Beverly Hills City Council
February 8, 2022

STAFF REPORT
Meeting Date: February 8, 2022
To: Honorable Mayor & City Council
From: Cynthia Owens, Policy & Management Analyst
Subject: Request by Councilmember Mirisch for Information on Public Banks
Attachments: 1. Bill Text - Assembly Bill 857, the Public Banking Act (2019)

2. Government Finance Review Article on State Banks (2021)

3. Public Bank of LA Proposal

4. Common Misconceptions about the Proposed Municipal Bank of Los Angeles

5. San Gabriel Valley Times - The Public Bank LA Plan is Incredibly Naïve

6. LA Community Development Bank – The Collapse of a Noble Idea

INTRODUCTION
Councilmember Mirisch is requesting an overview of public banks.

DISCUSSION
On September 13, 2019, the California legislature passed Assembly Bill 857, the Public Banking Act (“AB 857”). Governor Newsom signed AB 857 into law on October 2, 2019.

The new law provides a pathway for cities and counties throughout the state to establish public banks. The legislature requires a city or county to create a business plan to be presented to the public and approved by local legislature.

AB 857 states a public bank may engage in banking activities, including infrastructure lending, wholesale lending, participation lending, and certain retail activities. A public bank may not compete with local financial institutions or engage in certain retail activities without partnering with a local financial institution.

Under AB 857, public banks shall be organized as a nonprofit public benefit or mutually benefit corporation, owned entirely by cities and counties, governed by independent boards of directors, and run by professional bankers. Public banks are exempt from taxes and subjected to the Brown Act and the Public Records Act.

AB 857 requires public banks to obtain a certificate of authorization to transact business as a bank from the California Department of Financial Protection and Innovation (DFPI) and to obtain Federal Deposit Insurance Corporation (FDIC) insurance.

Meeting Date: February 8, 2022

Finally, AB 857 will be implemented over a period of seven years, with no more than two licenses to be issued each year, up to a maximum of ten licenses (§ Chapter 442, Section 5, 57607 (a) – page 16, Attachment 1). The Department of Business Oversight will conduct a study on the efficacy of the banks. The program is intended to demonstrate how public banks benefit Californian’s local communities and governments.

At the July 16, 2019, City Council formal session, the City Council voted to support the concept of AB 857. In general, the City Council was supportive of providing the option for a jurisdiction to establish a public bank; however, there was some concern expressed at the meeting that the formation of a public bank may not necessarily be the correct path forward for Beverly Hills.

Public Banking History
Public banking is banking operated in the public interest, through institutions owned by the people through their local or state governments. Public banking is distinguished from private banking as its mandate begins with the public’s interest. Currently, there are two public banks which exist in the United States: the Bank of North Dakota (“BND”) and the Territorial Bank of American Samoa.

BND was founded in 1919 on a wave of economic populism, capitalized with a $2 million bond offering and charged with “promoting agriculture, commerce and industry” in North Dakota. Under North Dakota state law, all state funds must be deposited into BND, which does not have deposit insurance but is instead insured by the “full faith and credit” of the state of North Dakota. BND primarily partners with local banks and credit unions to facilitate agricultural, commercial, real estate and student loans. BND reported a profit of $141.2 million in 2020, down from $169 million in 2019 with a return on investment of 15 percent in its annual report. In the 16 years preceding the publishing of the 2020 annual report, BND had reported record profits each year.

The other public bank, the Territorial Bank of American Samoa, was founded in 2016 after the last commercial bank left the territory. It gained access to the Federal Reserve’s payment system in 2018. The annual reports for the Territorial Bank of American Samoa are currently not available online; therefore, staff is unable to report how the bank is performing.

Studies of Public Banking by Government Agencies
Many state and local agencies have explored the idea of public banking and spent a great deal of time and resources to study the feasibility of public banking. This includes, but is not limited to:
 New Hampshire (as a state);
 Philadelphia, Pennsylvania;
 Seattle, Washington;
 Santa Fe, New Mexico;
 District of Columbia; and
 San Francisco, California.

Although the objectives of public banking vary from jurisdiction to jurisdiction, the common themes include:
 Provide a stable source of infrastructure funding and economic development  Provide better banking services for public entities at fair price  Gain greater access to credit or capital
 Help fund state government with bank profits
Meeting Date: February 8, 2022

 Stabilize the state/city economy during economic downturns  Fill in the gaps where there are not current financial services  Set up participation loan programs
 Increase the lending capacity of community banks
 Provide cannabis banking options – NOTE, banks must still be FDIC insured, so it is unknown if cannabis banking is truly an option as federal law has classified cannabis as a Schedule I drug under the Controlled Substances Act since 1970.

The studies widely concluded that public banking is costly and risky with relatively low return on investment. Many studies supported altering the existing banking structure and building targeted alternatives to support public interest. Currently, no public bank has been created by government jurisdictions who have completed a study; however, the City and County of San Francisco is still moving forward with exploring the option after completing a feasibility study.

Summary of San Francisco’s Feasibility Study
In March 2019, the City and County of San Francisco published a feasibility study for establishing a public bank. The study analyzed the financial costs and benefits of a public bank and outlined the policy and operational considerations if San Francisco chose to create a public bank.

The study notes pursuing a public bank is a time intensive and expensive endeavor. The upfront short-term cost, in terms of time, money and energy, is significant; while the long-term payout is uncertain.

The study provided three financial models:
1) A reinvestment entity, which focuses on affordable housing and small business lending to achieve community goals,
2) A divestment bank that performs all of San Francisco’s cash management, and 3) A combination bank that performs both cash management and affordable housing and small business lending for San Francisco.

The table below summarizes the findings of the three models:

Model 1: Reinvest Model 2: Divest Model 3: Combined
Years to Break Even 10 31 56
Size at Break Even $1.1 Billion $3.1 Billion $10.4 Billion Estimated Appropriation Required to Break Even
Start Up Costs $6 Million $119 Million $119 Million
Operational Subsidy $13 Million $990 Million $2.2. Billion Capital Investment $165 Million $460 Million $1.6 Billion Total $184 Million $1.6 Billion $3.9 Billion
The study listed several operational and policy challenges including:
 Sources of banking capital is limited to general fund, philanthropy or crowdfunding;
 Sources of deposits and collateral requirements;
 The bank’s governance structure needs to be independent of political process and pressures; and
 Tensions between a public bank and the state’s mandates of “safety, liquidity and yield”.

Meeting Date: February 8, 2022

The study recommended San Francisco take a phased approach, which offers a logical progression and pursues interim programs capable of achieving the same goals of a public bank, including socially responsible banking, small business lending and serving un-banked and/or underbanked individuals.

In June 2021, the San Francisco’s Board of Supervisors unanimously approved an ordinance moving the City closer to creating a public bank. The ordinance created a working group of community leaders and financial experts to develop a business plan to submit to the California Department of Financial Protection and Innovation for approval.

The group will also develop a timeline for the city to apply for a public banking license.

Jurisdictions in California Exploring Public Banking
Numerous cities and joint powers authorities are exploring the formation of a public bank. This includes but is not limited to:
 Los Angeles
 Oakland
 Santa Barbara
 San Diego
 San Francisco
 San Jose
 Santa Rosa
San Francisco is further in the process than most other jurisdictions in the state. The City of San Jose recently voted not to pursue implementing a public bank.

On September 9, 2021, the state legislature passed Assembly Bill 1177, California Public Banking Option Act (“AB 1177”). The bill was signed by the Governor on October 4, 2021.

AB 1177 establishes the CalAccount Blue Ribbon Commission to conduct a market analysis to determine the feasibility of the CalAccount Program by July 1, 2024. The Cal Account Program, should it be established by the state, would be for the purpose of protecting consumers who lack access to traditional banking services from predatory, discriminatory, and costly alternatives through specified banking and payment services, such as no-cost transaction accounts. The market analysis must cover specified research topics, including whether there are alternative programs that would accomplish similar policy objectives as the proposed CalAccount Program. This is seen as the state’s initial attempts to create a public bank.

Pros and Cons
Supporters of public banks see them as a catalyst for the promotion of social goals such as the development of affordable housing, refinancing of student debt and economic development in underserved communities. Supporters argue that a public bank’s decisions would focus on the values and needs of local communities, unlike private banks which focus on investor profits, charge high interest rates and fees and often take risks with public funds. Public banks can provide below-market interest rate loans to state and local governments, consumers, students and businesses, potentially reducing costs millions or even billions of dollars. They can also provide banking services to citizens who currently do not have access to these services.

Opponents of public banks argue they will take time to break even during which period of time the local government entity would need to pay bank employees, cover overhead at the bank, obtain a charter, and have other initial capitalization costs (starting cash).

Other items of concern include:
 Financial risk to the local jurisdiction,
Meeting Date: February 8, 2022

 High startup capital costs,
 Corruption, and
 Competition with existing commercial banks.

Finally, the Government Finance Officers Association in their Government Finance Review publication recently printed an article titled Is a State Bank a Useful Economic Tool? This article has been attached to this report to provide more information on this subject matter to the City Council (Attachment 2).

Public Bank of Los Angeles
On October 5, 2021, the City Council of the City of Los Angeles authorized their Chief Legislative Analyst to draft and release a Request for Proposals (RFP) in 60 days, seeking consultant services needed to conduct policy, fiscal, and economic analyses related to the formation of a public bank serving the City of Los Angeles.

Based on the agenda for the City of Los Angeles, and comments made at the meeting, it is unclear if the City of Los Angeles would be including the option of establishing a Joint Powers Authority (“JPA”) for a Public Bank of Los Angeles in the RFP. It is also unclear, that should the Beverly Hills City Council decide to pursue potentially joining a JPA with the City of Los Angeles what the process would be; what the structure of the JPA and bank would look like; what the fiscal impacts would potentially be to the City; and what the City’s role would be in establishing the bank.

As part of the discussion for entering a new JPA, the City Council should consider the implications of Assembly Bill 1912 (Rodriguez) Public employees’ retirement: joint powers agreements: liability, approved in 2018 (“AB 1912”). AB 1912 provides agencies that are part of a JPA, may be liable for debts, liabilities, or obligations of the other agencies within the JPA. Additionally, the City of Los Angeles utilizes its own public agency retirement system and is not in CalPERS. Part of the discussion for entering a new JPA would need to include how the JPA is established and which public agency retirement system would be responsible for the employees.

Presentations on February 8, 2022
On November 2, 2021, Councilmember Mirisch requested staff invite a person to speak to the City Council on the benefits of public banks. Mayor Wunderlich then requested that this should be a balanced presentation and requested staff invite someone to speak to the City Council on the disadvantages of public banks.

David Jette, co-founder of the Public Bank LA and the California Public Banking Alliance, will be present on February 8, 2022. Mr. Jette is able to answer questions and speak about the advantages public banks may offer to cities. Prior to the February 8, 2022 meeting, Mr. Jette provided several documents to City staff on public banks. Two of the most relevant documents are attached for the City Council to review (Attachments 3 and 4).

Jason Lane, Vice President - Deputy Director of Government Relations for the California Bankers Association, will be present at the February 8, 2022 Study Session Meeting. Mr.

Lane is able to answer questions and provide information on the disadvantages of public banks for City Council consideration. Mr. Lane has provided two documents to City staff on this subject which are included with this report (Attachments 5 and 6).

The City Council will have an opportunity to ask questions of each party.

Meeting Date: February 8, 2022

FISCAL IMPACT
Unknown as the fiscal impact is highly variable and dependent on the direction given by the City Council.

RECOMMENDATION
The City Council may provide any direction they wish on this subject matter. .

Gabriella Yap
Deputy City Manager
Approved By
Attachment 1
9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 1/16 SHARE THIS: Date Published: 10/02/2019 09:00 PM
AB-857 Public banks. (2019-2020)
Assembly Bill No. 857
CHAPTER 442
An act to amend Sections 5130 and 7130 of the Corporations Code, to amend Sections 119, 1004, and 1100 of, and to add Section 1008 to, the Financial Code, to amend Sections 6254.26, 23007, 53601, 53635, and 53635.2 of, to add Division 5 (commencing with Section 57600) to Title 5 of, and to add Sections 6254.35, 54956.97, and 54956.98 to, the Government Code, and to add Section 23701aa to the Revenue and Taxation Code, relating to public banks. [ Approved by Governor October 02, 2019. Filed with Secretary of State October 02, 2019. ]

LEGISLATIVE COUNSEL'S DIGEST
AB 857, Chiu. Public banks.

Existing law, the Financial Institutions Law, regulates the activities of various financial entities, including commercial banks, industrial banks, trust companies, credit unions, and savings associations. The Banking Law defines and regulates state banks and commits the enforcement of banking laws to the Commissioner of Business Oversight.

Existing law prohibits a county from giving or loaning its credit to, or in aid of, any person or corporation.

Existing law requires a local agency, as defined, to deposit all money belonging to, or in the custody of, that local agency into specified state or national banks, as defined. Existing law regulates the investment of public funds by local agencies.

Existing law, the Nonprofit Corporation Law, regulates the formation and conduct of a nonprofit mutual benefit corporation and a nonprofit public benefit corporation.

