Rules & Legislation Committee
November 17, 2022

Public Bank East Bay Viability Study
Prepared by Tom Sgouros Commissioned by Friends of the Public Bank East Bay March 2022

1 TABLE OF CONTENTS TABLE OF CONTENTS ..................................................................................................................................................... 1 Executive Summary ........................................................................................................................................................ 3 Introduction ...................................................................................................................................................................... 4 Why The East Bay Needs a Public Bank .................................................................................................................................. 4 Mission Statement ............................................................................................................................................................................ 6 What Will PBEB Do? ......................................................................................................................................................................... 7 Programs ............................................................................................................................................................................ 9 Housing .................................................................................................................................................................................................. 9 Climate ................................................................................................................................................................................................ 11 Business lending ............................................................................................................................................................................. 14 Financing ......................................................................................................................................................................... 19 Capitalization ................................................................................................................................................................................... 19 Funding ............................................................................................................................................................................................... 19 Expenses ............................................................................................................................................................................................ 21 Expansion and growth ................................................................................................................................................................. 21 Financial Projections .................................................................................................................................................. 22 Staffing ................................................................................................................................................................................................ 27 Housing ............................................................................................................................................................................................... 27 Climate ................................................................................................................................................................................................ 27 Small business lending ................................................................................................................................................................. 27 Municipal finance ........................................................................................................................................................................... 27 Treasury operations ...................................................................................................................................................................... 27 Data processing/IT ........................................................................................................................................................................ 28 Compliance officer ......................................................................................................................................................................... 28 Pre-Opening Budget ...................................................................................................................................................................... 28 Risk Analysis .................................................................................................................................................................. 29 Housing ............................................................................................................................................................................................... 30 Electrification lending .................................................................................................................................................................. 30 Business ............................................................................................................................................................................................. 30 2 Municipal lending ........................................................................................................................................................................... 31 Liquidity risk .................................................................................................................................................................................... 31 Governance ..................................................................................................................................................................... 32 Compliance with AB 857 Requirements ............................................................................................................... 34 Appendix A Governance Plan ................................................................................................................................... 36 Appendix B Legal Analysis ......................................................................................................................................... 40 Introduction ..................................................................................................................................................................................... 40 Section 6, Article XVI of the California Constitution ........................................................................................................ 41 Section 6, Article XVI of the California Constitution Likely Does Not Apply to AB 857 Public Banks in General ................................................................................................................................................................................................ 42 Section 6, Article XVI of the California Constitution Likely Does Not Apply to the Proposed Public Bank East Bay’s Structure and Operations ..................................................................................................................................... 43 Appendix C ...................................................................................................................................................................... 44 Appendix D ..................................................................................................................................................................... 46 Appendix E Next Steps ................................................................................................................................................. 47 Errata ................................................................................................................................................................................ 