It’s no surprise that Malia Cohen worries about what local public dollars are doing. As a member of the San Francisco Board of Supervisors, the municipal legislative body, it’s her job to know how, where and why the city’s money is coming in and going out. But recently, Cohen has joined a growing number of public officials around the country who are wondering what happens in between — what happens when the money in the city coffers goes to sleep at night.

In fiscal year 2017, the city of San Francisco took in an average of $508 million a month in revenues and put out $467 million a month in expenses. But in between, the banks that handle all that cash sometimes used public dollars in ways that, in the opinions of Cohen and others, contradict the reasons why that money is coming and going in the first place.

“The existing banking and financial structures we’re operating in don’t always mirror our city’s values,” Cohen says. “For example, we had many people opposing the Dakota Access Pipeline. Many of the banks we bank with support the funding of this pipeline.”

For some cities, like Philadelphia, Chicago, Seattle and elsewhere, the Wells Fargo fake accounts scandal was the last straw. The bank’s subsequent downgrade on its federal community reinvestment rating even forced New York, the nation’s largest city, to initiate the process of moving its deposits and banking services away from Wells Fargo.

But where else could all those dollars be kept other than in a large, private financial institution? State and local governments hold around $458 billion in deposits, according to the Federal Reserve Bank of St. Louis, while state and local pensions hold $3.7 trillion in investments. That’s a lot of money and a lot of daily transactions, which would overwhelm most community banks in most cities. For a solution, Cohen and others have turned to what seems like an unlikely place for big city legislators: the windswept plains of North Dakota. The state is home to the the Bank of North Dakota, the nation’s only public bank, a government-owned deposit-taking institution.

As Cohen and others see it, modeling a city-owned bank after the Bank of North Dakota would go beyond protecting public dollars from being used in ways that contradict public values and priorities — it could also help utilize those dollars as a powerful tool to advance those values and priorities. There are huge risks that need to be addressed and big questions to resolve along the way, but the urgency and energy around the public bank idea have never been stronger or more widespread, with public bank proposals at various stages in San Francisco, Oakland, Seattle, Los Angeles, Santa Fe, Washington D.C. and Philadelphia.

Several states, most notably New Jersey and Michigan, are also moving public bank proposals forward. New Jersey Governor Phil Murphy, new to office and himself a former Goldman Sachs investment banker, campaigned on creating a public bank.

“We would have more autonomy and more say in how our city resources are invested. San Francisco is one of the hottest real estate markets in the world but we’ve got an affordability crisis. Why are we not investing our dollars to solve that?” asks Cohen, who first heard about public banks during her 2010 campaign for office, when an opponent brought it up first. “What I’m also envisioning is how a municipal bank could better support small businesses, financing small businesses run by minorities, women, veterans — those who don’t have access to the same level of capital.”

A Banker’s Bank

Predominantly rural North Dakota may seem an unlikely place for cities to look for a solution, but there are some clear parallels between the Bank of North Dakota’s origins and the circumstances facing cities today. When the bank was founded in 1919, North Dakota farmers had been frustrated with the lending terms given to them by banks based in Minneapolis and Chicago, which they felt were too onerous and even predatory.

In today’s San Francisco, Cohen sees affordable housing developers struggling to access loans at affordable interest rates that would allow them to build or preserve more affordable housing, and at deeper levels of affordability. She also sees small businesses — both startups and well-established enterprises — struggling to get access to non-predatory credit that would enable them to grow and hire more employees.

At the California Reinvestment Coalition, the state’s leading financial watchdog group, executive director Paulina Gonzalez spends her days battling big banks, but she has similar hopes for a public bank.

“There’s an opportunity for cities,” Gonzalez says. “Maybe a public bank can provide support to local small businesses at lower interest rates, or provide support for affordable housing in a way that responds to community needs.”

With a budget appropriation for startup capital of $2 million, the equivalent of $28 million in today’s dollars adjusted for inflation, the North Dakota state legislature created the Bank of North Dakota, which opened its doors on July 28, 1919. How to raise startup capital is one of the big questions facing public bank advocates today. Banking startups can choose whether to be state-chartered (like the Bank of North Dakota) or federally-chartered; either way, regulators want to see a certain amount of startup capital based on the projected startup size of the bank.

“If the bank takes on deposits, we must be certain we can adequately fund the reserves necessary so that we can show we’re a responsible lender, modeling good behavior,” says Cohen, who also happens to be a trustee of one of the city’s pension funds.

Regulators will also want to see a business plan.