This bill would define the term “bank” for purposes of the Financial Institutions Law and the Banking Law to include a public bank. The bill would define the term “public bank” to mean a corporation, organized as either a nonprofit mutual benefit corporation or a nonprofit public benefit corporation for the purpose of engaging in the commercial banking business or industrial banking business, that is wholly owned by a local agency, as specified, local agencies, or a joint powers authority.

The bill would require a public bank to obtain a certificate of authorization to transact business as a bank from the commissioner and to obtain and maintain insurance, subject to specified requirements. The bill would prohibit the commissioner from issuing more than 2 public bank licenses, as defined, in a calendar year and would prohibit the commissioner from authorizing more than 10 public banks at one time. The bill would require a public bank to include a specified purpose statement in its articles of incorporation and make conforming changes. The bill would require a local agency to conduct and approve, as specified, a study of the viability of a public bank containing specified elements before submitting an application to the commissioner to organize and Home Bill Information California Law Publications Other Resources My Subscriptions My Favorites 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 2/16 establish a public bank and would require the local agency to include a copy of that study in the application submitted to the commissioner. The bill would require a local agency that is not a charter city to obtain voter approval of a motion to submit an application to the commissioner, as specified. The bill would authorize a county to lend its available funds to a public bank. The bill also would authorize a local agency to deposit funds in a public bank, and to invest in a public bank, subject to certain requirements. The bill would authorize a public bank to make distributions to its members. The bill would require, as specified, a public bank to conduct retail activities in partnership with local financial institutions and would prohibit a public bank from competing with local financial institutions.

The Corporation Tax Law imposes a franchise tax on financial corporations, but provides that the tax is in lieu of all other state and local taxes and licenses, with certain exceptions. That law also exempts specified classes of entities from the franchise and income taxes imposed by that law, including state-chartered credit unions.

This bill would additionally exempt from those franchise and income taxes any public bank. This bill would also exempt a public bank from all other state and local taxes and licenses, with certain exceptions.

Existing law, the Ralph M. Brown Act, requires that all meetings of the legislative body, as defined, of a local agency be open and public and all persons be permitted to attend unless a closed session is authorized.

This bill would authorize the governing board of a public bank or a committee of that governing board to meet in a closed session to consider and take action on matters pertaining to a loan or investment decision, a decision of the internal audit committee, the compliance committee, or the governance committee, and a meeting with a state or federal regulator. The bill would authorize a public bank to make all information received by a shareholder, member, or owner of a public bank confidential, as specified.

Existing law, the California Public Records Act, requires that public records, as defined, be available to the public for inspection and made promptly available to any person.

This bill would exempt specified information and records of a public bank, and related decisions of the directors, officers, and managers of the public bank, from the disclosure requirements of the act, including, among others, records related to alternative investments of the bank, as specified, meeting materials of any closed session, a record containing information regarding a portfolio position in which the public bank invests, information related to a specific account in the bank, and specified correspondence related to meetings with, or a memorandum or letter received from, state and federal banking regulators.

Existing constitutional provisions require that a statute that limits the right of access to the meetings of public bodies or the writings of public officials and agencies be adopted with findings demonstrating the interest protected by the limitation and the need for protecting that interest.

This bill would make legislative findings to that effect.

The California Constitution requires local agencies, for the purpose of ensuring public access to the meetings of public bodies and the writings of public officials and agencies, to comply with a statutory enactment that amends or enacts laws relating to public records or open meetings and contains findings demonstrating that the enactment furthers the constitutional requirements relating to this purpose.

This bill would make legislative findings to that effect.

Vote: majority Appropriation: no Fiscal Committee: yes Local Program: no THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

SECTION 1. It is the intent of the Legislature that this act authorize the lending of public credit to public banks and authorize public ownership of public banks for the purpose of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities. It is the intent of the Legislature that public banks shall partner with local financial institutions, such as credit unions and local community banks, and shall not compete with local financial institutions.

SEC. 2. Section 5130 of the Corporations Code is amended to read:
5130. The articles of incorporation of a corporation formed under this part shall set forth:
(a) The name of the corporation.
9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 3/16 (b) (1) Except as provided in paragraph (2), the following statement:
“This corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person.

It is organized under the Nonprofit Public Benefit Corporation Law for (public or charitable [insert one or both]) purposes.”
[If the purposes include “public” purposes, the articles shall, and in all other cases the articles may, include a further description of the corporation’s purposes.]
(2) If the corporation is a public bank, as defined in Section 57600 of the Government Code, the articles shall set forth a statement of purpose that is prescribed in subdivision (b) of Section 57601 of the Government Code. (c) The name and street address in this state of the corporation’s initial agent for service of process in accordance with subdivision (b) of Section 6210.
(d) The initial street address of the corporation.
(e) The initial mailing address of the corporation, if different from the initial street address.

SEC. 3. Section 7130 of the Corporations Code is amended to read:
7130. The articles of incorporation of a corporation formed under this part shall set forth the following:
(a) The name of the corporation.
(b) (1) Except as provided in paragraph (2) or (3), the following statement:
“This corporation is a nonprofit mutual benefit corporation organized under the Nonprofit Mutual Benefit Corporation Law. The purpose of this corporation is to engage in any lawful act or activity, other than credit union business, for which a corporation may be organized under such law.” (2) In the case of a corporation formed under this part that is subject to the California Credit Union Law (Chapter 1 (commencing with Section 14000) of Division 5 of the Financial Code), the articles shall set forth a statement of purpose that is prescribed in the applicable provisions of the California Credit Union Law. (3) In the case of a corporation formed under this part that is a public bank, as defined in Section 57600 of the Government Code, the articles shall set forth a statement of purpose that is prescribed in subdivision (a) of Section 57601 of the Government Code.
(4) The articles may include a further definition of the corporation’s purposes. (c) The name and street address in this state of the corporation’s initial agent for service of process in accordance with subdivision (b) of Section 8210.
(d) The initial street address of the corporation.
(e) The initial mailing address of the corporation, if different from the initial street address.

SEC. 4. Section 119 of the Financial Code is amended to read:
119. “Bank” or “banks” includes a public bank, as defined in Section 57600 of the Government Code, commercial banks, industrial banks, and trust companies unless the context otherwise requires. However, “bank” does not include a savings association or a credit union.

SEC. 5. Section 1004 of the Financial Code is amended to read:
1004. (a) A California state bank is a corporation incorporated under Division 1 (commencing with Section 100) of Title 1 of the Corporations Code or, in the case of a public bank, a corporation incorporated under Part 2 (commencing with Section 5110) or Part 3 (commencing with Section 7110) of Division 2 of Title 1 of the Corporations Code, that is, with the approval of the commissioner, incorporated for the purpose of engaging in, or that is authorized by the commissioner to engage in, the commercial or industrial banking business. 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 4/16 (b) (1) All provisions of law applicable to corporations generally, including, but not limited to, the General Corporation Law (Division 1 (commencing with Section 100), Title 1 of the Corporations Code) shall apply to a bank that is not a public bank. However, whenever any provision of this division or any regulation or order issued under any provision (other than this section) of this division applicable to banks is inconsistent with any provision of law applicable to corporations generally, that provision of this division or that regulation or order shall apply and the provision of law applicable to corporations generally shall not apply. (2) All provisions of law applicable to nonprofit corporations generally, including, but not limited to, the Nonprofit Corporation Law (Division 2 (commencing with Section 5000), Title 1 of the Corporations Code) shall apply to public banks. Whenever a provision of Division 5 of Title 5 of the Government Code applicable to public banks is inconsistent with a provision of law applicable to nonprofit mutual benefit corporations or nonprofit public benefit corporations generally, the provision of Division 5 of Title 5 of the Government Code applicable to public banks shall apply, and the inconsistent provision of law applicable to nonprofit mutual benefit corporations or nonprofit public benefit corporations generally shall not apply to a public bank. (c) As used in this section, public bank has the same meaning as defined in Section 57600 of the Government Code.

SEC. 6. Section 1008 is added to the Financial Code, to read:
1008. When applicable to a corporation organized as a public bank, as defined in Section 57600 of the Government Code, references in this division to share, shareholder, or stockholder shall mean membership or member in the public bank, as applicable.

SEC. 7. Section 1100 of the Financial Code is amended to read:
1100. The articles of each bank shall contain the applicable one of the following statements:
(a) Except as provided in subdivision (f), if the bank is, or is proposed to be, a commercial bank not authorized to engage in trust business, that the purpose of the corporation is to engage in commercial banking business and any other lawful activities which are not, by applicable laws or regulations, prohibited to a commercial bank. (b) Except as provided in subdivision (f), if the bank is, or is proposed to be, a commercial bank authorized to engage in trust business, that the purpose of the corporation is to engage in commercial banking business and trust business and any other lawful activities which are not, by applicable laws or regulations, prohibited to a commercial bank authorized to engage in trust business. (c) Except as provided in subdivision (f), if the bank is, or is proposed to be, an industrial bank not authorized to engage in trust business, that the purpose of the corporation is to engage in industrial banking business and any other lawful activities which are not, by applicable laws or regulations, prohibited to an industrial bank. (d) Except as provided in paragraph (f), if the bank is, or is proposed to be, an industrial bank authorized to engage in trust business, that the purpose of the corporation is to engage in industrial banking business and trust business and any other lawful activities which are not, by applicable laws or regulations, prohibited to an industrial bank authorized to engage in trust business. (e) In case the bank is, or is proposed to be, a trust company (other than a commercial bank authorized to engage in trust business), that the purpose of the corporation is to engage in trust business and any other lawful activities which are not, by applicable laws or regulations, prohibited to a trust company. (f) If the bank is, or is proposed to be, a public bank, the articles shall set forth a statement of purpose that is prescribed in subdivision (a) or (b) of Section 57601 of the Government Code.

SEC. 8. Section 6254.26 of the Government Code is amended to read:
6254.26. (a) Notwithstanding any provision of this chapter or other law, the following records regarding alternative investments in which public investment funds invest shall not be subject to disclosure pursuant to this chapter, unless the information has already been publicly released by the keeper of the information:
(1) Due diligence materials that are proprietary to the public investment fund or the alternative investment vehicle.
(2) Quarterly and annual financial statements of alternative investment vehicles. 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 5/16 (3) Meeting materials of alternative investment vehicles. (4) Records containing information regarding the portfolio positions in which alternative investment funds invest. (5) Capital call and distribution notices.
(6) Alternative investment agreements and all related documents. (b) Notwithstanding subdivision (a), the following information contained in records described in subdivision (a) regarding alternative investments in which public investment funds invest shall be subject to disclosure pursuant to this chapter and shall not be considered a trade secret exempt from disclosure:
(1) The name, address, and vintage year of each alternative investment vehicle. (2) The dollar amount of the commitment made to each alternative investment vehicle by the public investment fund since inception.
(3) The dollar amount of cash contributions made by the public investment fund to each alternative investment vehicle since inception.
(4) The dollar amount, on a fiscal yearend basis, of cash distributions received by the public investment fund from each alternative investment vehicle.
(5) The dollar amount, on a fiscal yearend basis, of cash distributions received by the public investment fund plus remaining value of partnership assets attributable to the public investment fund’s investment in each alternative investment vehicle.
(6) The net internal rate of return of each alternative investment vehicle since inception. (7) The investment multiple of each alternative investment vehicle since inception. (8) The dollar amount of the total management fees and costs paid on an annual fiscal yearend basis, by the public investment fund to each alternative investment vehicle. (9) The dollar amount of cash profit received by public investment funds from each alternative investment vehicle on a fiscal year-end basis.
(c) For purposes of this section, the following definitions shall apply:
(1) “Alternative investment” means an investment in a private equity fund, venture fund, hedge fund, or absolute return fund.
(2) “Alternative investment vehicle” means the limited partnership, limited liability company, or similar legal structure through which the public investment fund invests in portfolio companies. (3) “Portfolio positions” means individual portfolio investments made by the alternative investment vehicles. (4) “Public investment fund” means any public pension or retirement system, any public endowment or foundation, or a public bank, as defined in Section 57600.

