The Los Angeles Public Bank will use the city’s existing deposits as its primary source of funding. Currently, the City of Los Angeles holds billions of dollars in checking and short-term investment accounts at commercial banks, which earn very little interest and cost the city fees to manage. By housing these deposits in a public bank instead, the city can put them to work for its residents and save money on interest and banking fees, which currently total $1.35 billion and $340 million per year, respectively.
The start-up funds for a municipal public bank can come from a variety of sources, including appropriations from the local government budget, earnings from investment pools directed toward the public bank, bonds issued with the approval of citizens, grants from the federal government, and voluntary contributions from supporters of public banking. Each municipality will need to determine which sources are most appropriate for the size and scope of its bank.
Once the Los Angeles Public Bank receives a California State Public Bank Charter, as authorized under the California Public Banking Act, it will be able to accept deposits from municipal departments and neighboring municipalities. Additionally, it will be able to accept funds from pension funds, socially responsible mutual fund investment vehicles, and other institutional investors, or it may choose to work in partnership with a local financial institution.
To ensure a successful and trustworthy business plan, the Los Angeles Public Bank will need to focus on the complex tasks involved in running a bank. This will include providing basic services such as checking, credit card processing, and liquidity services for the city treasury. The bank will work closely with city departments and agencies to seamlessly integrate their accounts payable, receivable, merchant accounts, checking, wire, ACH, and payroll services, and will assist the Office of Finance in the collection and reporting of taxes.
As it begins to manage deposits, the bank can start making loans and purchasing interest-bearing assets. Its loan portfolio and investment decisions will be guided by its founding principles and the direction of its Board of Governors and may include infrastructure loans to the city, small business loans in partnership with community banks, and special loans for priority city initiatives such as affordable housing and clean energy upgrades.
Initially, the bank may function as a “banker’s bank,” providing liquidity and security for community banks seeking a strong local partner to compete with large multinational financial institutions. It could also offer clearing services and interbank liquidity. As it establishes itself as a reliable and profitable institution, the public bank could expand its offerings by partnering with community banks to provide extra security and lower the cost of banking for everyone.
As with a traditional bank, the City of Los Angeles will collect and store revenue in bank accounts as deposits and continue its regular activities. By bringing merchant services in-house, the city can manage them at a lower cost than commercial banks. After building up its reserve at the start, the public bank will not need to use tax dollars to fund its operations. Instead, it will make loans that are backed by city deposits, which will be properly insured and guaranteed, so they are not at risk. This approach will ensure that the public bank is self-sustaining and able to operate without jeopardizing taxpayer funds.
Municipal service providers, such as school districts and public utility commissions, will be the primary customers of the Los Angeles Public Bank. The bank will act as a “mini-Fed” for the region, providing assistance to local banks and guaranteeing loans. It will be established as a “banker’s bank,” meaning that it will offer loans in partnership with community banks and credit unions.
The public bank will work with local community banks, credit unions, and CDFIs to lend for projects that meet the needs of the community. This will help local banks to have greater lending ability and solvency. The bank will also initiate investment programs that align with the economic development plans of the City of Los Angeles, such as lending for affordable housing, supporting small and medium-sized businesses, and financing infrastructure projects that are financially viable and environmentally sound. By recycling public money locally, the public bank can ensure that it is not sent to distant shores.
The Los Angeles Public Bank will be governed by a board of qualified directors chosen for their reputation, financial knowledge, and commitment to the bank’s mission and financial stability. Unlike private banks, where board members are typically the largest investors and are often paid millions of dollars for their time, the public bank will be owned by the public, so elected representatives will play a role in selecting a board of qualified individuals with reasonable compensation who will be subject to higher levels of accountability and transparency in their management decisions.
The governance of the public bank will be informed by input from various stakeholders during the creation of the business plan and will be guided by the following principles:
– The bank will be run by an independent board of governors comprising community residents and experts in public finance, banking, affordable housing, and climate change mitigation. – It will be strictly regulated by the state of California and the FDIC and will be required to safeguard and grow municipal assets. – It will be accountable to policies requiring it to act in the best interests of the region and its people, rather than individual shareholders or executives.