49 3 Executive Summary This Viability Study demonstrates that the Public Bank East Bay (“PBEB”), a cooperative venture among the cities of Oakland, Berkeley, and Richmond and Alameda County, is a viable entity which can: • achieve fiscal stability within the first three years; • provide loan support to underserved sectors of the local economy; • address local infrastructure needs, with proposed initial attention to electrification infrastructure, as detailed on p. 11 • reduce local government dependency on Wall Street banks; • decrease local fossil fuel and other harmful investments; • partner with local financial institutions to the economic and social benefit of all; • mitigate economic inequity in the region; • serve as a model for public banks around the state and the country. This Study and the accompanying financial projections show that the PBEB can achieve these goals while operating in a conservative and secure way, minimizing the financial risk to its sponsor governments. The PBEB will be a low-overhead enterprise, with a small staff to run lending programs in partnership with existing local financial institutions. The lending programs will include: • making loans to local small businesses, in cooperation with local community development financial institutions (CDFIs) and local banks; • providing initial loans with minimized bureaucratic requirements to non-profit affordable housing developers for property acquisition, bridge financing, or foreclosure prevention, as well as financing for rehabilitation projects; • extending credit to help the East Bay do its part to ameliorate the climate emergency, financing building electrification as well as small-scale renewable energy installations; • supporting municipal finance, by providing modest credit to the member governments for small projects. As the Bank grows and adds capacity, it will also be able to provide an alternative to Wall Street banks for cash handling for the member governments. Through careful management of these programs, the PBEB can deliver benefits worth many times the initial investment and provide a vibrant institution that is a vital part of the East Bay economy for decades to come. 4 Introduction Why The East Bay Needs a Public Bank The current national, California, and East Bay financial systems are not meeting the needs of the East Bay. The urgent issues we face include: • The ongoing climate crisis is inescapable. Localities cannot wait for a paralyzed federal government to deliver, and must find ways to increase local funding for initiatives that will dramatically reduce greenhouse gas emissions and increase availability and affordability of green energy solutions. • The Bay Area is experiencing a housing crisis of extreme scale, visible along so many major thoroughfares. Quality affordable housing that does not accelerate displacement is desperately needed, and solutions cannot take ten years to ramp up. New local funding, along with streamlining availability of existing funds, is badly needed. • BIPOC small businesses lack funding. Nationally the unmet credit needs among entrepreneurs of color are 15-25% higher than those of white entrepreneurs.1 • Worker cooperatives, employee-owned firms, community land trusts, and other community- based models of ownership are poised to grow in scope and scale, but they are often unable to access traditional bank funding. Financing alone cannot solve these problems. However, access to inexpensive capital will inevitably play an essential role in all solutions. A public bank—that directs public assets to solve public problems— can and will be part of a solution that helps participating cities and counties tackle these issues, and more, by adding a component of financial infrastructure to the existing mix. The term “public bank” means many different things around the world. In this Viability Study and the forthcoming Business Plan, we define the term as it is defined in California’s Public Banking Act, “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.” Responsible and responsive banking of public funds will be an invaluable tool in transforming the current system to one that works for the people who need it. This Study demonstrates that the East Bay region of Northern California can be the home of a stable, productive, and transparent public bank—the Public Bank East Bay—which can help its region address essential structural problems. Wall Street banks which handle the vast majority of public funds in the East Bay and around the country have consistently placed profits and shareholders over the needs of everyone else. Self-admitted felonies by banks resulted in nearly $2 billion dollars22 paid in fines and fees over the past 20 years. Additionally, bank policies such as subprime mortgages and financialization led directly to the housing bubble and financial crisis of 2008 that devastated families and communities. People of color disproportionately lost wealth during this crisis. Banks were held accountable trivially if at all in the recovery from the crisis, and 1 Small Business Survey 2019. 2 https://bettermarkets.org/newsroom/new-report-details-first-time-20-plus-year-crime-spree-six-largest- wall-street-banks/ 5 continued to play fast and loose with customers’ money. The phantom account scandals at Wells Fargo (where the bank created millions of accounts for customers without their knowledge or consent) demonstrate how bank customers are often at risk from the banks themselves. Wall Street takes people’s money, uses it to gamble in their high-stakes casino, and leaves customers holding the pieces when they lose. Sad experience shows that states and municipalities are equally at risk as customers of private banks.3 Just as online commerce and big-box wholesale stores have decimated local businesses, including hardware, stationery, and book stores, small banks have been driven out of the market by Wall Street banks, or have been bought out or merged into larger banks. This has left banking deserts around the state, including in the East Bay. In 1994, the state had 500 community banks4, but by 2017 it had only 1245. While this corporate concentration may have brought convenience for some customers, it has caused pain to many others, in the form of less accessibility, fewer options, higher fees, and greater disconnection of banks from community priorities and control. Moreover, banks do not merely hold money, they do things with it. The major role of Wall Street banks in funding the fossil-fuel industry underscores the profound mismatch of these banks with the values of our region. Many jurisdictions, including Oakland, Berkeley, and Richmond have voted to divest public funds from fossil fuels, but have been unable to do so, due to their inescapable relationships with Wall Street banks. As easy as it is to enumerate the active ways in which the money-center banks harm our lives and our communities, it is just as important to examine what they fail to do. 6Over the past few decades, more and more bank revenue has been generated by fee income, i.e., direct charges made to bank customers for the service of handling money. This income has increased in importance, because interest income entails risk to the banks in a way that fee income does not. Consequently, bank management has emphasized fees over loans. In practice this has caused the big banks to cut back underwriting all but the most standard loans, eliminating much if not all of their lending risk. Plenty of mortgage credit is available; however, this market is highly controlled, subsidized, and insured by the federal government. Business credit is plentiful for big corporations, especially those large enough to access the bond market. But other market demand—including extending credit to BIPOC- and women-owned small businesses, worker cooperatives and land trusts, innovative green energy initiatives, and climate resilience measures—goes unmet. Even affordable housing, for which oceans of capital are theoretically available from federal, state, and private sources, suffers from a tragic lack of nimble capital that does not take years to approve.7 The 3 Sgouros, T, “Predatory Public Finance”, The Journal of Law and Society, 17:1 (2016), pp 91-102. https://law.wayne.edu/academics/co-curricular/journal-law-society 4 A “community bank” is a depository or lending institution that primarily serves businesses and individuals in a small geographic area. In 2018 Congress defined community banks as banks with less than $10B in consolidated assets (see here for a broad definition). Appendix D lists the 8 banks headquartered in Alameda and Contra Costa County that fall under this definition. 5 https://www.bankingstrategist.com/community-banks-number-by-state-and-asset-size 6 Money center banks are banks that raise most of their funds from domestic or international money markets instead of from depositors. Bank of New York, Deutsche Bank, Citigroup, J. P. Morgan Chase, and HSBC Bank USA are all examples of money center banks. 