SEC. 9. Section 6254.35 is added to the Government Code, to read:
6254.35. (a) For purposes of this section, the following definitions shall apply:
(1) “Customer” means a person or entity that has transacted or is transacting business with or has used or is using the services of a public bank or a person or entity for whom the public bank has acted as a fiduciary with respect to trust property.
(2) “Investment recipient” means an entity in which the public bank invests. (3) “Loan recipient” means an entity or individual which has received a loan from the public bank. (4) “Personal data” means social security numbers, tax identification numbers, physical descriptions, home addresses, home telephone numbers, statements of personal worth or any other personal financial data, employment histories, electronic mail addresses, and information that reveals any electronic network location or identity.
9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 6/16 (5) “Public bank” has the same meaning as defined in Section 57600. (b) Notwithstanding another provision of this chapter, the following information and records of a public bank and the related decisions of the directors, officers, and managers of a public bank shall not be subject to disclosure pursuant to this chapter, unless the information has already been publicly released by the custodian of the information:
(1) Due diligence materials that are proprietary to the public bank. (2) A memorandum or letter produced and distributed internally by the public bank. (3) A commercial or personal financial statement or other financial data received from an actual or potential customer, loan recipient, or investment recipient.
(4) Meeting materials of a closed session meeting, or a closed session portion of a meeting, of the board of directors, a committee of the board of directors, or executives of a public bank. (5) A record containing information regarding a portfolio position in which the public bank invests. (6) A record containing information regarding a specific loan amount or loan term, or information received from a loan recipient or customer pertaining to a loan or an application for a loan. (7) A capital call or distribution notice, or a notice to a loan recipient or customer regarding a loan or account with the public bank.
(8) An investment agreement, loan agreement, deposit agreement, or a related document. (9) Specific account information or other personal data received by the public bank from an actual or potential customer, investment recipient, or loan recipient.
(10) A memorandum or letter produced and distributed for purposes of meetings with a federal or state banking regulator.
(11) A memorandum or letter received from a federal or state banking regulator. (12) Meeting materials of the internal audit committee, the compliance committee, or the governance committee of the Board of Directors of a public bank.
(c) Notwithstanding subdivision (b), the following information contained in records described in subdivision (b) shall be subject to disclosure pursuant to this chapter and shall not be considered a trade secret exempt from disclosure:
(1) The name, title, and appointment year of each director and executive of the public bank. (2) The name and address of each current investment recipient in which the public bank currently invests. (3) General internal performance metrics of the public bank and financial statements of the bank, as specified or required by the public bank’s charter or as required by federal law. (4) Final audit reports of the public bank’s independent auditors, although disclosure to an independent auditor of any information described in subdivision (b) shall not be construed to permit public disclosure of that information provided to the auditor.

SEC. 10. Section 23007 of the Government Code is amended to read:
23007. Except as specified in this chapter, a county shall not, in any manner, give or loan its credit to or in aid of any person or corporation that is not a public bank, as defined in Section 57600. An indebtedness or liability incurred contrary to this chapter is void.

SEC. 11. Section 53601 of the Government Code is amended to read:
53601. This section shall apply to a local agency that is a city, a district, or other local agency that does not pool money in deposits or investments with other local agencies, other than local agencies that have the same governing body. However, Section 53635 shall apply to all local agencies that pool money in deposits or investments with other local agencies that have separate governing bodies. The legislative body of a local agency 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 7/16 having moneys in a sinking fund or moneys in its treasury not required for the immediate needs of the local agency may invest any portion of the moneys that it deems wise or expedient in those investments set forth below. A local agency purchasing or obtaining any securities prescribed in this section, in a negotiable, bearer, registered, or nonregistered format, shall require delivery of the securities to the local agency, including those purchased for the agency by financial advisers, consultants, or managers using the agency’s funds, by book entry, physical delivery, or by third-party custodial agreement. The transfer of securities to the counterparty bank’s customer book entry account may be used for book entry delivery.

For purposes of this section, “counterparty” means the other party to the transaction. A counterparty bank’s trust department or separate safekeeping department may be used for the physical delivery of the security if the security is held in the name of the local agency. Where this section specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase. Where this section does not specify a limitation on the term or remaining maturity at the time of the investment, no investment shall be made in any security, other than a security underlying a repurchase or reverse repurchase agreement or securities lending agreement authorized by this section, that at the time of the investment has a term remaining to maturity in excess of five years, unless the legislative body has granted express authority to make that investment either specifically or as a part of an investment program approved by the legislative body no less than three months prior to the investment:
(a) Bonds issued by the local agency, including bonds payable solely out of the revenues from a revenueproducing property owned, controlled, or operated by the local agency or by a department, board, agency, or authority of the local agency.
(b) United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest. (c) Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state.
(d) Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California. (e) Bonds, notes, warrants, or other evidences of indebtedness of a local agency within this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency. (f) Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.
(g) Bankers’ acceptances otherwise known as bills of exchange or time drafts that are drawn on and accepted by a commercial bank. Purchases of bankers’ acceptances shall not exceed 180 days’ maturity or 40 percent of the agency’s moneys that may be invested pursuant to this section. However, no more than 30 percent of the agency’s moneys may be invested in the bankers’ acceptances of any one commercial bank pursuant to this section.

This subdivision does not preclude a municipal utility district from investing moneys in its treasury in a manner authorized by the Municipal Utility District Act (Division 6 (commencing with Section 11501) of the Public Utilities Code).
(h) Commercial paper of “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or (2):
(1) The entity meets the following criteria:
(A) Is organized and operating in the United States as a general corporation. (B) Has total assets in excess of five hundred million dollars ($500,000,000). (C) Has debt other than commercial paper, if any, that is rated in a rating category of “A” or its equivalent or higher by an NRSRO.
9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 8/16 (2) The entity meets the following criteria:
(A) Is organized within the United States as a special purpose corporation, trust, or limited liability company. (B) Has programwide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond.
(C) Has commercial paper that is rated “A-1” or higher, or the equivalent, by an NRSRO.

Eligible commercial paper shall have a maximum maturity of 270 days or less. Local agencies, other than counties or a city and county, may invest no more than 25 percent of their moneys in eligible commercial paper.

Local agencies, other than counties or a city and county, may purchase no more than 10 percent of the outstanding commercial paper of any single issuer. Counties or a city and county may invest in commercial paper pursuant to the concentration limits in subdivision (a) of Section 53635. (i) Negotiable certificates of deposit issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally licensed or state-licensed branch of a foreign bank. Purchases of negotiable certificates of deposit shall not exceed 30 percent of the agency’s moneys that may be invested pursuant to this section. For purposes of this section, negotiable certificates of deposit do not come within Article 2 (commencing with Section 53630), except that the amount so invested shall be subject to the limitations of Section 53638. The legislative body of a local agency and the treasurer or other official of the local agency having legal custody of the moneys are prohibited from investing local agency funds, or funds in the custody of the local agency, in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the local agency, or a person with investment decisionmaking authority in the administrative office manager’s office, budget office, auditor-controller’s office, or treasurer’s office of the local agency also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificates of deposit. (j) (1) Investments in repurchase agreements or reverse repurchase agreements or securities lending agreements of securities authorized by this section, as long as the agreements are subject to this subdivision, including the delivery requirements specified in this section. (2) Investments in repurchase agreements may be made, on an investment authorized in this section, when the term of the agreement does not exceed one year. The market value of securities that underlie a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities and the value shall be adjusted no less than quarterly. Since the market value of the underlying securities is subject to daily market fluctuations, the investments in repurchase agreements shall be in compliance if the value of the underlying securities is brought back up to 102 percent no later than the next business day. (3) Reverse repurchase agreements or securities lending agreements may be utilized only when all of the following conditions are met:
(A) The security to be sold using a reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the local agency for a minimum of 30 days prior to sale. (B) The total of all reverse repurchase agreements and securities lending agreements on investments owned by the local agency does not exceed 20 percent of the base value of the portfolio. (C) The agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security. (D) Funds obtained or funds within the pool of an equivalent amount to that obtained from selling a security to a counterparty using a reverse repurchase agreement or securities lending agreement shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement or securities lending agreement, unless the reverse repurchase agreement or securities lending agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security.
(4) (A) Investments in reverse repurchase agreements, securities lending agreements, or similar investments in which the local agency sells securities prior to purchase with a simultaneous agreement to repurchase the security may be made only upon prior approval of the governing body of the local agency and shall be made only 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 9/16 with primary dealers of the Federal Reserve Bank of New York or with a nationally or state-chartered bank that has or has had a significant banking relationship with a local agency. (B) For purposes of this chapter, “significant banking relationship” means any of the following activities of a bank:
(i) Involvement in the creation, sale, purchase, or retirement of a local agency’s bonds, warrants, notes, or other evidence of indebtedness.
(ii) Financing of a local agency’s activities.
(iii) Acceptance of a local agency’s securities or funds as deposits. (5) (A) “Repurchase agreement” means a purchase of securities by the local agency pursuant to an agreement by which the counterparty seller will repurchase the securities on or before a specified date and for a specified amount and the counterparty will deliver the underlying securities to the local agency by book entry, physical delivery, or by third-party custodial agreement. The transfer of underlying securities to the counterparty bank’s customer book-entry account may be used for book-entry delivery. (B) “Securities,” for purposes of repurchase under this subdivision, means securities of the same issuer, description, issue date, and maturity.
(C) “Reverse repurchase agreement” means a sale of securities by the local agency pursuant to an agreement by which the local agency will repurchase the securities on or before a specified date and includes other comparable agreements.
(D) “Securities lending agreement” means an agreement under which a local agency agrees to transfer securities to a borrower who, in turn, agrees to provide collateral to the local agency. During the term of the agreement, both the securities and the collateral are held by a third party. At the conclusion of the agreement, the securities are transferred back to the local agency in return for the collateral. (E) For purposes of this section, the base value of the local agency’s pool portfolio shall be that dollar amount obtained by totaling all cash balances placed in the pool by all pool participants, excluding any amounts obtained through selling securities by way of reverse repurchase agreements, securities lending agreements, or other similar borrowing methods.
(F) For purposes of this section, the spread is the difference between the cost of funds obtained using the reverse repurchase agreement and the earnings obtained on the reinvestment of the funds. (k) Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States.

Notes eligible for investment under this subdivision shall be rated in a rating category of “A” or its equivalent or better by an NRSRO. Purchases of medium-term notes shall not include other instruments authorized by this section and shall not exceed 30 percent of the agency’s moneys that may be invested pursuant to this section. (l) (1) Shares of beneficial interest issued by diversified management companies that invest in the securities and obligations as authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (q), inclusive, and that comply with the investment restrictions of this article and Article 2 (commencing with Section 53630). However, notwithstanding these restrictions, a counterparty to a reverse repurchase agreement or securities lending agreement is not required to be a primary dealer of the Federal Reserve Bank of New York if the company’s board of directors finds that the counterparty presents a minimal risk of default, and the value of the securities underlying a repurchase agreement or securities lending agreement may be 100 percent of the sales price if the securities are marked to market daily.
(2) Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C.

Sec. 80a-1 et seq.).
(3) If investment is in shares issued pursuant to paragraph (1), the company shall have met either of the following criteria:
(A) Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 10/16 (B) Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience investing in the securities and obligations authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (q), inclusive, and with assets under management in excess of five hundred million dollars ($500,000,000).
(4) If investment is in shares issued pursuant to paragraph (2), the company shall have met either of the following criteria:
(A) Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
(B) Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience managing money market mutual funds with assets under management in excess of five hundred million dollars ($500,000,000). (5) The purchase price of shares of beneficial interest purchased pursuant to this subdivision shall not include commission that the companies may charge and shall not exceed 20 percent of the agency’s moneys that may be invested pursuant to this section. However, no more than 10 percent of the agency’s funds may be invested in shares of beneficial interest of any one mutual fund pursuant to paragraph (1). (m) Moneys held by a trustee or fiscal agent and pledged to the payment or security of bonds or other indebtedness, or obligations under a lease, installment sale, or other agreement of a local agency, or certificates of participation in those bonds, indebtedness, or lease installment sale, or other agreements, may be invested in accordance with the statutory provisions governing the issuance of those bonds, indebtedness, or lease installment sale, or other agreement, or to the extent not inconsistent therewith or if there are no specific statutory provisions, in accordance with the ordinance, resolution, indenture, or agreement of the local agency providing for the issuance.
(n) Notes, bonds, or other obligations that are at all times secured by a valid first priority security interest in securities of the types listed by Section 53651 as eligible securities for the purpose of securing local agency deposits having a market value at least equal to that required by Section 53652 for the purpose of securing local agency deposits. The securities serving as collateral shall be placed by delivery or book entry into the custody of a trust company or the trust department of a bank that is not affiliated with the issuer of the secured obligation, and the security interest shall be perfected in accordance with the requirements of the Uniform Commercial Code or federal regulations applicable to the types of securities in which the security interest is granted. (o) A mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivablebacked bond. Securities eligible for investment under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO and have a maximum remaining maturity of five years or less. Purchase of securities authorized by this subdivision shall not exceed 20 percent of the agency’s surplus moneys that may be invested pursuant to this section.
(p) Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (r), inclusive. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria:
(1) The adviser is registered or exempt from registration with the Securities and Exchange Commission. (2) The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (q), inclusive.
(3) The adviser has assets under management in excess of five hundred million dollars ($500,000,000). (q) United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO and shall not exceed 30 percent of the agency’s moneys that may be invested pursuant to this section.
(r) Commercial paper, debt securities, or other obligations of a public bank, as defined in Section 57600. 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 11/16 SEC. 12. Section 53635 of the Government Code is amended to read:
53635. (a) This section shall apply to a local agency that is a county, a city and county, or other local agency that pools money in deposits or investments with other local agencies, including local agencies that have the same governing body. However, Section 53601 shall apply to all local agencies that pool money in deposits or investments exclusively with local agencies that have the same governing body.