Within these guidelines, it will be up to elected representatives, banking experts, and the community to provide input on the governance structure that will best promote financial stability and meet the needs of the bank’s local area while upholding the bank’s mandate for social and environmental responsibility.
Credit unions are a good alternative to big banks and are owned by their members, rather than private shareholders. As a result, they are focused on providing the best services to their customers, rather than maximizing profits for distant shareholders. Credit unions are accountable to their depositors and not the general public.
On the other hand, public banks are owned by governments and are accountable to elected representatives. They support credit unions and community banks by making joint participation loans, providing them with credit, purchasing their mortgages, and cooperating in other ways that make more capital available to them to offer low-cost consumer services. For example, North Dakota, which has a state-owned public bank, has more credit unions and community banks per capita than any other state.
Unlike credit unions, public banks are not restricted by rules governing credit unions, which enables them to access capital at lower rates and with fewer restrictions on their lending. States and municipalities have large revenue streams and reserves that can be invested most efficiently by public banks in affordable housing, climate-resilient infrastructure, and support for small and medium-sized, locally-owned businesses.
Los Angeles is facing a severe housing crisis, with over 400,000 households living in substandard housing and many residents spending more than 50% of their income on rent and utilities. The city has the highest homelessness rate in the country, with 58,000 people living on the streets in 2017. It is estimated that a 5% increase in rent could result in an additional 2,000 people becoming homeless. Statewide in California, the median home price is more than 2.5 times higher than the national median.
Karl Beitel, a public banking expert, believes that public banks can help address this crisis by providing loans for affordable housing development, including construction loans and long-term bond and mortgage loans for multi-unit housing developments. According to Beitel, a municipal bank in Los Angeles “could, over time, be expanded to become a significant supplier of long-term affordable housing credit…and fund a property acquisition program that would acquire existing rental properties and place them into permanently affordable cooperative housing arrangements and land trusts.”
Public banks offer a smooth pathway for funding and an alternative to reliance on private investors and the for-profit housing market. They can help ensure that future housing development linked to publicly funded transit investments does not result in widespread displacement of residents, which often occurs in predominantly African-American, Asian, and Latino working-class neighborhoods. This can also be achieved through co-lending with local private banks and by encouraging and backstopping their investments in local housing initiatives.
The Los Angeles Public Bank has the potential to play a significant role in addressing the climate crisis and promoting sustainability in the city. By providing financing for clean energy infrastructure and prioritizing renewable energy lending, the bank can support the transition to a low-carbon economy. Additionally, by integrating sustainability into its investment strategies, the bank can align its financial decisions with the city’s environmental goals.
Other public banks around the world have successfully implemented similar strategies. The Sparkassen network of public banks in Germany has significantly contributed to the country’s shift towards renewable energy, with 73% of investment in this sector coming from the public bank sector. In Costa Rica, the worker-owned Banco Popular has funded various environmentally-friendly projects, including sustainable water supply systems, hydroelectric energy generation, and energy-efficient retrofitting. These examples demonstrate the potential for a public bank in Los Angeles to make a positive impact on the environment and promote sustainability in the city.
The Bank of North Dakota (BND) is a public bank with a long history of profitability. Since its founding in 1919, it has consistently achieved high returns on investment, including a 17% return during the COVID-19 pandemic. The BND’s success is due in part to its conservative approach to lending and investing, which has allowed it to weather economic downturns like the Great Depression and the Great Recession. In addition to providing low interest loans to small businesses and below-market student loans, the BND partners with local private banks to support the secondary mortgage market and buys municipal bonds to support local governments. It also played a key role in providing Paycheck Protection Program (PPP) loans to small businesses during the COVID-19 pandemic.
There is a growing movement in the United States to establish public banks at the municipal and regional levels, as well as state-wide. Some of the cities and states that are actively pursuing the creation of public banks include Los Angeles, San Francisco, the East Bay, the Central Coast in California, Seattle, Denver, Chicago, Philadelphia, and the District of Columbia. These efforts have garnered support from both Democrats and Republicans, as demonstrated by the bipartisan legislation filed in Michigan to create a state public bank. At present, North Dakota is the only state with a statewide public bank, which is supported by a Republican-controlled legislature.