7 Vitally important in a state where approximately 160,000 people are experiencing homelessness on any given day. See https://www.usich.gov/homelessness-statistics/ca/ 6 consequences to the East Bay’s economy have been severe, with bank credit to small businesses shriveling, and rising prices for mundane and low-risk municipal investments. Transformative financial programs are essential to comprehensive solutions to these problems. By keeping overhead low, partnering with local financial institutions, reinvesting revenue to the business, using inexpensive public monies, and not being bound to reap high profits, public banks can make credit more available and more equitable, underwrite new initiatives, and serve as clearinghouses and conduits for more efficient and restorative uses of public money. Public banks cannot fully address these crises on their own, but public banks are an essential component of addressing them. In countries around the world, including Germany, Costa Rica, India, Vietnam, and many more, publicly owned banks have helped create and direct new financial tools to serve public needs. The Bank of North Dakota is the only major publicly owned bank in the United States. In its century of existence, it has maintained and strengthened community banks, reduced student loan debt, compensated for the 2008 financial crisis, and equitably distributed federal pandemic relief—and shown substantial financial success while doing so. The public banking movement is growing around the country. California has led the way with the California Public Banking Act (AB 857), which authorizes the formation of public banks to engage in the lending of public monies under public ownership. This legislation sets out the path for PBEB to open its doors.8 Mission Statement PBEB will invest public monies from participating governmental agencies to meet the needs of local communities. PBEB will seek to return a reasonable, but not excessive, profit to its stakeholders by making economically sustainable loans and providing a high level of service to its partners and stakeholders. It will adhere to the principles of the United Nations Declaration on the Rights of Indigenous People, and will prioritize environmentally regenerative, culturally equitable and participatory practices that reverse discrimination against members of economically and socially marginalized communities. The Bank’s decisions will be based on five key values: • Equity: We are committed to a public bank that acknowledges and attempts to relieve the contemporary and historical burdens carried by disenfranchised communities, including low- income communities of color and other marginalized groups. • Social Responsibility: Decisions regarding loan recipients, sponsored projects, and who benefits from PBEB policies will all prioritize investing our money into the wealth and health of local communities and the environment. 8 While there are no major established US public banks outside of North Dakota, both San Francisco and Los Angeles are working on their business plans, and the Central Coast is working on its viability study. No other state has passed enabling legislation yet, but bills are pending in MA, NY, NM, and WA, and there are local efforts in various states. (See the website of the Public Banking Institute for detailed, if not fully up-to-date, information on efforts across the country) 7 • Fiscal Responsibility: As a steward of public money collected by depositing agencies from individuals and businesses in the East Bay, the Bank is committed to compliance with the directives and policies of state and federal regulators. It is equally committed to active and constant attention to managing risk and making fiscally responsible decisions so as to maintain PBEB in a safe and sound condition. • Accountability: The Bank is accountable to the residents of the East Bay, who have a right to fully transparent explanations of PBEB’s actions and choices. • Democracy: The Bank will be governed using inclusive and participatory processes which consciously and intentionally adhere to the values/principles listed above. What Will PBEB Do? PBEB’s primary function is to employ public funds to meet public needs. This will entail working with member government agencies (initially the cities of Berkeley, Oakland and Richmond, and the County of Alameda) to gradually redirect tax and fee assets and locally generated funds to: • increase available capital to the local economy with a focus on affordable and community- controlled housing, small-business and worker ownership lending, green infrastructure projects, and cost-saving funding of municipal bonds. • support equitable economic development in the region. By prioritizing the least served businesses and by attending to local infrastructure needs, the Bank can provide money to various enterprises and initiatives that are currently neglected, jump-starting needed changes with increased resources. • manage and invest municipal funds safely and cost-effectively. Safeguards, regulatory oversight and conservative loss reserves will make the Bank a reliable guardian of public funds. • enable local governments to redirect public funds from Wall Street banks. The nation’s big banks invest our money in places that are not only irrelevant to our communities but are actively harmful to them. Those practices cannot change without adequate alternative institutions to manage those dollars. • harness public funds to invest in public goals. Traditional banking models incentivize decision- makers to prioritize profits above all else. PBEB will remain committed to financial viability, safety and solidity, balancing the essential need to be profitable with its commitment to our region’s social needs and the Bank’s social mandates. • nimbly, transparently, and democratically modify these goals as local priorities change. To meet these goals, PBEB will partner with and complement local financial institutions, such as Community Development Financial Institutions (CDFIs), credit unions, and local community banks.9 PBEB will be managed by professionals experienced in banking and community finance, independent of the member county and cities. It will have a strong democratic and multi-stakeholder operational and governance structure, including a Board of Directors, with community members and representatives of the governmental agencies filling a majority of seats. The mission, operations, and decision-making of PBEB will ensure financial viability, as demonstrated in this Study, while prioritizing community value above maximized profit. 9 A strong positive for PBEB which is also required by the California Public Banking Act. 8 A democratically organized Bank with strong community oversight, PBEB will be governed by a Board of 15 people who bring banking and financial expertise along with social and political experience. The Board members will have a varied knowledge base and a shared commitment to representing and meeting the needs of systemically underserved communities – and all East Bay residents. Meetings will be public except for discussion of private customer information, personnel matters and appropriate regulatory issues, and the Bank will hold a highly publicized annual meeting to share results with the community and get feedback on future priorities. The Bank and the Board will also adhere to the highest standards with regards to records accessibility and transparency. A discussion of governance issues is on p. 35 and a detailed governance plan is included in Appendix A. 9 Programs The purpose of the PBEB is to redirect a portion of the cash and investments of its member governments from bonds and CDs issued by Wall Street banks10 to local lending. This study lays out four initial target programs: housing, climate, business lending, and municipal finance. The credit market needs—and the outline of a plan for fulfilling them—are described in the following sections and referenced in the financial projections. A rough market analysis was done for each of the four target lines. For housing, climate, and business lending, the analysis included interviews with market participants and review of various reports and studies made on the subject. The review of municipal borrowing added an analysis of public bond documents as filed on the EMMA website of the Municipal Securities Regulation Board.11 Housing The lack of affordable housing in our country has reached crisis level. According to Alameda County’s 2021 Affordable Housing Needs report,12 52,254 low-income renters do not have access to an affordable home and 71% of extremely low-income households are paying more than half of their income in housing costs. Renters in Alameda County need 2.9 times the minimum wage to afford the average asking rent. The housing crisis has been growing over time as housing construction has slowed13 and has been exacerbated by the Covid-19 pandemic. Over the course of the pandemic, nationally, rents have increased 11.4% in 2021 compared to about a 3% annual increase pre-pandemic.11 The homeownership rate for Black and Hispanic residents stands at 45.1% and 49.3% respectively. For whites, the rate is 73.8%. Moreover, this gap has not changed significantly over the 50 years since the Fair Housing Act. Similar inequities are also found in home ownership by income level. As is evident in places like the Bay Area, the high cost of housing in many areas—especially those experiencing significant levels of real estate speculation—forces many lower-income families out of established, often better-resourced communities and into concentrated pockets of poverty within the city or in a neighboring jurisdiction.