This section shall be interpreted in a manner that recognizes the distinct characteristics of investment pools and the distinct administrative burdens on managing and investing funds on a pooled basis pursuant to Article 6 (commencing with Section 27130) of Chapter 5 of Division 2 of Title 3.

A local agency that is a county, a city and county, or other local agency that pools money in deposits or investments with other agencies may invest in commercial paper pursuant to subdivision (h) of Section 53601, except that the local agency shall be subject to the following concentration limits:
(1) No more than 40 percent of the local agency’s money may be invested in eligible commercial paper. (2) No more than 10 percent of the total assets of the investments held by a local agency may be invested in any one issuer’s commercial paper.
(b) Notwithstanding Section 53601, the City of Los Angeles shall be subject to the concentration limits of this section for counties and for cities and counties with regard to the investment of money in eligible commercial paper.
(c) A local agency subject to this section may invest in commercial paper, debt securities, or other obligations of a public bank, as defined in Section 57600.

SEC. 13. Section 53635.2 of the Government Code is amended to read:
53635.2. As far as possible, all money belonging to, or in the custody of, a local agency, including money paid to the treasurer or other official to pay the principal, interest, or penalties of bonds, shall be deposited for safekeeping in state or national banks, public banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in this state selected by the treasurer or other official having legal custody of the money; or may be invested in the investments set forth in Section 53601. To be eligible to receive local agency money, a bank, savings association, federal association, or federally insured industrial loan company shall have received an overall rating of not less than “satisfactory” in its most recent evaluation by the appropriate federal financial supervisory agency of its record of meeting the credit needs of California’s communities, including low- and moderate-income neighborhoods, pursuant to Section 2906 of Title 12 of the United States Code. Sections 53601.5 and 53601.6 shall apply to all investments that are acquired pursuant to this section.

SEC. 14. Section 54956.97 is added to the Government Code, to read:
54956.97. Notwithstanding any provision of law, the governing board, or a committee of the governing board, of a public bank, as defined in Section 57600 of the Government Code, may meet in closed session to consider and take action on matters pertaining to all of the following:
(a) A loan or investment decision.
(b) A decision of the internal audit committee, the compliance committee, or the governance committee. (c) A meeting with a state or federal regulator.

SEC. 15. Section 54956.98 is added to the Government Code, to read:
54956.98. (a) For purposes of this section, the following definitions shall apply:
(1) “Shareholder, member, or owner local agency” or “shareholder, member, or owner” means a local agency that is a shareholder of a public bank.
(2) “Public bank” has the same meaning as defined in Section 57600. 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 12/16 (b) The governing board of a public bank may adopt a policy or a bylaw or include in its governing documents provisions that authorize any of the following:
(1) All information received by a shareholder, member, or owner of the public bank in a closed session related to the information presented to the governing board of a public bank in closed session shall be confidential.

However, a member of the governing board of a shareholder, member, or owner local agency may disclose information obtained in a closed session that has direct financial or liability implications for that local agency to the following individuals:
(A) Legal counsel of that shareholder, member, or owner local agency for purposes of obtaining advice on whether the matter has direct financial or liability implications for that shareholder local agency. (B) Other members of the governing board of the local agency present in a closed session of that shareholder, member, or owner local agency.
(2) A designated alternate member of the governing board of the public bank who is also a member of the governing board of a shareholder, member, or owner local agency and who is attending a properly noticed meeting of the public bank governing board in lieu of a shareholder, member, or owner local agency’s regularly appointed member may attend a closed session of the public bank governing board. (c) If the governing board of a public bank adopts a policy or a bylaw or includes provisions in its governing documents pursuant to subdivision (b), then the governing board of the shareholder, member, or owner local agency, upon the advice of its legal counsel, may conduct a closed session in order to receive, discuss, and take action concerning information obtained in a closed session of the public bank governing board pursuant to paragraph (1) of subdivision (b).

SEC. 16. Division 5 (commencing with Section 57600) is added to Title 5 of the Government Code, to read:

DIVISION 5. Public Banks
57600. For purposes of this division:
(a) “Local financial institution” means a certified community development financial institution, a credit union, as defined in Section 165 of the Financial Code, or a small bank or an intermediate small bank, as defined in Section 25.12 of Title 12 of the Code of Federal Regulations. (b) (1) “Public bank” means a corporation, organized under the Nonprofit Mutual Benefit Corporation Law (Part 3 (commencing with Section 7110) of Division 2 of Title 1 of the Corporations Code) or the Nonprofit Public Benefit Corporation Law (Part 2 (commencing with Section 5110) of Division 2 of Title 1 of the Corporations Code) for the purpose of engaging in the commercial banking business or industrial banking business, that is wholly owned by a local agency, local agencies, or a joint powers authority formed pursuant to the Joint Exercise of Powers Act (Article 1 (commencing with Section 6500) of Chapter 5 of Division 7 of Title 1) that is composed only of local agencies.
(2) A local agency located within a county with a population of less than 250,000 may organize a public bank only if it does so as part of a joint powers authority formed for those purposes. (3) For purposes of paragraph (2), population shall be based on the most recent estimate of population data determined by the Demographic Research Unit of the Department of Finance. (c) “Public bank license” means a certificate of authorization to transact business as a bank as described in Section 1042 of the Financial Code.
57601. (a) If a public bank is organized as a nonprofit mutual benefit corporation, the articles of incorporation shall include the following purpose statement: “This corporation is a nonprofit mutual benefit corporation organized under the Nonprofit Mutual Benefit Corporation Law as a public bank. The purpose of the corporation is to engage in the commercial banking business or industrial banking business and any other lawful activities which are not prohibited to a public bank by applicable laws or regulations.” (b) If a public bank is organized as a nonprofit public benefit corporation, the articles of incorporation shall include the following purpose statement: “This corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person. It is organized under the Nonprofit Public Benefit Corporation Law 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 13/16 for the public purpose of engaging in the commercial banking business or industrial banking business as a public bank.”
(c) Notwithstanding Sections 5410 and 7411 of the Corporations Code, a public bank may make distributions to its members.
(d) All provisions of law applicable to nonprofit corporations generally, including, but not limited to, the Nonprofit Corporation Law (Division 2 (commencing with Section 5000) of Title 1 of the Corporations Code) shall apply to public banks. Whenever a provision of this division applicable to public banks is inconsistent with a provision of law applicable to nonprofit mutual benefit corporations or nonprofit public benefit corporations generally, the provision of this division shall apply, and the inconsistent provision of law applicable to nonprofit mutual benefit corporations or nonprofit public benefit corporations generally shall not apply to a public bank. 57602. (a) A public bank shall obtain and maintain deposit insurance provided by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act (12 U.S.C. Sec. 1811 et seq.). (b) In seeking and retaining insurance, a public bank may do all things and assume and discharge all obligations required of it that are not in conflict with state law. 57603. (a) Before engaging in business, a public bank shall obtain a certificate of authorization to transact business as a bank pursuant to Division 1.1 of the Financial Code (commencing with Section 1000). (b) A local agency shall comply with the requirements of Section 53638 with respect to its deposits in a public bank unless, with the prior approval of the Commissioner of Business Oversight, the public bank and the local agency depositor agree otherwise.
(c) Notwithstanding Section 23010, a county may lend any of its available funds to any public bank. (d) Notwithstanding Section 53601, any local agency that does not pool money in deposits or investments with other local agencies that have separate governing bodies may invest in debt securities or other obligations of a public bank.
(e) Notwithstanding Section 53635, any local agency that pools money in deposits or investments with other local agencies, including local agencies that have the same governing body, may invest in debt securities or other obligations of a public bank.
(f) Notwithstanding Section 53635.2, a public bank shall be eligible to receive local agency money. 57604. (a) As used in this section:
(1) “Conducted in partnership with” means pursuant to a written agreement with a local financial institution to provide financial products and services to the public located within the jurisdiction of the public bank. (2) “Infrastructure lending” means granting a loan or extending credit to a local agency for the purpose of building or improving public infrastructure, including housing projects, as defined in Section 34212 of the Health and Safety Code, and affordable housing, as defined in subdivision (a) of Section 62250. (3) “Local agency banking” means providing any of the following services to a local agency:
(A) Accepting a deposit of any kind.
(B) Granting a loan or extension of credit of any kind. (4) “Participation lending” means purchasing or selling an interest in a loan or loans originated by or sold to a local financial institution, or originating, leading, or directing a loan transaction involving a local financial institution pursuant to a written agreement with the local financial institution. (5) “Person” means a person as defined in Section 127 of the Financial Code, except that a person does not mean a local agency as defined in Section 50001 of the Government Code, but includes any individual employed by a local agency.
(6) “Retail activities” means providing any kind of financial product or service to a person that is typically offered or provided by a local financial institution, including, but not limited to, all of the following:
(A) Accepting a deposit of any kind from a person, including the issuance of shares by a credit union. 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 14/16 (B) Granting a loan or extension of credit, of any kind, to a person. (7) “Wholesale lending” means granting a loan or extension of credit to a local financial institution. (b) Except as provided in paragraph (2) of subdivision (c), a public bank shall conduct retail activities in partnership with local financial institutions and shall not compete with local financial institutions. (c) A public bank may do both of the following:
(1) Engage in all of the following banking activities:
(A) Local agency banking.
(B) Infrastructure lending.
(C) Wholesale lending.
(D) Participation lending.
(2) Engage in retail activities without partnering with a local financial institution, if those retail activities are not offered or provided by local financial institutions in the jurisdiction of the local agency or agencies that own the public bank.
57605. For the purposes of Section 1280 of the Financial Code, any person or entity, including a local agency, that owns, controls, or holds an ownership interest in a public bank is not a bank holding company by reason of that ownership interest.
57606. (a) Before submitting an application to organize and establish a public bank pursuant to Section 1020 of the Financial Code, a local agency shall conduct a study to assess the viability of the proposed public bank. The study shall include, but is not limited to, all of the following elements:
(1) A discussion of the purposes of the bank including, but not limited to, achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities.
(2) A fiscal analysis of costs associated with starting the proposed public bank. (3) An estimate of the initial amount of capital to be provided by the local agency to the proposed public bank. (4) Financial projections, including a pro forma balance sheet and income statement, of the proposed public bank for at least the first five years of operation. The financial projections shall include an estimate of the time period for when expected revenues meet or exceed expected costs and an estimate of the total operating subsidy that the local agency may be required to provide until the proposed public bank generates sufficient revenue to cover its costs. In addition to projections that assume favorable economic conditions, the analysis shall also include a downside scenario that considers the effect of an economic recession on the financial results of the proposed public bank. The projections may include the downside scenario of continuing to do business with the local government’s current banker or bankers.
(5) A legal analysis of whether the proposed structure and operations of the public bank would likely comply with Section 6 of Article XVI of the California Constitution, but nothing herein shall compel the waiver of any attorneyclient privilege attaching to that legal analysis. (6) An analysis of how the proposed governance structure of the public bank would protect the bank from unlawful insider transactions and apparent conflicts of interest. (b) The study may include any of the following elements:
(1) A fiscal analysis of benefits associated with starting the proposed public bank, including, but not limited to, cost savings, jobs created, jobs retained, economic activity generated, and private capital leveraged. (2) A qualitative assessment of social or environmental benefits of the proposed public bank. (3) An estimate of the fees paid to the local agency’s current banker or bankers. (4) A fiscal analysis of the costs, including social and environmental, of continuing to do business with the local agency’s current banker or bankers.
9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 15/16 (c) (1) The study required by subdivision (a) shall be presented to and approved by the governing body of the local agency, and a motion to move forward with an application for a public banking charter shall be approved by a majority vote of the governing body at a public meeting prior to the local agency submitting an application pursuant to Section 1020 of the Financial Code. In addition, the local agency shall include a copy of the study required by subdivision (a) in the application submitted to the Commissioner of Business Oversight. (2) Before the local agency submits an application pursuant to Section 1020 of the Financial Code, the motion to move forward with an application for a public banking charter shall be subject to voter approval at the next regularly scheduled election held at least 180 days following the vote of the governing body. (3) The voter approval requirement described in paragraph (2) shall apply to a local agency entering into a joint powers authority formed pursuant to the Joint Exercise of Powers Act (Article 1 (commencing with Section 6500) of Chapter 5 of Division 7 of Title 1) after the study required in subdivision (a) has been completed and before submitting an application to organize and establish a public bank pursuant to Section 1020 of the Financial Code. (4) As used in paragraphs (2) and (3), “local agency” does not include a charter city. (d) The local agency shall make available to the public the financial models and key assumptions used to estimate the elements described in paragraphs (2) through (4) of subdivision (a) before presenting the study to the governing body of the local agency as required by subdivision (c). 57607. (a) The Commissioner of Business Oversight shall not issue more than two public bank licenses in a calendar year.
(b) The Commissioner of Business Oversight shall not issue a public bank license if issuing that public bank license would cause there to be more than 10 public banks authorized to transact business pursuant to Division

1.1 (commencing with Section 1000) of the Financial Code. (c) The Commissioner of Business Oversight shall conduct a study of public banking in California within two years after the date upon which the commissioner issues the 10th public bank license. (d) The Commissioner of Business Oversight shall not issue a public bank license after the expiration of a period of seven years from the date upon which the commissioner first promulgates regulations for the purpose of carrying out the commissioner’s duties under this division.