Public banks in California will manage municipal agency funds and will not have physical branches for retail banking, however, Public Bank Los Angeles and the California Public Banking Alliance are working towards options for the general public. In 2021, the state passed the California Public Banking Option Act (AB 1177), which will establish the CalAccount program providing zero-cost, zero-penalty bank accounts to all Californians. Local public banks may potentially become designated partners and hold CalAccounts, although they are generally prohibited from retail activity. However, they can provide certain retail services, such as accepting deposits and making loans to other public entities, if there are no local financial institutions offering the same services in their jurisdiction.
There are two existing models that can serve as inspiration for the Los Angeles Public Bank: the Bank of North Dakota and the Sparkassen in Germany.
a) The Bank of North Dakota. The Bank of North Dakota has a board with three elected representatives who set policy for public service interests and an advisory board of bankers who serve in an advisory capacity.
b) Sparkassen of Germany. The Sparkassen in Germany has three boards, with one-third elected by a regional parliament, one-third made up of employee representatives, and one-third made up of people from the public who have proven economic expertise. It will be up to Los Angeles’ elected representatives, banking experts, and the people to determine the most effective governance structure for the public bank, taking into consideration the needs of the city and upholding the bank’s social and environmental responsibility mission. One proposal for the Public Bank LA incorporates the Los Angeles Neighborhood Councils into the governance framework.
There is a great deal of interest in providing banking services for the millions of dollars spent on cannabis in California. Many legal distributors have no reliable means for the normal financial services needed to run a business. While public banks are often mentioned as a solution to cannabis business banking, as long as cannabis remains a Schedule 1 federally prohibited drug, they will likely not provide services to these businesses as it would be an impediment to gaining approval from the FDIC and Federal Reserve System. Federal law will have to change in order to protect those public banks who choose to serve cannabis businesses from potential prosecution. In addition, public banks are not chartered as banks to private businesses.
Opponents of public banking often raise concerns about bureaucracy, inefficiency, and corruption in the public sector. However, the public bank will not be run by politicians, but by professional bankers who are accountable to a board of governors. These bankers will be mandated to serve the public, rather than shareholders or executives.
The Bank of North Dakota (BND) is a successful example of a publicly owned state bank. According to the Wall Street Journal, it is more profitable than Goldman Sachs and JP Morgan Chase. BND is known for its risk-averse lending practices, low costs, and partnerships with local banks. It does not pay bonuses or dividends, and does not compete with local banks.
Public sector banks, while not common in the US, are found in many other countries. Studies have shown that they are often more profitable, safe, and transparent than private banks.
Public banks in California will be required to obtain Federal Deposit Insurance Corporation (FDIC) insurance and will be subject to the same regulations and protections as private banks. Deposits in public banks will be collateralized according to the same rules that apply to all banks. This ensures that public banks in California operate in a safe and responsible manner, protecting depositors and the public’s funds. The California Public Banking Act (AB 857) allows cities and counties to establish their own banks and requires compliance with these regulations as a condition of charter approval.
Public banking has broad appeal across political ideologies. The Bank of North Dakota, the only state-run bank in the US, is supported by both Democrats and Republicans in the conservative state of North Dakota. This is due to its track record of supporting the state’s economy through low-cost loans to farmers, businesses, homeowners, and college students, as well as its contributions to the state treasury which help reduce the need for tax increases.
In California, a largely Democratic state, the passage of the California Public Banking Act (AB 857) has been seen as a solution to pressing issues such as affordable housing, small business support, and financing infrastructure improvements to address the climate crisis. Public banks are accountable to the communities they serve and are able to make investments that reflect the desires of the majority of residents, considering the perspectives of both conservatives and progressives.
Public Bank LA is a grassroots initiative working to establish an eco-socially responsible bank in Los Angeles. Our community-led effort aims to redefine banking by prioritizing social impact and environmental sustainability.
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