Lastly, there is evidence of significant generational inequality, with younger Americans unable to accesses homeownership at the same rates as previous generations. This is particularly true for the "millennial generation” (roughly born between 1981 and 1996), which has significantly lower median wealth than previous generations did at the same age and high levels of student loan debt. Many millennials are disproportionately burdened by housing costs, and fewer are able to purchase homes.14 10 Over $300M (4.5%) of Alameda County’s portfolio is invested in JP Morgan alone according to its annual reports. 11 https://emma.msrb.org 12 https://chpc.net/resources/alameda-county-housing-need-report-2021/ 13 https://www.nytimes.com/2021/08/10/opinion/housing-crisis-eviction.html 14 https://thenextsystem.org/learn/stories/revisiting-community-control-land-and-housing-wake-covid-19 10 Short-term financing for housing development and preservation The goal of increasing the region’s stock of affordable housing will not be reached merely by increasing the amount of available credit. A great deal of credit is available for affordable housing development, but the credit that is available does not always match the credit that is needed. In addition, securing the credit and managing all the other logistical aspects of building an affordable housing development is an arduous and complex process that can take three to five years from the time a property is identified to when the units are move-in ready. A single affordable housing development might rely on over 20 sources of funding. Unfortunately, though both government and private credit is available in theory, it is difficult or expensive to find credit that can be deployed quickly, which can allow a non-profit developer to act on a property that comes up for sale suddenly, or to participate in the foreclosure or tax sale markets to preserve affordability of properties that come up for sale. Perhaps more important, a housing agency with a flexible and readily-deployed source of capital would also be better equipped to prevent those foreclosures or tax sales, and the cascade of negative impacts that result for the people who lose their homes. Foreclosures can also cause harm to neighborhoods and financial institutions by lowering neighborhood home values. During the pandemic, a moratorium was placed on foreclosure actions, however, that moratorium has been lifted and foreclosures are beginning again. Housing agencies also frequently require bridge finance, to get a project underway while the longer- term financing is worked out. This tends to be expensive. Offering non-profit housing developers a flexible line of credit will help them obtain the cash they need efficiently, and will allow agencies the flexibility to deploy credit quickly. PBEB will coordinate this program with other financing agencies. Many of the developers interviewed for this study identified permitting and grants as a major obstacle to building more affordable housing and expressed hopes that as a public bank, PBEB would be in a better position to reach out to local agencies and governments, to help navigate public permits and grants and ensure ongoing municipal support for housing projects, saving money for projects overall. The credit line will work as credit lines do for individuals, with a credit limit and a repayment schedule for each drawdown of credit based on a 3-5-year amortization of the balance. Many non-profit developers have equity in past developments which can be used to help secure such a credit line, and the acquisitions made with it can also be pledged as security. Participating in the housing market, and the security pledged for this housing credit could allow the PBEB to access the resources of the Federal Home Loan Bank, a potentially valuable source of collateral. This form of credit is a departure for this market, so it can be expected to take a bit longer to build out this component of the Bank’s portfolio. Affordable housing rehabilitation and other housing finance options Affordable housing rehabilitation is another largely unmet need in the East Bay.15 Many affordable units were built decades ago and are overdue for repairs to their roofs, cabinets, plumbing, electric service, and more. This kind of lending is smaller than new construction or home purchase finance, typically in the tens of thousands per unit, and the terms also tend to be much shorter: in the 5-10 year range, or perhaps 15 for a roof. This is compatible with the strategy of focusing on shorter term loans in the formation stage of 15 https://baysfuture.org/time-to-fill-a-crucial-gap-in-affordable-housing-financing/ 11 the PBEB. Some of the same agencies who might be line-of-credit clients could be partners to take on the underwriting overhead. Financing Accessory Dwelling Units (ADUs) is another area where traditional housing finance is largely unavailable to meet current and future needs.16 Given the state of the housing market, this demand could be quite substantial and an important component to addressing affordable housing in the East Bay. The referenced study identified over 15,000 parcels where an ADU would be possible, so this has potential to add a substantial amount of housing. Providing this credit, however, will require substantial underwriting effort, as well as navigating some legal issues, especially concerning the value of existing mortgages on properties where an ADU is proposed. From a policy perspective this is an important area to address, but providing this credit will require an investment in time and expertise beyond what is envisioned at the early stage of the PBEB. Without an obvious partner to absorb that overhead, this is not covered in this Study and the financials. It is mentioned here as a fruitful early place to expand PBEB business as the Bank Board and management deem feasible. Climate At this late date in the progress of the climate crisis, there is not nearly enough credit available to reduce the carbon footprint of our society. The PBEB can help by focusing funds on important climate goals, like reducing the carbon footprint of our buildings and adding renewable energy production capacity. Electrification of residential buildings Buildings generate an estimated 40% of annual global climate emissions, with building operations being responsible for most of those emissions. Though addressing the carbon contribution of individual buildings may seem unimportant, this is not only a vital step towards a low-carbon economy, it is also among the lowest-hanging fruit.17 Multiple plans have been developed in the Bay Area to decarbonize existing buildings. Electrification of new and existing buildings is a critical aspect of these plans. The City of Berkeley’s Existing Building Electrification Strategy recognizes that: “Beneficial electrification takes this idea further and ensures that electrification results in reduced GHG emissions, more grid resiliency, and lower energy costs for residents. With the availability of renewable electricity associated with Senate Bill (SB) 100 and EBCE, this switch to electrification, if done equitably, opens up the potential for significant benefits including reductions in GHG emissions, improved health and safety, cost savings, and more.”18 16 https://communityinnovation.berkeley.edu/sites/default/files/a_solution_on_the_ground_report_9-27.pdf 17 https://www.rewiringamerica.org/policy/rewiring-communities 18 https://berkeleyca.gov/sites/default/files/2022-01/Berkeley-Existing-Buildings-Electrification-Strategy.pdf 12 Over 42 cities in California have banned fossil fuel infrastructure such as natural gas heating systems in new construction, however electrifying existing buildings remains a challenge. Retrofitting existing buildings is more costly and complicated than electrifying new buildings. From a fiscal perspective, there is plenty of evidence for long-term savings associated with building electrification. Unfortunately, available and affordable financing of upfront costs is difficult to obtain. PBEB will provide low-cost credit to address this community need. Providing low-cost electrification loans to residential properties owners will also strengthen local economies by creating an economic boom for local businesses and tradespeople. Electricians, plumbers, and carpenters are just some of the professions that will benefit from the increase in demand for residential home conversions. Estimates from across the region give a glimpse of the size of the need for financing electrification loans. In a recent report, the City of Berkeley estimated the average cost of transitioning a residential building to be $30K, with an estimated 32,500 existing residential buildings. The 2020 census for Alameda County counted approximately 625,000 residential housing units (not buildings) which would put the cost of electrification somewhere over $10B. Compared to many other kinds of credit, retrofit loans are relatively small with terms of five to ten years. Many will be only a few thousand dollars, though some will reach the tens of thousands. To keep the cost of underwriting as low as possible, the assessment of eligibility and approval can be partially automated, with much of the paperwork effort delegated to software run by the plumbers, electricians, and HVAC contractors who will be the customer’s point of contact. For security, customers can be offered a choice between an unsecured personal loan, repaid via an additional charge on their utility bill19 and a property lien, which might merit a lower rate. An on-bill tariff will also make the lending more responsive to the cost-effectiveness of the proposed improvements instead of the economic resources of the bill payer. Costa Rica’s BPDC serves as an example of the successful public financing of energy transition.20 There, the public bank financed a large-scale conversion to LED lighting by analyzing the potential cost-savings of the