SEC. 17. Section 23701aa is added to the Revenue and Taxation Code, to read:
23701aa. A public bank as defined in Section 57600 of the Government Code. In addition, a public bank is exempt from all other taxes and licenses, state, county, and municipal, imposed upon a public bank, local utility user taxes, sales and use taxes, state energy resources surcharges, state emergency telephone users surcharges, motor vehicle and other vehicle registration license fees, and any other tax or license fee imposed by the state upon vehicles, motor vehicles, or the operation thereof.

SEC. 18. The Legislature finds and declares that Sections 8, 9, 14, and 15 of this act, which amend Section 6254.26 of, and add Sections 6254.34, 54956.97, and 54956.98 to, the Government Code, impose a limitation on the public’s right of access to the meetings of public bodies or the writings of public officials and agencies within the meaning of Section 3 of Article I of the California Constitution. Pursuant to that constitutional provision, the Legislature makes the following findings to demonstrate the interest protected by this limitation and the need for protecting that interest:

Certain information collected by a public bank must be kept confidential because confidentiality is essential to a public bank’s relationships with its customers, lenders, regulators, and other banks. This confidentiality extends to portions of meetings of the board of directors relating to loan or investment decisions, to meetings with banking regulators, and to meetings of the internal audit committee, the compliance committee, or the governance committee of a public bank. This bill balances the interests of a public bank in keeping certain important information confidential with the interest of the public in accessing information concerning the conduct of the people’s business by allowing the public to monitor the performance of a public bank and allowing the public to know the identities of principals involved in management of a public bank so that conflicts of interest on the part of public officials can be avoided.

SEC. 19. The Legislature finds and declares that Sections 8, 9, 14, and 15 of this act, which amend Section 6254.26 of, and add Sections 6254.34, 54956.97, and 54956.98 to, the Government Code, further, within the 9/16/21, 7:55 AM Bill Text - AB-857 Public banks.
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB857 16/16 meaning of paragraph (7) of subdivision (b) of Section 3 of Article I of the California Constitution, the purposes of that constitutional section as it relates to the right of public access to the meetings of local public bodies or the writings of local public officials and local agencies. Pursuant to paragraph (7) of subdivision (b) of Section 3 of Article I of the California Constitution, the Legislature makes the following findings:

This bill balances the interests of a public bank in keeping certain important information confidential with the interest of the public in accessing information concerning the conduct of the people’s business.

Attachment 2

Attachment 3

PUBLIC BANK LA
Proposal to Establish a Regional
Public Bank for Southern California
What is a
public bank?
• A bank owned by a government entity (“local
agency”), like a city or county, with a non-profit
public purpose and governed by public mandate.
• Common around the world and will soon be
common in the U.S. As of mid-2020, there were
910 public development, commercial/retail and
universal banks worldwide with nearly US$49
trillion in combined assets.
• Tied to local investment and public welfare
metrics, accountable to public entities and
transparency laws
• Bank of North Dakota
• $7 Billion in assets
• $1 Billion in equity
• Handles all govt deposits in ND
• Partners with community banks to make loans
and provide services
• Sparkassen (Germany)
• 431 ‘County’-level banks
• $1 Trillion in Assets
• 250,000 Employees
• Universal banking, open to all
• Wholesale, not retail
• Partners with local community banks and credit
unions to provide small business and community
development loans
• North Dakota weathered credit crisis of 2008 and
distributed COVID relief better than any other state
• Supports local financial institutions by providing a
non-competitive partner
Bank of
North Dakota
Public Bank + Local Banks = Faster Response
to Crisis and a More Equitable Recovery
• 15 consecutive years of
record profits
• State’s ROI in 2018: 18%
• Earned $159 million in
2018 on $7B in assets
• Returned >$1 billion to
state over first 99 years
ND Leads all states in
PPP dollars-per-worker
What is a
public bank?
• AB 857 Banks are:
• Non-profit mutual benefit corporations or public
benefit corporations
• Owned and controlled exclusively by cities,
counties, or a JPA consisting of cities and/or
counties
• Can provide banking services and credit to any
public entity
• Can also provide to businesses and consumers in
partnership with credit unions and community
banks
• Passed in 2019, directs the DFPI (formerly DBO) to
consider applications for commercial banking charters
from local agencies.
• AB 857 restricts public banks from competing directly with existing local financial institutions (<$1B) but
allows them to partner to provide services and make
loans.
• Requires local agencies (cities/counties) to build a
business and governance plan and seek approval from
DFPI. Charter cities do not need to hold a referendum.

AB 857 is the law that permits cities and counties to found their divest from Wall Street and found their own banks.

Why found a
public bank?
● Deposits generate loans locally with
profits and interest returned to localities
● Uses banks’ ability to leverage money to
benefit the public instead of private
shareholders
● Reflects community values and invests in
community-identified priorities
● Brings democracy and transparency to
banking and investment of public funds
● Creates a multi-generational source of
capital that invests long term for impact
purposes for residents and businesses
Keep public money invested locally
Why found a
public bank?
Billions in public funds will be invested over the next five years, to bring our economy into recovery and to take advantage of low interest rates for infrastructure development and climate change mitigation.

Federal, state and local governments will depend on banks and other lenders to deploy large sums to public projects, green energy development, workforce programs, disaster relief, and other social impact investments.

Wall Street banks have thus far dominated the deployment of funds from these programs, earning huge profits while preferencing big business and reinforcing inequalities present in our financial system.

Public banks are the financial
infrastructure we are missing
Why found a
public bank?
• Early in the pandemic, the Federal Reserve established a “Municipal Liquidity Facility” (MLF). Los Angeles city could have tapped $1.2 billion, the county near $2
billion, but high penalty rates made MLF unusable, and
small cities had no access.
• Private banks engorged themselves on cheap capital
from Fed spending and distributed the bulk of PPP
loans to large corporations who are their biggest
customers. Small businesses, especially those owned
by Black and Latino families were left out.
• The Biden administration will likely approve hundreds of billions in new spending and lending to stimulate
the economy and recover from COVID, and there is
hope that more investment will be made in climate
change reversal and urban infrastructure.
• A public bank positions the city and county to be in
the driver’s seat when such programs are opened to
financial institutions, who currently have a monopoly
on the basic public utilities of municipal debt and
administration of public purpose investment programs.

Federal programs will distribute trillions in relief, often in the form of loans and other financial mechanisms.

Why found a
public bank?
• Municipalities overcharged on fees and interest
through bond placement
• Municipal bonds have a 0.14% default rate,
compared to over 10% on corporate bonds.
• Rates for municipal bonds remain higher than
their credit risk would dictate
• Outside banks and established lenders, borrowing
costs are high, especially for marginalized groups
• Businesses hollowed out by corporate credit cards
charging 20-35% with no alternatives
• Individuals bankrupted by Payday lenders by
charging annualized rates over 300%
• Direct savings
• Lower interest rate on financing for city
infrastructure
• Lower bond placement costs, especially for
smaller agencies and municipalities
• Indirect savings by providing capital (housing &
infrastructure) and services (business lending,
banking the unbanked)
• The costs incurred by governments due to
market failure/gaps are increasingly known
• For instance, providing housing costs cities
$20,000 per cap, unhoused individuals cost
$50,000+ in services
Public banks save people, business, and governments money.

What are the
risks?
• AB 857 requires public banks to submit to full
inspection by both DFPI and the FDIC just like any
other commercial bank.
• AB 857 further requires cities and counties seeking to apply for a bank charter to obtain a mandate from
their constituencies, through an act of legislation or a voter referendum.
• AB 857 sets higher requirements preventing conflicts
of interests among bank governance than for
commercial banks, to protect public funds.
• All investments face certain risks, and a public bank will have to employ strict underwriting, active loan
servicing, and appropriate standards for borrowers.

Luckily, its biggest direct borrower is likely to be the public itself, in the form of infrastructure loans and the purchase of municipal debt.
• Compare this to today. Remember that the passive
investment of surplus funds in the corporate debt of
companies like Chevron and Phillip Morris have
external risks much higher than can be calculated on a
simple financial statement.

Banking is profitable when risks are managed, but it’s crucial that all risks are taken into account.

What are the
risks?
• (Small-C) conservatively managed banks largely
succeed by building trust and then leveraging that
trust over scale.
• A major problem with endlessly consolidating
megabanks is that they grow to impossible sizes,
internalize conflicts and pose systemic risk while bigdogging more competent and trustworthy banks out of the market.
• A public bank can and should scale only to the size its region desires, focused on programs the public wants.
• Operational costs are a large burden for banks. A
public bank would not deploy resources in branch
offices, ATMs, or business banking offices. Instead, it would partner with existing CDFIs, credit unions and
community banks to leverage their existing
relationships with Angelenos to achieve its goals.
• Compliance and regulatory costs associated with
managing a bank are considerable, and this is not an
area the public bank can skimp. Cities and counties
should pressure state and federal agencies to provide
regulatory clarity and admin support for public banks.

The public should roll out it its bank in phases, to avoid overextending itself, while shoring up support for quick victories.

What are the
risks?
• Lending to businesses and consumers comes with
different risks than lending to public agencies, and this is where AB 857 banks partnerships with local financial institutions helps again:
• COVID-19 Relief and Equitable Recovery Loans could be backed in part by a public bank, which can contribute a large share of loan principal and any concessionary credit the public can provide.
• Community banks, credit unions and CDFIs can promote, underwrite, and originate the loans while sharing in the interest if the loan is successful.
• This leverages commercially-tested underwriting and the longterm vision of a senior capital partner with a public mandate. • Public deposits in the bank will subject to 110%
collateralization by the bank, guaranteeing the liquidity and safety of city and county funds in operational
accounts at the bank.
• Business and consumer deposits that might be held by
the bank will be FDIC insured, with appropriate
reserves in liquid securities and federal paper to
ensure safety and soundness.
• The bank should be permitted to diversify part of its portfolio into non-local ESG assets to avoid over
concentration.

The public should leverage existing banking partners and regulators to ensure its bank operates efficiently and soundly.

Banks work best at scale, and when their interests are
diversified across industries, localities, and risk profiles. • Smaller cities may lack the funds or credit to charter a bank of meaningful size, or to allocate investments
locally that will move the needle for its goals.
• Those smaller cities with the means to found a bank
may find their local economy too limiting to build a
sound investment portfolio.
• Larger cities and the counties will not want to bear the sole burden of capitalizing public banks, nor should
they be the sole arbiters of how a bank is managed
and what it invests in.
• Like any public infrastructure, cities and counties
collaborate to achieve sufficient scale and distributed access to a region’s resources.
• Devising a bank from the start which incorporates the will of people from all over the region will help align the bank’s governance and financial incentives with
the well-being of everyone.
• To achieve scale and diversification of risk, the bank should aim to serve the entire Southland, and belong
to every resident thereof.

What are the
risks?
AB 857 lays out a
straightforward
process.

The key elements are:

1. a business plan /
viability study,

2. legislative and/or
voter approval

3. approval of an
application to DFPI.

How to charter a
public bank?
Before submitting an application to organize and establish a public bank, a local agency shall conduct a study to assess the viability of the proposed public bank, including:
57606. (Summarized)

1. Purpose of the bank - achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities.

2. A fiscal analysis of costs.

3. An estimate of the initial amount of capital.

4. Financial projections and pro forma for at least the first five years of operation.

5. A legal analysis of whether the proposed structure and operations of the public bank would likely comply with debt provisions of CA Constitution.

6. An analysis of proposed governance structure and policies preventing unlawful insider transactions and apparent conflicts of interest.

7. A fiscal analysis of benefits associated with starting the proposed public bank, including, but not limited to, cost savings, jobs created, jobs retained, economic activity generated, and private capital leveraged.

8. A qualitative assessment of social or environmental benefits of the proposed public bank.

9. An estimate of the fees paid to the local agency’s current banker or bankers.

10. A fiscal analysis of the costs, including social and environmental, of continuing to do business with the local agency’s current banker or bankers.

How to charter a
public bank?
The viability study and business plan is approved by the city council (or voters for non-charter cities) and submitted to DFPI. 57606. (Summarized, Cont.)

1. The study is presented to and approved by the
governing body of the local agency by a majority vote,
prior to submitting an application to the Commissioner
of Business Oversight.

2. Only local agencies which are not charter cities
must seek voter approval of the public bank and study
at the next scheduled election.

3. The plan and all financial projections are made public prior to submission of the application.

Additional considerations for DFPI:

1. DFPI can only issue up to two (2) public bank licenses per year.

2. DFPI may issue a maximum aggregate of ten (10)
licenses in the state, and only until 2026 (seven years since adoption of AB 857).

3. DFPI will conduct a study on public banking two years after the last license is issued.

4. DFPI will closely examine governance proposals and
conflicts of interest, as well as the handling of public funds held in trust.

