The Los Angeles Office of the Treasurer manages billions in a general investment pool. With stakes primarily in the U.S. Treasury and multinational corporations, the bureaucratic office’s website describes its investment strategy with one word: prudent.
This safe, methodical approach grew the city’s general investment portfolio value by almost $13 billion over two decades. Financial advisors would say the portfolio proves Wall Street offers long-term returns to the city, but community advocates argue this money doesn’t have to leave Los Angeles in the first place. They say L.A. should invest in local business, housing development and infrastructure— even if it means taking on a riskier portfolio.
Picture a public option for banking: that is what the City Council has tasked New York-based HR&A Advisors Inc. to do after unanimously voting in June to fund a feasibility report. The city will spend $460,000 to for the first phase of studying the viability of a public bank.
Los Angeles is the latest municipality pushing the needle forward on public banks.
As the country phases out pandemic emergency funding initiatives and regulators clamp down on banks’ risk management following multiple failures this year, the idea of banking as a public asset, has gained traction.
But for those watching from the banking industry, the high-risk, long-term return model proposed is contradictory, and poised for corruption.
What is a public bank?
Here’s how it would work: If Los Angeles approved the measure, either the state, city or county would deposit money into the public bank, which would reinvest any profits earned from its financing back to community-based businesses.
Advocates and researchers who worked with the Los Angeles City Council emphasize this would not be a consumer-facing bank— at least not at first. Organizers at Public Bank LA envision a wholesale bank servicing community development financial institutions, such as local credit unions, on financing projects the smaller lenders could not risk alone. If the bank makes a return on investments, over time it could grow to become an alternative to Wall Street institutions for ordinary loans and deposits.
“It doesn’t solve any problems all by itself,” said David Jette, a business executive who helped to co-found Public Bank LA “But it contributes to the financial tool set of public entities.”
According to the latest investment report by the city treasurer, Santa Monica-based Main Street Advisors Inc. currently advises the city’s portfolio, while the Bank of New York Mellon Corp. is the securities lending agent.
There are public banks operating around the world. Many advocates and politicians note how German public banks played a pivotal role in building the country’s infrastructure.
In the United States, the Bank of North Dakota is currently the only state-owned bank in operation. Founded in 1919, the bank holds all the state government’s deposits and finances loans through local lenders to support farming and infrastructure. While North Dakota makes a profit from this entity, advocates like Jette acknowledge its model likely wouldn’t work in Los Angeles.
In May, the Jain Family Institute and the Berggruen Institute released a five-part report detailing how a public bank could finance projects around Los Angeles. One such project could be affordable housing, with one report detailing how the bank could cut through the complicated capital stacks for construction loans or launch a rapid acquisition fund to preserve affordable housing.
According to Jack Landry, a research associate with the Jain Family Institute who worked on the report, the bank would compete for small-to-midsize renovation projects, not for high-rise developments.
“The idea here is to preserve the existing affordable housing in Los Angeles rather than stop all existing development,” Landry said.
Alongside affordable housing, researchers compiled portfolio options offering more flexible financing terms than existing capital sources. From green energy developments to financial justice initiatives like worker cooperatives, the bank would bet on businesses that don’t fit the typical credit profile traditional banks approve.
Historically unfavored
The proposals compiled by the two research institutes mirror the business plan presented to the San Francisco Board of Supervisors in May. HR&A – the advisors also hired by the L.A. City Council – was commissioned by San Francisco’s Reinvestment Working Group in February.
The advisors say significant bumps would be expected in the San Francisco bank’s first three operating years. Proposing a separate financial corporation to start while the city seeks regulatory approval from the California Department of Financial Protection and Innovation, the bank would incur “much greater expenses” while launching its operations, thus limiting its investment ability.
According to an executive of a Los Angeles-based bank, who spoke on background due to the public bank’s controversial nature, the FDIC heightens banks’ risk-management scrutiny. As a result, federally insured banks often pass on lending to unproven and often money-losing public projects to avoid being penalized for risky investments.
“Bank boards are supposed to be very agenda-free,” the executive said. “They need to be remorseless in their ability to only make good loans.”
Other critics cite the risk of politicians corrupting the public bank’s balance sheet by financing projects benefiting their districts or connections only. While advocates have pushed for distancing infrastructures through citizen committees and oversight boards, the L.A. City Council’s many corruption scandals could sway public opinion against the formation of a public bank.
Business lobbyists point to City Hall’s track record as the main reason a public bank’s good intentions wouldn’t make up for lack of oversite and protection of the bank’s deposits.
“We don’t want to allow consumers to have to turn on the TV to see whether or not their money will be safe when it comes to either scandals or political corruption,” said Chris Wilson, senior policy manager for the Los Angeles County Business Federation.
The Business Federation was one of many groups that opposed the California Public Banking Act, or AB-857. Gov. Gavin Newsom signed the bill into law in 2019 after Los Angeles voters struck down an amendment to the City Charter in 2018 that would have allowed a public bank to form.
The Business Federation, echoing others in the financial world, argues that banks require sophisticated models that only experienced managers could steer for long-term investments. Even with the slim chance of minimal mismanagement or political corruption, critics say the 100-year payout from a public bank requires a large capital commitment that could be invested in local banks already operating.
“It’s going to cost $25 million to $100 million to set up a bank, said Roberto Barragan, the executive director of the California Community Economic Development Association. “That could be better spent investing in an existing, or establishing a new, community development financial institution.”
After the quasi-public Los Angeles Community Development Bank went insolvent in the early 2000s after less than a decade of operating, the finance industry isn’t worried about public banks’ potential to disrupt the marketplace. According to the bank executive, these entities will gain traction based on their good intentions but diminish as illiquid market players.
“Every banker I know is going to applaud this. They just won’t be very concerned from a competitive perspective.”