switch and then granting low-interest loans based on those savings. The switch to LED allowed the project sponsor to receive a carbon neutral certification and continues to provide additional cost reductions. With a substantial push for building electrification, the potential size of loan demand for electrification will be much greater than the PBEB as proposed can accommodate. This can be addressed by carving out some subset of demand for intensive attention, either by geographic area, or perhaps by the type of appliance (e.g. loans for batteries, or for heat exchangers). The financial projections indicate the 19 We are assuming the cooperation of the utility over issues like cash flow and the locus of default risk. These issues have been overcome in several other states and territories, e.g. https://www.myrec.coop/bill-tariff-energy-efficiency-program. California’s AB 841 contains incentives for in-state electric utilities to adopt measures like these, and directs them to obey PUC directives to establish them. https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB841 20 https://www.tni.org/en/publication/how-public-banks-can-help-finance-a-green-and-just-energy- transformation 13 prospective PBEB capacity, and assume that the main problem facing policymakers will be to contain the demand for electrification loans rather than to find borrowers.21 Cooperation from local utilities with either incentives or obligations to improve energy efficiency, in the form of grants and/or paying for some of the work, is not calculated into these projections because it requires substantial negotiation. If this were to be successfully arranged, the scope of this project could grow significantly. Other green energy finance Finance is needed, both to increase the green energy supply (such as windmills, solar, possibly hydro, and biomass). and for load-balancing features, like in-house backup batteries, that will allow the existing electrical grid to accommodate that increase in supply without burning fossil fuels. Large solar and other energy projects take time to come online, while smaller projects at the home/single building level, or the block or cluster-of-buildings level can be built and installed relatively quickly. According to the consulting firm Wood Mackenzie, a national goal of 50% renewable energy will require more than a trillion dollars in finance capital.22 California represents 6-7% of the national electricity market,23 and the state’s own goal is even more aggressive, seeking to achieve 60% renewables by 2030 and 100% by 2045.24 The state’s financing needs are thus in the several tens of billions for the next decade, and the East Bay’s share of that is in the range of $3-7B. Obviously not all of that financing falls within the PBEB service area or initial target projects, but any appreciable fraction represents several hundred million in demand for financing, providing a substantial opportunity for the low-cost capital the PBEB can provide. We recognize the current controversy around home solar policy costs proposed by the California Public Utilities Commission (CPUC). If approved, that will discourage the construction of small renewable installations in the near term,25 however, the larger goal may be expected to prevail over the next 2-4 years unless the state also disavows its renewable energy targets. The financial projections are based on providing credit to small-scale renewable installations with the expectation that, though the details may change substantially based on possible state action, the demand will remain substantial. Another benefit to focusing on renewable energy installation in partnership with local lending institutions is the potential for funding to be included in upcoming infrastructure legislation and regulation to benefit “green banks.”26 Designating PBEB as a green bank may open up other funding opportunities as state and federal energy policies evolve. 21 Alternatively, one might use the bond market to supply the lion’s share of lendable funds, and use funding through the public bank as a liquidity reserve for that lending program and to augment the loanable funds. This would allow the PBEB to meet much more of this demand than is envisioned in this proposal, and reduce the risk to the bondholders, which would result in a lower cost of funds. This would be a substantially different institution than is proposed in this document. 22 Presentation to the American Clean Power Association, December 2020. https://cleanpower.org/wp- content/uploads/2021/02/american-clean-power-renewable-energy-and-infrastucture-policy-analysis.pdf 23 https://www.eia.gov/state/seds/data.php?incfile=/state/seds/sep_fuel/html/fuel_use_es.html&sid=US 24 https://www.ncsl.org/research/energy/renewable-portfolio-standards.aspx 25 https://kesq.com/news/local-news/2021/12/17/residents-heated-over-california-legislators-proposal- to-rollback-solar-incentives/ (accessed 11/9/22) 26 https://www.epa.gov/sites/default/files/2018-10/documents/usepa_greenbankingstrategies_october_2018.pdf10/documents/usepa_greenbankingstrategies_october_2018.pdf 14 Business lending The severe lack of access to capital for small businesses, in particular for very small and woman- and BIPOC- owned businesses, is well documented nationwide and in the Bay Area.27 In 2019, the Federal Reserve Bank of Atlanta published a report showing that Hispanic- and Black-owned businesses are less likely to be approved for bank loans and receive less money when they do.28 It estimates that nationally the unmet credit needs among entrepreneurs of color is 15-25% higher than those of white entrepreneurs. These findings were confirmed in a more recent study by the Federal Reserve in 2021.29 In an academic study from 2021 researchers showed that Black-owned businesses received loans that were 50% lower than observationally similar white-owned businesses.30 The racial disparity in small business lending worsened during the pandemic, where Black-owned businesses were more likely to shut down31 and less likely to receive government support through the Paycheck Protection program (PPP).32 An SBA report has shown that in 2020 Black-owned businesses received only 2% of PPP loans while white-owned businesses received 83%.33 This racial disparity in small business lending is structural. A perceived higher risk-level for the part of the population that has been historically excluded from the formal banking sector, the generational impacts of poverty (e.g. entrepreneurs of color often have few assets to pledge as collateral for loans, and less wealthy family networks to tap into for starting a business) as well as a general lack of trust in banking institutions among people of color are some of the factors resulting in the lending discrepancy. Typically, the loans needed by BIPOC-owned small businesses are too small for commercial banks to earn a profit. The cost to originate and service an individual loan is almost the same for a $25K loan as it is for a multi-million-dollar loan, so Wall Street banks as well as community oriented local banks and credit unions, more often than not choose the larger loan, as they are structurally mandated to fulfill their private shareholders’ expectation for competitive profit rates. Out of $1.1B of commercial loans lent among the six community banks headquartered in Alameda County, only $93M (7%) was issued in amounts of $100K or less.34 In a recent report created by the Bay Area Association of Black-Owned Businesses for the Friends of the Public Bank East Bay, these general observations have been confirmed through surveys of the 27 See https://cameonetwork.org/microenterprise-research-policy/ for a rich collection of reports on this topic. 28 Federal Reserve Bank of Atlanta (2019): Small Business Credit Survey. https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/20191211-ced-minority- owned-firms-report.pdf 29 Federal Reserve (2021): Small Business Credit Survey. Report on firms owned by people of color. https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/sbcs-report-on-firms- owned-by-people-of-color 30 Atkins, Cook, Seamans (2021): Discrimination in lending? Evidence from the Paycheck Protection Program. In Small Bus Econ, July 2021, https://link.springer.com/content/pdf/10.1007/s11187-021-00533-1.pdf 31 “More than half of Black-owned businesses may not survive COVID-19,” National Geographic, July 17,2020. https://www.nationalgeographic.com/history/article/black-owned-businesses-may-not-survive-covid-19#%3A%7E%3Atext%3DResearch%20at%20the%20University%20of%2Cpercent%20of%20white%2Downed%20businesses 32 See Wilmuth (2020): “The Effects of the COVID-19 Pandemic on Small Businesses.” SBA Office of Advocacy. See also the report by NCRC (2002): “Lending Discrimination within the Paycheck Protection Program” 33 This is based on an analysis of the latest published annual reports for these six banks (Fremont Bank, Summit Bank, Community Bank of the Bay, Beneficial State Bank, Gateway Bank, Metropolitan Bank). 