How to charter a
public bank?
What’s the
timeline?
1) Community engagement, labor, and stakeholder meetings to identify needs and devise viable business plan. (Months 1 - 5)
a) Member City Councils, in conjunction with the awardee of the Founding Member’s RFP, structure and translate input into the business plan. b) The bank’s mission, loan products and business lines, and governance policy will be devised through discussions with participating agencies, community members and stakeholders. These meetings should take different formats to reach a wide range of individuals and organizations.
c) During this step, the Members may apply for capital support from the Federal Reserve system or Congressional programs, if available. 2) Establish mutual benefit corporation and commit all Charter Member agencies to initial governance and capitalization plan. (Month 6) a) An interim Governance Board comprised of representative of each Founding and Charter Member establishes the operating MBC.
b) As each participating entity commits, they approve the draft plan and submit starting capital to the MBC, which the DFPI hold in escrow during the application.
3) Apply for charter from the DFPI, include Capitalization Plan, Products and Services, Mission, Management, and Governance (Months 7 - 12) a) The DFPI will be engaged early in the planning process. Working with the DFPI is an iterative process with a liaison for the City alongside the consultant working in tandem with the DFPI.
b) The Task Force will facilitate the application to the DBO, in conjunction with the City of Los Angeles.

At this point, a bank can begin making loans, with initial focus on lending on emergency facilities and other programs.

What’s the
timeline?
Subsequent to establishing the bank, the following steps allow it to expand service offerings:
5) Apply to Federal Reserve Bank for a Master Account (Months 12 - 36) a) Seek membership in the Federal Reserve either as a regular commercial bank or as a public bank under new legislation setting such a distinction. b) Access low-cost liquidity via the Discount Window to support bank operations. 6) Apply to FDIC for deposit insurance (Month 12 - 24)
a) Apply for insurance and assessment by the FDIC for any qualified (consumer and business) deposits held by the bank.
b) This would be simultaneous to the establishment of any direct banking services offered to the general public by the bank.
7) Receive FDIC/Fed approval and start depository banking services a) Once approved by federal depository and payments regulators, the bank could expand its offering to local agencies and the general public like any state or federally chartered bank.

A sound plan includes a phased roll-out of bank services and lending programs, designed to take advantage of CDFIs and community banks to make immediate investments and relief available right away.

As regulators gain comfort with the starting scale and focus of the bank, its compliance and executive management can set plans for wider operations such as deposit taking and payment processing.

These additional functions will permit participating members and even private parties to fully divest from private financial institutions into public banks.

Crucially, these services are core to a bank’s ability otr leverage its capital into much more impactful and efficient lending.

A regional public bank would leverage its initial
capital to build sound financing to advance social
impact and public savings across the county.

Local Government Agency Lending
Agencies needing credit access and emergency loans could seek long term options with a public bank right when they need it most.

Partnership Lending through Local Financial Institutions Provide targeted relief and equity financing for businesses and other constituents through sponsored programs managed and fronted by community banks, credit unions, CDFIs and non-profit partners.

Infrastructure and Affordable Housing Bonds
Projects seeking long term bonds with impact weighting could provide cash flow and growth for the bank and tie terms to the cost and affordability of housing, and immediately finance critical infrastructure projects with local, union jobs.

What’s the
upshot?
What’s the
upshot?
A regional public bank led by the City of Los Angeles with six Charter Members could raise up to $300 million to
found a bank of about $2.7 billion in assets in Year 1.

Local Government Agency Lending
Up to $650 million in bond purchases and direct loans to local agencies.

Partnership Lending through Local Financial Institutions Up to $800 million in small business COVID recovery loans, targeted in part to Minority-owned businesses and worker-owned
cooperatives.

Infrastructure and Affordable Housing Bonds
Up to $850 million in affordable housing bonds, direct acquisitions, and project completion loans, creating thousands of new units and bridging projects already in process or limited by availability of funds.

6.00 1.00

1.00 1.00

1.00 1.00

1.00 Example Charter Member Board
City of LA
Culver City
Long Beach
Compton
Burbank
Santa Monica
Glendale
150.00

25.00 25.00

25.00 25.00

25.00 25.00
Example Charter Member Contributions
City of LA
Culver City
Long Beach
Compton
Burbank
Santa Monica
Glendale
What’s the
upshot?
A bank focused on these three priorities could establish operations quickly and scale up with regulatory comfort and proof of its soundness is demonstrated.

After three years of successful operation, a second
phase of capital and new programs coincides with Federal Reserve membership and the end of de novo status.

These charts are only examples of how such a bank of
such scale, with generally favorable interest rates and targeted impact in key areas might perform. A detailed
financial plan would balance these priorities and demonstrate viability, soundness, liquidity and sufficient growth.
-
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
2021202320252027202920312033203520372039204120432045204720492051 Example Asset Mix

AFFORDABLE HOUSING

SMALL BUSINESS

SECONDARY SECURITIES

PUBLIC DEBT

RESERVES
-

20.00 40.00

60.00 80.00
100.00
120.00
140.00
2021202320252027202920312033203520372039204120432045204720492051 Example Income from Operations
iBank Debt and Other CA Bonds
Private ESG Securities
Affordable Housing Direct Loans
Affordable Housing Acquisition Fund
Affordable Housing Bonds
Worker Cooperative Loans
Minority-Owned Business Loans
Small Business COVID Recovery Loans
Local Govt Bonds and Securities
Local Govt Agency Direct Loans
What’s the
upshot?
The expenses and staffing necessary at a bank of this size are considerable, but public banks have an innate advantage against private banks in this area. Public banks do not advertise like private banks, do not pay dividends, bonuses, or partnership fees to grease the wheels of finance.

A public bank with the programs described in this
presentation would carry costs in staffing, compliance, technology, insurance, and oversight and regulatory
reporting.

This chart is only an example of what such a bank may
cost if it is managed to reasonable efficiency by a
professional bank executive staff, led by the Members.
(2,000,000)
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2021202320252027202920312033203520372039204120432045204720492051 Example Operating Expenses Less Workforce
Startup Expenses
Taxes
Professional Fees
Technology, IT & Software Licenses
Marketing/T&E/Growth
Facilities
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
2021202320252027202920312033203520372039204120432045204720492051 Example Workforce and Benefits
Overhead
Legal & Complaince
Marketing and Public Relations
Operations
Banking Staff
Executive Staff / Board
Questions about
a public bank?
With a Federal Reserve Bank Master Account, the Bank of Los Angeles will have access to federal funds and overnight liquidity through interbank lending, thus providing the least expensive source of funds.

The Federal Reserve does not lend directly to local and state governments, preferring instead to work exclusively through financial markets and the banks and financial institutions that operate within them.

By having a public bank, the City will be able to interact with federal funds. Where Congress is prepared to intervene on behalf of banks but cannot provide direct relief to states, a public bank gives the City more options to access these funds.

How will a city public bank interact with federal funds? Questions about
a public bank?
BND was founded nearly a century ago, before the Federal Reserve Act and the FDIC.

Until AB 857, cities and regulators lacked specific guidance on how to form or govern public banks, so states and localities which have explored the issue over the years have been faced with more questions than they could answer alone. Now that AB 857 addresses the state law and regulatory issues, such as those raised by the Los Angeles CLA report and others like it in other California cities, we expect to see many more serious inquiries and potential applications for banks of this kind.

Since the passage of AB 857, multiple municipalities and regions in California including San Francisco, Oakland, Berkeley, Alameda County, Pomona County, have begun the process of formulating their public bank’s business plan. Advocates in New Mexico are currently working with legislative officials to create a New Mexico State Bank. The cities Seattle, Denver, Chicago, and the state of Illinois, Maryland, Massachusetts, and Mississippi have active public banking campaigns.

Legislation to initiate the creation of a public bank has been introduced in Michigan, Washington, and New York state.

Why has the North Dakota model not been used elsewhere? What other cities and states are exploring public banking? Questions about
a public bank?
As long as cannabis is a Schedule 1 drug, a public bank would not be able to lend to these businesses as it would conflict with access to the FDIC and Federal Reserve System.

Cannabis: will a public bank be in use before it becomes federally legal? Could a public bank interact with cannabis funds before that time?
Questions about
a public bank?
The mission and purpose of the Bank must derive from a community-led exploration of the priorities of the people of the region as to the investment of public capital in new lines of credit to government, secured loans to businesses and individuals, and how to grant access to utilities like check cashing. City Councils must undertake a survey and stakeholders process in their districts to achieve maximum consensus on the size, scope, priorities, limitation, and phased development of a people’s bank.

Most likely, it will start as a ‘bankers’ bank’ that directly supports existing lending on infrastructure and low-income housing, and indirectly supports residents and their access to affordable and reparative credit by partnering with community banks, credit unions, and CDFIs who support those goals through their services and lending. (A good model for this is the expansion of iBank as envisioned under AB 310) As the Bank develops over the years and decades, it could take on more ‘resident-facing’ services, though this will be determined both by the nature of its partnerships and the establishment of federal law on postal and public banking.

Public vs. public: is a public bank created for residents or infrastructure? What is its main purpose?
Questions about
a public bank?
The City of Los Angeles Housing and Community Investment Department (HCIDLA) provides an array of affordable and supportive housing financing opportunities that could be expanded/leveraged. This could also help the City more quickly bring to fruition its affordable housing managed pipeline. Most recently, Project Roomkey could be expanded to provide more opportunities to convert hotels as well as office space to housing.

Finally, the Bank could expand funds such as the Supportive Housing Loan Fund and New Generation Fund.

Beyond housing, the Bank could expand institutions that provide public goods. For instance, a public bank could support the expansion of mental health and trauma-informed care facilities used by the County’s Department of Mental Health and Department of Health Services.

Network of local financial institutions: the public bank can support these through participation lending and other partnership financing activities.

Ultimately this allows these organizations to scale their work two-fold or more.

National organizations (many with Los Angeles offices): Corporation for Supportive Housing; Enterprise Community Partners; Local Initiatives Support Corporation; Low Income Investment Fund; Nonprofit Finance Fund; Capital Impact Partners Organizations based in Los Angeles: California Community Foundation; Genesis LA Economic Growth Corporation; Pacific Coast Regional, Small Business Development Corp; Valley Economic Development Center What existing City of LA programs at the local level could be expanded and maximized with help from the Bank?
Questions about
a public bank?
• Credit unions missions are devoted to their private depositors. A public bank would be established to profit and benefit the entire city of Los Angeles. It would work hand-in-hand with credit unions toward that goal.
• Public banks would add to the diversity of options and allow public funds to more fully support the activities of organized labor, community groups, and public agencies. • Credit unions cannot access the Federal Reserve in the same way as chartered banks. • Public funds held by Wall Street firms, even through credit unions, exposes them to activities that are in direct contradiction to the spirit, mission, and duty of public entities.

Why do we need a public bank if we already have credit unions? Questions about
a public bank?
An established public bank could provide the compliance, cash flow, and legal foundation for providing low/no-cost check cashing services through LADWP and other public touchpoints.

A public bank could also work with LA Metro and public benefits administration to issue EBT or other debit instruments to provide accountable delivery of public assistance payments and accounts.

A public bank could take correspondent deposits through local financial institutions or postal banks to provide low cost FDIC-insured banking under $5,000 to all city residents at no cost. This would greatly increase the lending leverage of the bank and would free up tens of millions in fees currently paid by the region’s poorest residents to access their own wages.

How can a public bank supplement check cash services?
Questions about
a public bank?
Send them to us!
Email us at [email protected]
Thank you for your kind attention and
contribution to this historic effort to build a
multigenerational institution for the benefit of all.

PUBLIC BANK LA
Proposal to Establish a Regional
Public Bank for Southern California
Attachment 4
Common Misconceptions about the Proposed
Municipal Bank of Los Angeles
INDEX

1. The public sector is inefficient—a public bank will squander public funds………………………… 2

2. Private banks already do everything a public bank proposes to do……………………………………. 3

3. The public bank will be dominated by special interests and become a tool for government bureaucrats to hand out favors controlled by the Mayor and the City Council………………………………………………………………………………………………………………………………………………….. 3

4. The City is looking for a blank check to create a public bank……………………………………………….. 4

5. It will cost taxpayers $1 billion to capitalize a municipal bank……………………………………….……. 5

6. The LA public bank will fail like the now-bankrupt Los Angeles Community Development Bank……………………………………………………………………………………………………………………….……. 6

7. The Bank of Los Angeles won’t be FDIC insured and we’re going to have to bail it out if something goes wrong……………………………………………………………………………………………………………………… 7

8. The Bank of Los Angeles will bank cannabis funds……………………….……………………………………….. 7

9. Local public banks will not be diversified enough to outlast local catastrophes………………. 7

10. Meeting the liquidity requirements set by the FDIC would be enormously costly for public banks, and subsequently, the City that funds them………………………………………………..………. 8 publicbankla.com
1 CLAIM: The public sector is inefficient—a public bank will squander public funds.

