt to ensure selection of
an unbiased group through a two-thirds vote
requirement to approve selection.
Page 5, line 16, after the period insert: The
selection of an organization to staff the task force
must be agreed to by at least two-thirds of the
membership of the task force.
iv. Fourth, it is unclear what happens if
the nonprofit or private organization hired to staff
the task force produces a work product with which
the task force does not agree. Staff suggests an
amendment to clarify that the content of the task
force report must reflect the views of the task
force; the task force should not merely submit a
work product to the Legislature that is produced by
the nonprofit/private entity brought on to staff the
task force, unless the task force agrees with and
endorses all of the elements of its staff report.
Page 6, between lines 11 and 12, insert:
(c) The report may include findings from the
organization selected to staff the task force
pursuant to subdivision (f) of Section 64160, but
must represent the conclusions and recommendations
of a majority of the task force membership.
v. Staff also suggests an amendment
requiring the task force to review the activities of
California's existing I-Bank, when developing its
task force report, with an eye toward developing
recommendations on whether to modify or expand the
I-Bank, rather than creating an entirely new state
AB 750 (Hueso), Page 9
bank from scratch. Amendments would also be
valuable to ensure that some of the regulatory and
competition issues posed by creation of a state bank
are addressed. The author has agreed to the
following:
Page 6, between lines 4 and 5, insert the following,
and renumber the paragraphs that run from line 5
through line 11:
(4) Whether the California Investment Trust should be
created as a separate entity or by modifying or
expanding the California Infrastructure and Economic
Development Bank.
(5) The manner in which the trust should be regulated
to protect the safety and soundness of the
institution and its depositors, and to avoid
conflicts of interest that could arise from state
regulation of a state-run depository institution.
(6) The extent to which the trust will be allowed to
compete with retail banking establishments operating
in California.
vi. Finally, staff questions whether a
thirteen-member task force is too large to achieve
consensus on the questions they have been tasked to
study. The author's office has expressed a desire
to reduce the size of the task force from 13 to 9,
and has agreed to the following amendments:
Page 3, line 25, strike "two" and insert: one
Page 3, line 30, strike "two" and insert: one
Page 3, line 35, strike "five" and insert: three
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Association of County Treasurers and Tax Collectors
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Labor Federation
California Nurses Association
California Professional Firefighters
AB 750 (Hueso), Page 10
California School Employees Association
California Teamsters Public Affairs Council
Communications Workers of America, AFL-CIO, District 9
Engineers and Scientists of California
Fairfax Town Council
International Longshore and Warehouse Union
Professional and Technical Engineers, Local 21
SEIU California
UNITE HERE!
United Food and Commercial Workers - Western States Conference
United Steelworkers
Utility Workers Union of America, Local 132
Opposition
California Bankers Association
Consultant: Eileen Newhall (916) 651-4102