15 borrowing needs of Black-owned businesses in the East Bay region.35 The majority of surveyed businesses operate with revenues less than $75K, implying needed loan amounts of well below $50K. Many Black business owners reported a lack of trust in banking and government institutions, including fear of being rejected and reluctance to carry debt in general. These concerns often keep business owners from applying for the credit that might be necessary to grow. Trustworthy institutions rooted in the community, low-interest loans, ease of access, flexible repayment terms, and more situational evaluation of the risk created by borrowers with lower-than-typical credit scores can all help address these concerns. One type of lending institution is currently providing such loans: CDFIs are organizations, frequently nonprofit, with the federally assigned mission to provide loans to people and businesses underserved by the traditional banking system. The Bay Area has one of the highest densities of CDFIs in the country with more than ten CDFIs headquartered, and many more actively lending, in the area (Appendix D). These institutions have a strong track record of distributing a majority of their funds to BIPOC- and women-owned businesses, originating loans with amounts as small as $5K, and providing technical assistance to help borrowers succeed. This includes determining the right type and amount of financing and writing a sound business plan. The goal is simply to help borrowers grow and succeed in their businesses—and repay their loan.36 Providing loans and assistance with this level of engagement is costly. As they are committed to providing low rates, most CDFIs finance their operations primarily through grants and donations. Loan funds generally come from banks who are comfortable issuing loans to CDFIs at low rates (currently as low as 2-3%) in order to satisfy their Community Reinvestment Act (CRA) requirements. All CDFI executives we talked to confirmed that there is currently no lack of bank loans at low rates. In some cases, CDFIs commit to pay back 100% of the principal to the banks, even if the underlying borrowers fail, relying on grant money to cover any losses. This dependence on grants and donations to provide their loans often makes it challenging for CDFIs to grow, as they need to raise additional capital to enable additional debt financing for a growing portfolio.37 This situation is structurally unsustainable. Private banks satisfy their federally regulated requirements to lend to low-to-moderate income businesses without incurring the cost of issuing these loans themselves and without taking on any significant risk, while still returning profits to their private shareholders.38 The CDFIs, on the other hand, do all the work necessary to issue these loans and 35 “Borrowing Needs of Black Owned Businesses” A report by the Bay Area Organization of Black Owned Businesses (BAOBOB), commissioned by the Friends of the Public Bank East Bay. See Appendix C for more information. 36 Many representatives of CDFIs who we talked to during our research (see Appendix D) were proud of not letting any of their customers fail or rejecting them for their loan applications, instead they are doing everything in their capacities to help them succeed. 37 See Simmons, Bereton and Klein (2021): “Addressing the Capitalization and Financial Constraints of CDFI Microlenders” 38 Default rates for CDFI loans are generally not higher than for typical bank loans. For 2019, the delinquency rate of all reported CDFI loans was 1.08%. See the report by the Opportunity Finance Network (2019): “Opportunity Finance Institutions Side by Side”, p. 5 16 additional services, operating with lower resources, distributing no profits, and financing their operations and loan losses through grant money.39 When lenders complain they cannot find enough qualified borrowers, it means either that they have too few applications, or they do not feel comfortable with the level of risk implied by the applications they see. The PBEB can help with both aspects of this problem, primarily by providing an additional stable source of funding for CDFIs in the region at low interest rates (3% or less), in the form of a revolving line of credit. In the short term, this will provide additional financing sources for CDFIs eager to grow their portfolios. In the longer term this would guarantee the availability of low-cost funds in times when commercial banks might not be willing to lend at similarly low rates, thereby creating an interest rate ceiling that is crucial for ensuring the access to low interest rate loans for small businesses in the future. Another way the PBEB can assist is to buttress the management of loan guarantees, to allow local lenders to be comfortable with applicants further out on the risk spectrum. One successful program for helping financial institutions occupy space further out on the risk spectrum has been the California Capital Access Program (CalCAP). Though the program has been a success for years, recent changes in both federal and state rules have made the program less attractive in some different ways.40 The PBEB can address some of these issues, partly by providing a locus for joint management of guarantee funds for multiple local lenders, and partly by foregoing some interest rate revenue to offset the loss of state subsidy on participation loans. For example, a borrower might have loaned $50K to an entrepreneur. Under CalCAP, both would contribute 2-3% to a guarantee fund, or about $1250 each. With a participation loan, the originating bank would contribute half that amount, with PBEB making up the other half. To make up for the absent state subsidy, PBEB can offer half its revenue from that loan for the first two years. Unlike the state subsidy, this can be sustainable indefinitely, so long as PBEB can keep its underwriting and administrative expenses down. The CalCAP program works best when the volume of lending is high enough for the statistics of a guarantee fund to work well. A 5% loss ratio for some category of a hundred loans held by multiple banks can still be devastating for a single bank that only made a few of those loans if they are unlucky enough to hold more than one default. PBEB can aggregate activity from a variety of small banks and CDFIs, thus spreading the risk across multiple banks. In addition, PBEB could improve the climate for local small businesses in other ways, not currently reflected by this Study’s financial model. ● PBEB could purchase loans from CDFIs, securitize them and sell them on the secondary markets to banks and other lenders, thereby freeing up the balance sheets of CDFIs that will allow them to make more loans. Centralizing the purchase, securitization and sale of these small assets at a public bank could reduce costs for participating community banks and CDFIs that are already 39 The Financial Times recently summarized this unsustainable situation well. Financial Times, 12/13/2021: “Race and Finance: America’s Segregated Finance Sector”. 40 https://www.urban.org/sites/default/files/publication/98051/capital_access_programs_cdfi_case_study_on_ the_california_capital_access_programs.pdf 17 doing these types of transactions.41 Given that these credits would mostly be CRA eligible, a high demand on the secondary market for these loans is almost guaranteed. ● PBEB could help smaller CDFIs or other non-profit lenders with technical loan infrastructure. These lenders create great value in the time-intensive customer-centric interactions with the customers focusing on their actual needs; the training provided in understanding their borrowing needs, business plan, accounting, growth, and much more. The technical infrastructure for distributing and servicing loans on the other hand could probably be standardized and centralized, thereby reducing the cost of lending for CDFIs. ● PBEB could act as a referral agency supporting the growth of CDFIs. Every single CDFI representative we talked to mentioned a lack of awareness among small business owners in the Bay Area of the existence of alternative and mission-oriented lenders like themselves. Public agencies, such as cities’ economic development offices, are much more known to small business owners. By developing a trusted public brand and cross-subsidizing significant marketing and platform building, PBEB could take on the role of referring incoming loan inquiries to the most relevant CDFI or community bank in the area.42 Approximately ten CDFIs headquartered in the Bay Area focus on small businesses (primarily low- income, BIPOC-owned). They (very roughly) have originated approximately $50M in such loans over the last year. The East Bay makes up about 1/3 of the Bay Area by population, so the CDFI loan volume in the East Bay can be estimated at about $17M. Beyond the CDFIs, the six community banks located in Alameda County have around $90M in small business loans (loan amounts below $100K) on their books. Assuming 10-year terms, this is about $9M in business each year. Adding credit unions and other lenders implies as much as $30M in small business lending in the PBEB service area each year. If partnerships with the PBEB could expand the range of businesses to which these CDFIs could lend, either by lowering the interest rate, or providing access to a guarantee fund, this sum could increase substantially, and the PBEB might be able to grow into a share of that expansion. This is incorporated into the financial projections.