From its very beginning, the Bank of North Dakota’s business plan was not to compete directly with private banks and credit unions, but rather to complement them. Its primary source of deposits is not individuals or businesses, but the state’s tax payments, fees and pension funds, as well as deposits from city and county government entities in North Dakota. Today’s public bank advocates have to consider whether a new public bank, starting a hundred years after North Dakota’s, can feasibly take over all revenue streams at once or whether it should carve out public revenues and deposits one slice at a time to gradually grow the public bank.

As part of its non-compete model, the Bank of North Dakota doesn’t have branch offices and doesn’t offer ATM cards, debit cards, credit cards or online bill pay. If individuals or businesses want to open an account, or make a deposit or withdrawal, they have to come to the bank’s headquarters in Bismarck. Only North Dakota residents and businesses may open a checking or savings account, or purchase a certificate of deposit at the Bank of North Dakota.

Despite what seems like a limited business model, the Bank of North Dakota currently has around $4.9 billion in deposits and $7.3 billion in assets — including $4.8 billion in loans. The bank earned a record $136 million in net income in 2016, and hasn’t posted a net income loss going back to at least 1971, according to the bank’s 2016 annual report. Over the past few decades, the bank typically paid between $30 to $50 million a year back into the state’s general budget — something that could be a huge boost to chronically underfunded city governments.

Based on population size — approximately 758,000 in North Dakota and 865,000 in San Francisco — a San Francisco public bank could eventually be as large and financially profitable as North Dakota’s, if not more so, given the city’s overall wealthier population and higher property values.

In its lending strategy, the Bank of North Dakota also seeks ways to complement private banks instead of competing with them. It does so mainly by serving as a sort of banker’s bank in a couple of different ways.

Business loans make up around 40 percent of the Bank of North Dakota’s lending portfolio and about half of those loans are so-called participation loans. Much of the bank’s farm loans are also participation loans. In a participation loan, a client comes to a private bank asking for a loan that turns out to be bigger than what the bank is able to provide at the time of the request. Banking regulators don’t like to see banks be “overexposed” to any one client — that’s putting too many loan eggs into one client’s basket. In North Dakota, when faced with this situation, the private bank can approve a loan to cover part of the client’s request, then it can ask to the Bank of North Dakota to make a loan covering the rest.

With the participation loan model, the business or farmer is less likely to seek capital and services from a larger, perhaps national bank. Thanks to the Bank of North Dakota, local North Dakota banks are better positioned to keep relationships with clients as their businesses grow, which most likely keeps those businesses’ deposits local while still providing them access to all the capital they need.

The Bank of North Dakota also makes direct investments into local banks—it currently holds around $249 million in local bank stock shares, helping to meet a crucial need for smaller banks, which often have a tougher time raising the level of capital required by federal regulators to remain in operation.

It’s largely because of the Bank of North Dakota’s participation loans and local bank investments that North Dakota has more banks and credit unions per capita than any other state, says Stacy Mitchell, co-director of the think tank Institute for Local Self-Reliance.

“It’s fascinating to me because it’s a public solution that creates a much more robust cadre of capitalist enterprises,” Mitchell says. “In terms of the functionality, I don’t see a particular reason this model wouldn’t adapt to an urban environment.”

There are some parts of the Bank of North Dakota model that Mitchell doesn’t think would transfer to a more politically tumultuous, big-city environment. For example, while the Bank of North Dakota is staffed with professional bankers with backgrounds and experience in running private banks and underwriting loans, its board consists of only three people, one of whom is the Governor of North Dakota. The other two are the state’s Attorney General and the head of the Department of Agriculture, who the governor appoints.

“It’s a very small board, and it has worked in favor of North Dakota, which has a fairly high level of integrity in its government,” Mitchell says. “It’s a small place and it seems to have worked out fine, but I look at the structure and it doesn’t seem robust enough.”

For San Francisco and other places, governance is a huge question. In a place like New Jersey, it’s concerning to an almost comic degree, with “Bridgegate” being just the latest highly visible example of what lengths politicians are willing to go to spite each other.

“You have to very carefully circumscribe what the bank is allowed to do and who is on the board,” says Ellen Hodgson Brown, founder and chair of the Public Banking Institute, a nonprofit supporting public banking advocates around the country. “You don’t want politicians deciding who gets the loans.”

The banker’s bank model can help insulate a public bank from getting too involved with politics, according to Hodgson Brown. “Let the local banks deal directly with the customers,” she says.

“Enhance What We’re Already Doing”

Cities don’t have to go to North Dakota to see if it’s possible for a public sector entity to make loans while keeping politicians at arms’ length.