REALITY: Public sector banks are common and popular in other countries with advanced economies and recent studies
1 have shown that they are more profitable, safer, less corrupt, and more accountable than private banks. Globally, there are approximately 700 public banks worldwide with combined assets of $37.7 trillion. Many, if not most, of these public banks are well-run institutions that play critical roles in the local economic and financial ecosystem.

Examples include: Germany’s Sparkasse network of 400 municipally-owned public banks instrumental to their renewable energy transition and robust small business and manufacturing sectors; and the Bank of North Dakota (BND), a long-standing, century-old public bank credited with helping the state have one of the healthiest banking ecosystems in the United States.

The Bank of North Dakota has proven to weather and recover from economic and natural disasters better than its neighbors. BND has greater return-on-assets than Goldman Sachs, holds a better credit rating than JPMorgan Chase, and has returned over $1 billion in profits to the state through sound investment and management. Due to BND’s financial strength and its prudence in avoiding subprime lending and other risky behaviors typical of Wall Street banks, North Dakota was the only state not left deep in red ink during the Great Recession.

BND recorded its sixteenth consecutive year of record profits in 2019, during which the state’s return on its investment was an astonishing 17%. BND’s successful model includes prudent management and insulation from political influence. The bank’s state-appointed advisory board consists of finance experts; its executives are experienced bankers; and routine lending decisions are made by account professionals, like any other bank.During the COVID-19 pandemic, BND, provided more Paycheck Protection Program (PPP) loans per capita to small businesses than any other state. The bank served as a much needed administrative conduit to the federal government, helping to facilitate distribution of federal aid across its vast network of over 600 local banks.
2 Public banks are driven by a mission to benefit the community and provide public infrastructure critical to the functioning of a healthy economy (clean energy, transportation, health, education, parks, and affordable housing). Public banks re-center public benefit in the investment and savings of public dollars, enabling these publicly-owned institutions to deploy capital quickly and efficiently.
2 https://bnd.nd.gov/pdf/2020_bnd_annual_report.pdf
1 https://www.eurodad.org/public_development_banks_towards_a_better_model publicbankla.com
2 CLAIM: Private banks already do everything a public bank proposes to do.

REALITY: Public banking is fundamentally about creating a public option where the private sector has left a gap. A public bank would be mandated to support community banks, credit unions, and local non-profit financial institutions. These institutions may offer services to unbanked and underbanked communities but don’t have enough capital or resources to expand their footprint or provide services tailored to these communities. By partnering with smaller, local financial institutions, the public bank would offer such banks more liquidity via participation loans, loan loss reserves, and loan guarantees. This would allow local banks to expand their balance sheets, so they can make more loans to fledgling small businesses, and offer a wider variety of services to underserved areas, such as microloans. Increasing the impact and resilience of these valued financial partners is prudent, and binding public money to public good is likewise a good investment. A public bank would do all this without reinventing the wheel, but rather by supporting the institutions already in place within their communities.

CLAIM: The public bank will be dominated by special interests and become a tool for government bureaucrats to hand out favors controlled by the Mayor and the City Council.

REALITY: The public bank will be governed like any bank, by a board of directors qualified and selected based on their reputation, financial and domain area knowledge, and their accountability to a fiduciary duty to advance the mission and soundness of the bank.

Shareholders of the bank are local taxpayers, and they will choose the bank’s representatives and board. The bank’s financials will be audited and subject to public record, and the bank will be governed both at the state level like any other state-chartered bank, and at the local level subject to a regular public review process.

This governing structure does not put politicians in charge of the bank or the board of the bank.

It puts the public in charge of selecting and evaluating its own commission by either electing or confirming appointees and attending and contributing to regular, meaningful public meetings as to the business of the bank. A public bank is like any other civic institution—universities, public safety, municipal service and utilities—all areas where people participate both directly and through representatives. The final governance plan must be approved by not only the City Attorney but also the state’s banking regulators, who will be looking specifically for areas where political power could adversely affect the bank’s soundness and fiduciary duty to its shareholders and depositors.
publicbankla.com
3 Through the Democracy Collaborative, researcher Michael Brennan interviewed close to 30 community stakeholders in Los Angeles. Based on these interviews and a study of governance structures throughout the world, he put forward a Governance proposal for the Municipal Bank of Los Angeles, recommending the following mandate for the charter:
“[The Bank will be] established for the purposes of (1) achieving cost savings, (2) addressing infrastructure and housing needs, (3) promoting equitable recoveries from social, economic, and ecological crises, (4) developing community wealth building institutions and approaches, (5) promoting just transitions to address the climate and biodiversity crises, (6) repairing the historical harms to Black, Indigenous, and immigrant communities, and (7) achieving financial sustainability while avoiding profit seeking.” A multi-chambered board will provide balance between financial experts and community leaders, as the German national bank Sparkassen does, and all bank activity will be fully transparent for scrutiny from both the public and oversight committees to curtail any potential corruption.

Regardless of the final form of a bank, the key distinction from existing banks is that the people of Los Angeles will have a voice in its priorities and leadership. All of this stands in sharp contrast to how banks are currently governed—designed for the purpose of pursuing profit, often extractively, and poorly incentivized to invest in local communities. The public bank of Los Angeles will be a public bank for and by the people of Los Angeles.

CLAIM: The City is looking for a blank check to create a public bank.

REALITY: In October 2021, Los Angeles City Council unanimously approved a motion to move forward with issuing a Request For Proposal to hire a consultant to develop the business plan for the City’s public bank. A sound and economically viable business plan will be developed by this consultant, in conjunction with regular community input meetings. After the plan is developed, it will be presented to the Council for a vote, and will be implemented by the City upon approval by the state’s regulatory agency the Department of Financial Protection and Innovation (DFPI).

The City currently utilizes banks and has bank accounts where income is deposited and expenses are paid. The public bank is just a different entity where the money is held, one that will be required by state law (AB 857) to meet all the same or greater requirements of safety and soundness as the city’s current banks. Any funds invested or secured by the bank will be subject to approval by City Council and will be subject to a public standard of fiduciary duty.. It publicbankla.com
4 will be subject to extensive scrutiny and financial analysis, and will require ongoing regulation and oversight by banking regulators and the City itself.

The business plan for the Municipal Bank of LA will include a capitalization model to start the bank, which is reviewed and approved by the DFPI. The City currently has approximately $10 billion currently invested in financial assets like US treasuries and the debt obligations of private companies. Over $1 billion of these funds are invested in “short term commercial paper” of large multinational banks and petrochemical companies—funds that invest directly against our City’s stated climate goals.

Alternatively, the city could invest some of these funds as start-up capital to open a municipal public bank. Such an investment would be subject to targeted financial returns, like other banks, but would have a broader mandate to serve our communities and local businesses, and invest in a greener, more equitable future for all Angelenos. Rather than investing tax dollars in idle or counter-productive investment funds, public banks can create vehicles for tax dollars to build affordable housing, schools, and green infrastructure - all at lower costs to fund. Public banks return money back to our communities in the form of expanded credit and services, lower the cost of municipal debt, and boost economic growth—from the bottom up.

CLAIM: It will cost the taxpayers $1 billion to capitalize a municipal bank.

REALITY: The most common-sense approach to capitalizing the Municipal Bank of LA would cost taxpayers zero dollars—our City has $10 billion in investments and utilizing a small portion of it to capitalize the LA public bank acknowledges the contribution each of us has made to support the public good. This capital can then be lent out or leveraged to support the city's economy. Through sound management and investment common to any bank, public or private, the Municipal Bank of LA has the potential to return substantial profits back to city coffers while also expanding credit to the City and to working Angelenos.

The funds used to capitalize a public bank do not have to be drawn from the City’s general funds. The City could alternatively issue bonds to capitalize the bank and then earn a direct return from bank operations to offset new debt service expenses. The capitalization could also constitute a simple reappropriation of now well-funded reserves to public bank securities with the same return and risk profile of existing city investments. Deployed in this way, these funds would offer the City a multiplier effect on its general fund, helping to pay off a bond and bolstering growth in local economies.
publicbankla.com
5 Revenue to the City from taxpayers and other sources that are currently deposited into private banks can also capitalize the municipal bank. Right now, approximately $10 billion of our public assets and upwards of $45 billion in investments for pensions and other funds, are managed through accounts primarily held at Bank of America and JPMorgan Chase. These commercial banks use the large pools of funds from public entities and pensions to achieve tremendous leverage on their own investments, and derive private profit from public funds, often at the expense of public good. And for these services, those banks charge the City over $1 billion per year in fees and interest! With public funds invested in a public bank, our city’s expenses would be below market rate because funds would be reinvested in local communities. As just one example, instead of a pension fund invested in national corporate securities, it could be invested in affordable housing lending here in Los Angeles, at the same rate of return and with less risk.

There is no minimum of capital needed to start the Municipal Bank of LA, but with more startup funding, the bank can better take advantage of economies of scale, and thereby generate greater revenues for the city through its investments and services.

The Municipal Bank of Los Angeles would likely start as a “banker’s bank,” servicing the needs of the municipal government by holding City deposits and handling its day-to-day banking needs. As a “banker’s bank,” the bank would not have branches, ATMs, or any associated brick-and-mortar costs of traditional retail banks. Such a public bank could serve as a market-maker for public debt, including the often expensive debt for school districts, which pay outsized fees to brokers just to finance their operations.

A public bank could also serve as a public partner and deal-enabler for existing community financial institutions and credit unions. The Municipal Bank of Los Angeles could stand in as guarantor or investor for loans underwritten and serviced by existing CDFIs and community-focused lenders and financial service providers, thus expanding credit and resources for truly affordable options for constituents. Such lending support has existed at the state level for over 25 years, and was a vital way of expanding small business lending during the pandemic. The public bank would enable and enhance responsible financial services in the city and help small businesses, often overlooked or unfairly targeted by larger lenders, compete.
publicbankla.com
6 CLAIM: The LA public bank will fail like the now-bankrupt Los Angeles Community Development Bank.

REALITY: The Los Angeles Community Development Bank which closed in 2003, was not in fact a bank—it was a loan fund designed to support banks and other lenders, providing loans to LA-based small businesses with higher credit risk.
3 It served a similar function as SBA loan
guarantee programs and allowed for more lending to LA-based small businesses. It was designed to lose money so that banks wouldn't need to. A Los Angeles public bank, like the Bank of North Dakota, would be run by seasoned bankers fully mindful of credit risk, interest rate risk, and quality of assets. The Municipal Bank of Los Angeles would also be regulated like other banks, requiring it to maintain capital reserves rather than simply spend down funds.

CLAIM: The Bank of Los Angeles won’t be FDIC insured and we’re going to have to bail it out if something goes wrong.

REALITY: The California Public Banking Act (AB 857), the law that permits cities and counties to found their own banks, requires California public banks to obtain Federal Deposit Insurance Corporation (FDIC) insurance before the state will approve their charters. Public deposits will be collateralized according to the same rules that apply to all banks. Public banks will have to abide by all regulations that private banks are subject to and will receive the same benefits of deposit protection offered to private financial institutions.

Unlike private commercial Wall Street banks, the continuous solvency of the LA municipal bank is not dependent upon the unpredictable nature of the stock market. By investing in goods and services that all Angelenos rely upon, like affordable housing and green jobs, the bank can act as a “counter-cyclical” economic force, providing economic stability to the City even during a downturn, much like the Bank of North Dakota was able to in the past two recessions.

CLAIM: The Bank of Los Angeles will bank cannabis funds.

REALITY: 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 3 Abramowitz et al., 2010. “Community Development Finance in Los Angeles: Challenges and Responses”
https://community-wealth.org/sites/clone.community-wealth.org/files/downloads/paper-abramowitz-et-al.p df
publicbankla.com
7 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.

CLAIM: Local public banks will not be diversified enough to outlast local catastrophes.

REALITY: Should a disaster such as an earthquake or a pandemic occur, the public bank is mandated to act in the public interest. As in the Bank of North Dakota model, the Bank of Los Angeles would become a conduit for federal or state disaster loan assistance distribution. The Bank of North Dakota distributed more PPP loans to local small businesses than commercial banking did in other states. By building local relationships with small businesses and other lenders, the public bank will become more knowledgeable of the local economy, and be inherently better positioned to provide administrative support and technical know-how to connect smaller institutions with federal and state funding programs. As we have seen during the prolonged response to COVID-19, an inadequate response upfront means much greater losses for more people over time. A public bank expands the available tools to respond quickly to emergencies and, over time, reduce the overall loss incurred by the City and all Angelenos.

CLAIM: Meeting the liquidity requirements set by the FDIC would be enormously costly for public banks, and subsequently, the City that funds them.