Municipal finance Most municipal borrowing is served by the nation’s investment banks and the market for municipal bonds they have developed, and yet there is value in including municipal lending in the services provided by the PBEB, both to the Bank and to its member municipalities. In 2020 alone, the four initial member governments issued more than $350M in bonds, not counting short-term tax anticipation notes. These bonds had a wide range of terms, ranging from 1 to 20 years, with a few even longer than that. The mid-to-longer term bonds have rates ranging from 2% to 3%. Some of these bonds are for taxable purposes, and those are for slightly higher rates, up to 4%. The nation may be entering a climate of somewhat higher rates than has been the case for several years. 41 Michael Herne from LISC made the case for creating a secondary market for CDFI loans. Herne (2021): “A “Quantum Leap” for CDFI Funding: The Potential of Securitization”. 42 Darien Louie’s report for Alameda County in 2019 came to a similar conclusion. While there are plenty of resources in the East Bay providing loans and assistance to small businesses, few of them are widely known. Darien Louie (2020): “Community Investment and Local Banking Initiative Study”. 18 From a government’s perspective, bond debt is slow and relatively inflexible. A program must be thoroughly described in bond documents prepared months in advance, and once a bond is sold, there is no negotiation if the agency’s programmatic needs or economic circumstances change. The bond market can be a huge resource to the government of a wealthy community, which can access seemingly endless quantities of money at low rates. Less affluent communities, however, can struggle to access affordable interest rates, even though the actual difference in risk to the bondholder is barely detectable. PBEB can relieve some of these burdens, providing a valuable asset to the member governments. Though it will take time to grow into an institution that can address these needs at large scale, the Bank can help in a small way simply by being one additional buyer for members’ municipal debt. This is especially true because it is not driven by maximizing profit and thus may be able to consider lending at a lower cost and set a ceiling on bond rates secured by the member governments. Beyond that, with sufficient expertise and personnel, the Bank could actually underwrite some small bond issues. Apart from the basics of filing regulatory documents, the fundamentals of underwriting are twofold: finding buyers and making a market, which simply means promising to buy bonds in the future if some bondholder wishes to sell. (The price is not predetermined.) Collateral requirements mean the Bank will usually have the liquidity necessary to make a market for a modest issue because the state- required collateral can be repurposed to purchase these securities, which also count as collateral. Finding buyers for these bonds is related to other prospective components of PBEB business. For example, the PBEB might choose to securitize and sell packages of small business loans or green energy loans, and presumably the buyers of those securities might also be buyers of the municipal bonds. Being able to underwrite some bonds could potentially save on issuance costs for the member government and provide revenue to PBEB. It could also help the member governments in future negotiations with potential underwriters to have additional options for underwriting, especially an option that provides a degree of transparency about what it earns. Finally—and this gets to the original point of a public bank—it makes sense to be able to deploy public assets in service of important public policy goals. If a PBEB can make some of its member governments’ own capital available for their needs, that is all to the good. From the Bank’s perspective, municipal debt is valuable not only for its security, but also for its predictability. Because of the bond market’s inflexibility, bond issues are generally planned far in advance. This allows the PBEB to have a high degree of confidence in certain components of its business, especially important during the opening phase of the Bank, where the guarantee of some income can allow the PBEB to show incoming revenue much sooner than is usual for a startup.43 In fact, recent years have seen a substantial amount of project finance move from the open bond market to private placements with banks for exactly these reasons, especially for smaller projects.44 These are attractive lending opportunities for any bank, not just a public bank. 43 A more mature and financially stronger bank can offer more flexibility, but this will not be true at the beginning, at least not at the scale at which most bonds are issued. At smaller scale, it will certainly be true, and pieces of the original bond issue can be liquidated to fund such loans. 44 See Ivanov and Zimmerman, “The Privatization of Municipal Debt” Brookings, 2018. The privatization is not all to the good, and can have the effect of impeding access to the bond market for financially weaker 19 The PBEB will not start at a scale that could accommodate hundreds of millions in loans per year, but setting a precedent that it will lend to its members may be useful, both to the member governments and to the Bank itself. However, if at its inception, the Bank were to buy a substantial amount of upcoming bond issues, it would have a fair amount of interest income available from the start, that could be liquidated as it builds out other components of its lending portfolio. It could buy this either by participating in a standard bond sale, or underwriting the bond and keeping some fraction of the issue. Financing The basics of a bank are the money invested in it and the money it invests. The first constitutes the bank’s capital, the foundation of its financial stability, and the second, its funding, the deposits and invested funds with which the bank makes its loans. We describe these in turn. Capitalization Any bank must account for the capital with which it is begun. This is the original money invested in creating the bank, and that continues through its life to be the difference between the bank’s assets and the deposits and investments that it must eventually return to others. The PBEB is to be a mutual institution, where ownership is by the members who invest “pledged” deposits that count as capital. These are deposits that are meant to be permanent.45 Pledged deposit accounts do not bear interest, though the ownership share they represent can acquire additional value through retained earnings. Because of this, it is likely not within the purview of investment administrators alone to make such an investment, and will require an explicit appropriation by the relevant legislative body. The financial projections accompanying this report assume that the Bank begins with a commitment of $40M in pledged deposits from the initial four member governments: Oakland, Berkeley, Richmond, and Alameda County. They show that running the Bank in a conservative and careful fashion can result in an institution worth over $250M within a decade. Much of the activity of a bank—the number of loans issued, the amounts, the deposits and investments behind them—can be scaled arbitrarily. Some of the important costs, however, do not scale as conveniently. These components of the Bank’s overhead include the costs of staff, as well as the costs of the necessary data processing infrastructure, legal expenses, and regulatory compliance. The smaller the bank, the more difficult it is to amortize these costs and the more expensive the services it provides become. In effect, a policy goal of low-cost capital sets a minimum size for the institution. We have tried here to specify the minimum size necessary to carry these overhead costs and still achieve the policy goals of low interest rates and security. Funding This study does not address the question of municipal budgeting to identify how the initial investment might be appropriated by each member government. 