The people’s bank of California?
Reader opinion by Chris Petlock
Over the last two months we have watched city, county, and state rainy-day funds quickly drained. State and local governments are facing substantial increases in expenditures for emergency preparedness and public health responses related to COVID-19. Urgent action is required to prevent widespread loss to local governments and small businesses.
At the same time, the postponement of the federal income tax filing deadline has caused many states to also postpone their state tax filing deadlines, and other sources of tax revenue, including sales, gas, and hotel taxes, have materially decreased or disappeared. Even property tax payments are being delayed while treasurer/tax collector offices remain closed. As a result, the need for short-term borrowing by state and local governments is expected to exceed the capacity of investors to absorb such debt at reasonable yield levels for issuers. Where just a few months ago municipal bonds were oversubscribed and selling out in just a few hours, the month of March saw zero issuances of new municipal bonds from California.
In response, the federal government has declared a major disaster, releasing FEMA funds, and the Treasury Department is administering the multi-trillion dollar CARES Act, while the Federal Reserve, our nation’s public bank, is administering multiple trillions in lending through its emergency powers. Among those powers, the Federal Reserve has launched a Municipal Liquidity Facility (MLF) that purchases debt from state and local governments with populations greater than one million, and recently lowered access to the MFL to a single municipality or county government in a county with a population greater than five-hundred-thousand. This makes the MLF still out of reach for many areas.
Similar to the initial rollout of a Paycheck Protection Program, these programs are structured in such a way as to dismiss many of the most vulnerable small local governments. Unless small local governments have resources and expertise to acquire and maintain FEMA funding, their emergency spending will not be reimbursed; in addition, there will be no access to the Municipal Liquidity Facility to help offset their revenue losses. Meanwhile, small local governments are required to maintain basic services such as police and fire. There is talk of allowing states and local governments to go through the bankruptcy process; this would be devastating to those communities.
With the passage of AB857, the California Public Bank Alliance had been working to meet the next crisis with regional public banks to support local governments and small businesses, but it seems this crisis has closed that window for now.
In light of this, emergency action to create a state-level public bank is the type of bold leadership Californians need, and the political window may be opening. The Governor’s recent appointment of Tom Steyer as Chair of the Taskforce on Jobs and Economic Recovery may be a welcome sign of openness to such innovation as a public bank. The Governor himself has voiced support for a state-level public bank in the past. Recently, in a Wall Street Journal OpEd Janet Yellen, Former Fed Chair, stated that California should focus on a “California Recovery Bank.”
The next step in California’s public banking journey could be for the State of California to launch a bank that is initially tasked with economic recovery and coordinating statewide relief efforts, while laying the groundwork for a future network of local public banks. This state-level bank would have the benefit of access to Federal Reserve emergency powers including the discount loan window. The State Bank would then coordinate economic recovery efforts among local governments and local financial institutions.
Across the country, state governors and treasurers could set up their own state banks to readily tap into and leverage the newly-created financial options to rescue communities from the pandemic-induced economic crisis. Taking steps toward establishing publicly-owned state banks will not only help stave off crushing economic disaster but can create an honest and efficient financial infrastructure that can keep communities productive and healthy long into the future.
Chris Petlock is a member of the California Public Bank Alliance