REALITY: If banking were unprofitable and too risky to be worth it banks wouldn’t represent such a major portion of the global economy and trillions in investments across the globe. The FDIC’s liquidity coverage ratios would apply to deposits held at the Municipal Bank of LA, just as it applies to other banks. Public funds deposited with the bank would be collateralized by qualifying assets in excess of 100% according to California law. Sound management will allow the bank to gain efficiencies on its balance sheet and support community financial networks through non-competitive partnership banking services. The bank would also be able to benefit from additional federal services that local municipalities cannot access, allowing the bank to maintain the same safety and security as other banks of its size at a comparable cost of capital. publicbankla.com
8 Attachment 5
1/7/22, 10:26 AM The Public Bank LA plan is incredibly naïve – San Gabriel Valley Tribune https://www.sgvtribune.com/2021/06/26/the-public-bank-la-plan-is-incredibly-naive/ 1/4 ___
By SHIRLEY SVORNY |
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OPINION
ThePublicBankLA planis incrediblynaïve
• Opinion
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Shirley Svorny
Tags: Guest Commentary
$22 for 2022: 1 Year of Unlimited Digital Access - Read with No Article Limits SUBSCRIBE NOW   Attachment 6
n march 2004, the once-heralded los
Angeles Community Development Bank (lacdb)
closed its doors because of insolvency. The government-created bank’s demise should come as no surprise. Credit officers at the not-for-profit bank lacked incentives to monitor loans on an ongoing basis. The
lacdb’s lending was subject to pressures by public
officials, which distorted decisions so as to favor politically connected borrowers. Moreover, the bank — like other public lenders — was actively encouraged to fund ill-conceived, highrisk projects. A financial institution with a portfolio of very high-risk loans was bound to fail.

At its inception, the lacdb was one component of a
broad set of targeted lending programs and subsidies ostensibly directed at improving the lives of the urban poor. Others include the Community Reinvestment Act (see “Renovating the Community Reinvestment Act,” Summer 2001) and entities such as enterprise and empowerment zones.

The failure of the lacdb illustrates the types of problems inherent in U.S. urban industrial policy.

THE PLAN IN ACTION
The establishment of the Los Angeles Community Development Bank was part of the Clinton administration’s response to the city’s 1992 riots. At the time, urban industrial policy was focused on identifying areas in need of economic development, then using public funds to foster job creation.

In 1994, Los Angeles was awarded “supplemental empowerment zone” status (missing out on the more lucrative empowerment zone status), which made it eligible to receive funding for the lacdb. The bank, in turn, was set up to make loans to small Robert Krol is professor of economics at California State University, Northridge. He may be contacted by e-mail at [email protected].

Shirley Svorny is chair of the Department of Economics at California State University, Northridge. She may be contacted by e-mail at [email protected]. and medium-sized businesses located in the designated zone.

The U.S. Department of Housing and Urban Development
allocated $435 million in grants and loan guarantees to capitalize the community development bank. The federal funds were awarded to the County and City of Los Angeles, which were then to funnel the funds to the lacdb. An agreement was reached in 1995 that set forth the conditions for the annual flow of funds from the county and city to the lacdb.

The grant component of the funding included $5 million
from the federal Community Development Block Grant program and $115 million in the form of an Economic Development Initiative grant. Also included was $315 million in hud loan guarantees under Section 108 of the Community Development Block Grant program. Those loan guarantees allowed the county and city to borrow funds for the lacdb from private banks and investors at an interest rate slightly above that paid on Treasuries. Future county and city Community Development Block Grant allocations were pledged as collateral, in case the lacdb’s loans were not repaid.

The bank was structured as a public–private partnership. At the time, politicians across the country were reacting to the failure of public sector programs by embracing joint public–private efforts for economic development. The goal was to find a system or method for public sector involvement that would match the success of private entrepreneurs.

The plan called for leveraging federal dollars with private funds. Private banks pledged $210 million to the effort on the condition that the lacdb identify promising lending opportunities. Over the life of the lacdb, little private bank participation occurred, providing a strong signal about the poor quality of lacdb projects.

REJECTION MEANS YOU’RE QUALIFIED The lacdb became
fully operational in June 1996. Loans were to be directed exclusively toward businesses whose applications for credit had been 30 REGULATION WINTER 2004-2005

BANKING & FINANCE
The failure of the L.A. Community Development Bank
epitomizes how good intentions often become bad policy.

The Collapse
of a Noble Idea

BY ROBERT KROL AND SHIRLEY SVORNY
California State University, Northridge
I
REGULATION WINTER 2004-2005 31

MORGAN BALLARD

BANKING & FINANCE
rejected by private lenders. Businesses located in (or willing to move within) the borders of the designated empowerment
zone were to receive 75 percent of the loans, and the remaining money was to go to businesses in a one-mile buffer surrounding the zone. Bank officials were responsible for assuring that 51 percent of the jobs associated with the loans were filled by residents of the empowerment zone. In addition, the lacdb was required to identify one new or retained job for every $35,000 of bank capital invested.

In order to win approval from the Los Angeles City Council, the lacdb was established as a nonprofit institution. The council argued that, because public dollars capitalized the bank, it should operate on a not-for-profit basis. Little thought was given to the perverse incentive effects associated with creating a publicly funded, nonprofit lending institution that would be inclined to issue risky loans that could lead to its insolvency. Finally, so as not to compete with private banks, the lacdb was prohibited from engaging in retail banking; the bank was not permitted to take in deposits. The end result was a substantial reliance on public funds, leaving the bank free from the market and regulatory oversight that constrains the actions of private financial institutions.

The lacdbmade business loans, but also engaged in venture capital investments. Between its inception in 1996 and October 2003, the bank committed $130 million in 252 separate loans and investments. Empowerment zone businesses ultimately received only 42 percent of the money, well below the program’s 75 percent requirement. Buffer zone businesses received 55 percent, even though they were only to receive 25 percent. The remaining 3 percent of the financing went to businesses located in other low- to moderate-income census tracts in the city, which was permitted under the Section 108 program. The
observed lending patterns may have met federal lending guidelines, but clearly did not meet the lacdb’s stated objectives.

According to the bank, 3,623 jobs were created, but empowerment zone residents filled only 20 percent of those positions.

IN THE RED As of the fall of 2003, the lacdb had $16 million in outstanding loans. Since 1996, the bank received $43 million in repayments and charged off $39 million worth of loans.

Assuming the remaining $16 million in outstanding loans would have been repaid, the bank still charged off an astounding 40 percent of the funds it lent. To put that in perspective, the current charge-off rate for private commercial banks is less than one percent. Over the last 20 years, it never rose above two percent. Consumer credit charge-off rates are around six percent.

Over the seven years it was in operation, the lacdb’s venture capital fund committed $35 million to businesses in or near the Los Angeles empowerment zone. Of that, $26.6 million was actually invested. As of October 2003, the fair market value of those investments was only $7.6 million. Lenders at the lacdb were supporting investments that were poorly thought out. In March 2004, the city decided to cut its losses and the bank was shuttered.

The poor performance in loan repayment and investment
tells us two important things. First, the lacdb did a poor job assessing loan risk and investment prospects. The high lending losses indicate a lack of lender oversight that would normally accompany private bank loans. Clearly, the high risk in lending extensively in distressed urban areas was poorly managed by the lacdb staff.

DESIGN PROBLEMS
The fundamental assumption of proponents of community development banks is that private banks overlook viable investment opportunities. The proponents presume that
employees of a federally funded, nonprofit bank can and will identify those overlooked business opportunities and make them happen.

Given the incentives of the individuals involved, that is a hard premise to defend. It rests on concerns that private banks discriminate in lending (avoiding otherwise profitable investments), as well as the even-more-incredible premise that credit officers at a nonprofit community development bank are more adept than their private-sector counterparts at assessing the potential success of firms that plan to operate in poor neighborhoods.

Lending is a risky business. To manage that risk, private banks diversify their loan portfolio. In the case of the lacdb, the constraints on lending produced a non-diversified portfolio of high-risk loans. Default rates would be high even in a growing economy. A recession would predictably lead to bank failure.

If job creation was a key objective, limiting loans to firms in the designated empowerment zone was counterproductive.

By setting constraints on firm location, the program reduced the potential for subsidizing or encouraging job creation. Public safety, proximity to amenities, and the state of public infrastructure (roads, for example) play an important role in business location decisions. Those are attributes that distressed, poor areas lack.

Another fundamental design flaw was the nonprofit nature of the institution and its dependence on public funding. In Los Angeles, the loan process was politicized with city council members showing an interest in directing funds to their own districts. Where such pressures exist, loan decisions are distorted; funds may go to the politically well connected instead of to promising business prospects.

The profit motive is the key to effective and efficient operation of any business. Private banks and financial institutions invest their own resources and specialize in finding economic projects to fund. Those that succeed do so because they are good at identifying viable projects. The nonprofit structure of the lacdb distorted those incentives and made it highly unlikely that the bank would significantly promote inner-city growth and job creation.

Different managers could not have improved the poor performance of the lacdb loan portfolio. It was the lack of proper incentives to monitor and assess risk that led to the not-forprofit bank’s failure.

THE CASE AGAINST GOVERNMENT LENDING
The establishment of community development banks has been justified on the basis that private financial institutions under32 REGULATION WINTER 2004-2005 serve inner-city communities. However, there is little evidence of discrimination against qualified borrowers. In fact, there has been significant growth in lending in low-income neighborhoods. For example, between 1993 and 1997, home loans to low-income urban borrowers increased 37 percent. That was higher than the increase for moderate- or high-income urban borrowers over the same period.

Changes in technology and deregulation of the banking system have changed the financial system, improving access to capital. Computer technology has significantly reduced the cost of checking credit histories, so loan approvals today are less likely to be based solely on personal contacts, private knowledge of a borrower, or racial or ethnic factors.

As to the government’s ability to improve on private financial market failures, the opposite is true: Government agencies do a poor job directing capital to its highest-valued use. Evidence from countries with large, government-owned or government-controlled banking systems suggests that such controls slow economic growth.

Few independent studies have focused on the accomplishments of government-sponsored inner-city lending programs.

Self-reporting by lending agencies exaggerates successes and ignores failures. Agencies report jobs created, but there is no discussion of situations where loan recipients fail or seek bankruptcy protection and suppliers are not paid; those job losses are not reported.

One economic development program that has been examined is the Small Business Administration’s Minority Enterprise Small Business Investment Company (sbic), established in the late 1960s. The program’s rationale was the same as the lacdb’s — to provide funds to underserved inner-city businesses. sbics are privately owned firms that finance small- and medium-sized minority-owned firms. The Small Business
Administration subsidizes sbic loans. The sbic industry as a whole has lost money.

An investigation of successful sbics (i.e., those that did not fail) found that they did not invest extensively in small, minority-owned businesses. The majority of the sbics that survived invested in New York City taxicab medallions, hardly an engine of inner-city economic development. Others held a significant portion of their funds in bank certificates of deposit. Neither investment supports the idea that public loan subsidies promote inner-city economic development or job creation.

CONCLUSION
The Los Angeles Community Development Bank was an
ineffective policy tool for promoting inner-city economic growth. The bank failed because it had a nondiversified portfolio of high-risk loans and investments. Its not-for-profit status and use of public funds distorted the incentive structure for lending. From the very beginning, the bank was a long shot to succeed.

Policymakers need to face the facts — there are areas in cities today that do not have the basic conditions needed for economic growth. As a result, those areas will continue to have high rates of unemployment and poverty. What can the government do? Rather than wasting billions of dollars on ineffective loan programs, policymakers should focus on fostering the conditions needed for economic growth. Providing more police in order to reduce crime, improving schools, and repairing inner-city streets are basic public goods that would benefit residents and create an atmosphere attractive to private investment.

In addition, transportation regulations should be rewritten to facilitate low-income residents’ access to employment, wherever it can be found. Deregulating taxis and allowing private bus services would increase transportation services available to inner-city residents, improving access to jobs across the city.

In terms of economic development, the government should quit trying to do what the private sector does better. The lacdb is a classic example. The United States has the most competitive and efficient financial system in the world. It specializes in finding worthwhile business projects to finance. It does that job well, even in the inner city.

Loans are not welfare. Established welfare and unemployment compensation programs assist families and individuals.

Loans are different. Scarce loan funds should only go to businesses and individuals who have a project that makes economic sense. There is nothing wrong with turning loan applicants down, as private banks do, if their plans have little chance of succeeding. In the long run, bad loans do not create jobs or generate economic growth.

REGULATION WINTER 2004-2005 33
• “The Community Reinvestment Act: Looking for
Discrimination That Isn’t There,” by George Benston. Cato Institute Policy Analysis No. 354 (1999).
• “Financing the Development of Urban Minority
Communities: Lessons of History,” by Timothy Bates. Economic Development Quarterly, Vol. 14 (2000).
• “Government Ownership of Banks,” by Rafael La Porta,
Florencio Lopez-de-Silanes, and Andrei Shleifer. Journal of Finance, Vol. 57 (2002).
• “Inner Cities and Long-Run Government Policy,” by Robert Krol and Shirley Svorny. Jobs & Capital, Vol. 3 (1994). • “The Los Angeles Community Development Bank: The
Possible Pitfalls of Public–Private Partnerships,” by Julia Sass Rubin and Gregory Stankiewicz. Journal of Urban Affairs, Vol. 23 (2001).
• “Trends in Home Purchase Lending: Consolidation and the Community Reinvestment Act,” by Robert Avery, Raphael
Bostic, Paul Calem, and Glenn Canner. Federal Reserve Bulletin, Vol. 85 (1999).

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