Local and state housing finance agencies everywhere already issue tax-exempt bonds to finance affordable housing projects, carefully underwriting the projects and developers who must eventually pay back those funds to investors. Housing finance agencies can’t play around with politics because they need to be able to keep up their low risk ratings or else lose the interest of the Wall Street types that invest in their bonds on behalf of future retirees, pensioners and others.

Depending on the city, the local community development agency may also be underwriting loans on a regular basis. The San Francisco Mayor’s Office of Housing and Community Development technically has a $1.4 billion affordable housing loan portfolio, for which it evaluates the finances of developers and the projects they propose, scrutinizing construction cost estimates and other project documents for possible fraud and other concerns. It doesn’t always work perfectly, but they underwrite loans on a regular basis without politicians getting involved in the day-to-day transactions.

Getting away with poor cost estimates in affordable housing finance in San Francisco would be hard, says Rebecca Foster, executive director of the San Francisco Housing Accelerator Fund, because the Mayor’s Office of Housing and Community Development (MOHCD) has a lot of layers of review built into their systems and loan documents. The Fund works closely with MOHCD’s underwriting, construction oversight and loan administration teams, and for rehab and new construction loans, the city’s construction manager as well as the developer’s construction manager both must review and sign off on a construction contract. In its loan agreements, the city limits administrative and overhead costs and requires that these costs are clearly line-itemed.

“If governments like the city or even the state could figure out more effectively how to link the investments of some of their deposits, even a very small portion … to local activities they support, that could be incredibly powerful,” Foster says.

On a smaller scale, San Francisco also offers down payment assistance loans to first-time, low-to-moderate income homebuyers. It currently has around 1,200 such loans outstanding in its portfolio, worth around $82 million. It also has a revolving loan fund for small business loans, currently administered by a nonprofit.

“The public bank would be able to enhance what we’re already doing,” Cohen says. “For example, our down payment assistance program has some limitations, and this could help it become more robust.”

In New Jersey, public banking advocacy efforts have been coordinated by environmentalists Walt McRee and Joan Bartl, both also working under the banner of the Public Banking Institute. They met future gubernatorial candidate Phil Murphy at a picnic of the Princeton Community Democratic Organization before he announced his run. “Because it’s what we talk about, we asked if he had heard about it,” McRee says.

San Francisco Supervisor Malia Cohen, seen here in a 2016 photo, is one of a growing number of city officials examining how public banks can benefit local governments. (AP Photo/Jeff Chiu)

Not only had Murphy already heard about the Bank of North Dakota, but as a former U.S. Ambassador to Germany, he had learned about that country’s network of local public banks, which have been around for hundreds of years.

Since then, McRee and Bartl have been touring the state, talking with anyone who is interested in speaking with them, from various labor groups to professional networks to mayors and local council members. They’ve been hoping to prime allies in anticipation of huge push back from the banking lobby if Murphy moves forward with his campaign promises around public banking. “The status quo has a momentum,” McRee adds.

Their efforts are already paying off. Last month, Murphy’s allies in the New Jersey legislature introduced a bill defining the scope of a public bank and establishing a process to establish a board of directors for a public bank.

Keeping the Bigger Picture in Mind

Last year, Cohen and her colleague Sandra Fewer requested an analysis on “community responsive banking” with a focus on creating a municipal bank from the city’s Budget & Legislative Analyst’s Office. A key step in moving the public banking process forward, the analysis includes a re-assessment by city attorneys that the city does have the legal authority to charter a banking entity, which contradicts earlier city attorney findings from 2011.

“The key thing I took away from the report was this is doable,” Cohen says. “There’s a lot of moving parts in our financial banking and payroll system, but San Francisco has a lot of talent, and the legal framework already exists.”

It would also be cheaper than what the city is already doing. The community responsive banking analysis notes that the city pays $864,000 a year in fees just for short-term cash management accounts. The city has nearly 200 short-term cash management accounts, one each at Union Bank and U.S. Bank, and the rest with Bank of America, with an average account balance of around $223 million. Meanwhile, Citibank manages the city’s $8.3 billion in longer-term investments for an annual fee of $186,000, in addition to any broker and dealer fees for trading in stocks, bonds and other investments.

Thanks to the interest that the Bank of North Dakota earns on its lending and other assets, the state of North Dakota pays nothing for the same services — in fact, the bank more often pays the state in those chunks of $30 to $50 million a year, if it’s needed.

The Office of San Francisco Treasurer José Cisneros just launched the next phase of the public bank formation process, announcing the members of a Municipal Bank Feasibility Task Force.