46 As identified in the financial projections, the total amount constitutes less than half a percent of the collective value of the cash and investments of 45 The pledge contracts can conceivably be drawn to allow for gradual withdrawal as the Bank is able to replace the pledged monies with capital accumulated through operations, or through other contributions. 46 All numbers referencing the cities’ and County’s finances in this section are based on an analysis of the last five years of the four agencies’ monthly treasurer’s/cash management reports published on their websites. 20 the four founding member governments, or about 0.75% of their collective annual budgets. The money could be appropriated from those investment balances as long-term equity investment in the Bank that is not intended to be withdrawn.. In addition to the bank capital, any bank plan must also account for the money to be loaned. For the PBEB, this will include liabilities in the form of tradable bonds, or notes of the Bank, as well as more traditional deposits. These bank bonds are specifically permitted by California code 53601(r), and are not required to be collateralized. Large institutions widely use bonds and large denomination CDs as a store of value. These investments are secure and easily cashed in to provide necessary liquidity. The PBEB founding agencies are no different from thousands of other institutions. Alameda County has over 30% of its portfolio in money market funds and commercial paper, including over $300M at JP Morgan. PBEB bonds will be another option available to the cash managers for storing their money and keeping it safe. Investments like these are made for security and liquidity, not yield. The average rate of return for Alameda County is 1.12% (July 2020-June 2021) and the rate for the three cities is even lower; the rates PBEB investment returns will mirror the rest of the market. The agencies investing their money in PBEB notes will not have to sacrifice yield to do so. The use of these funds and their relation to the budgets and assets of the sponsoring agencies is explored further in the financial projections.

In addition to the member governments, the Bank can accept deposits, or note purchases, from area non-profits and foundations. These have considerable cash resources. According to publicly available tax disclosure forms and annual reports, the assets of twenty of the largest non-profits and foundations in the local area include more than $1.3B in cash and equivalents, and billions more in equities and longer- term bonds. Moreover, institutions such as these (especially in health and education) are increasingly adopting the “anchor mission” approach to their relationship with local communities, and a significant part of this includes re-directing a portion of their financial assets to locally beneficial strategies (such as affordable housing, environmental sustainability, and economic development). Attracting only a percent or two of that cash alone could amount to tens of millions potentially available to the Bank. There are also many smaller non-profits and foundations in the area, from which PBEB might receive investable funds. These funds would provide valuable flexibility and be an important component to the liquidity risk management strategy (see Risk analysis, p. 29). The financial projections reference deposits and investments made from these cash balances amounting to a bit more than one percent of the available cash. The bank deposits from the member governments, including the pledged deposits, are required by California state law to be collateralized. This will provide a substantial amount of available liquidity that can be used for the management of the municipal lending operation, such as the market-making suggested there. Finally, according to the state Treasurer’s investment guidelines, doing business with the PBEB will require adjustments to the investment policies of its member governments. The City of Oakland has already made this change, approving the option to invest in public banks.47 47 Oakland ordinance: https://cao-94612.s3.amazonaws.com/documents/IPFY22.pdf 21 Expenses The goal of the PBEB is to provide credit as safely and inexpensively as possible. To achieve this goal, lending programs are designed to capitalize on existing networks and partner banks, and to eschew expensive underwriting operations wherever possible. In similar fashion, the day-to-day operations are intended to take advantage of existing infrastructure and avoid expensive expenditure for buildings and real estate. Thus, the financial projections include minimal funds for facilities; the assumption is that most if not all of the Bank operations can be housed in facilities already owned by the member governments. Similarly, the staffing projections beyond the C-suite employees use salary numbers comparable to those appropriate for senior civil servants and employees of local CDFIs in the area. People should be paid fairly—with the cost of living in the East Bay taken into account and commensurate with their expertise and ability to contribute to the operation of PBEB—but not exorbitantly. Details of the staffing levels and salaries can be found on the assumptions sheet of the financial projections. Expansion and growth The Bank can become an integral component of the financial management and policy apparatus of the member governments. However, it will have to grow substantially from its inception in order to fill that role and some constraints on the growth of the PBEB must be considered. At the outset, PBEB does not anticipate providing demand accounts (checking services) to its member agencies. Governments are high-engagement customers for this service, which requires complex bookkeeping and instantly responsive customer service. The PBEB may grow into this role for its members over time, at the discretion of its Board. At this juncture, we have focused on keeping costs low, to demonstrate that keeping costs low is viable. A future PBEB board might choose to stress capital growth to a greater degree by increasing rates for some business lines. A mutual bank can only grow as fast as its investors—or its business operations— build up its capital. Since part of the policy goal is to provide credit as cheaply as possible, there will always be tension between providing low costs and increasing capital. One growth strategy for the PBEB is to ask its member governments to increase the amount of capital and funding they invest. Though there is considerable room between the initial investment level envisioned here and the limits prescribed by the concentration risk treasury policies of the member governments, there are obvious limits to growth by that strategy even beyond concentration risk. Another growth strategy is to increase the PBEB’s capital by including other agencies as members. Though Oakland and Berkeley are the two largest cities in Alameda County, a dozen others could also join, representing growth potential of another 20-25% of assets. Alameda school districts and other quasi-governmental agencies (not counting BART) would add another 20-25%. BART alone would add 10%. Beyond the borders of Alameda, other nearby county governments and their cities and agencies offer the possibility of perhaps four to five times more investments. There is, therefore, ample room for growth by expanding membership. 22 Financial Projections The following financial projections do not incorporate growth assumptions beyond increases in loan demand and modest increases in the amount of assets invested, such as increases in membership, or substantially higher investment levels. Given that we have projected that this small and conservative form of the Bank is viable, growth opportunities are likely to arise naturally. The financial projections for the PBEB have been thoroughly reviewed by bankers and banking attorneys familiar with public bank specifics. They depend on an analysis of the available assets and estimates of the demand for credit in the various lines of business anticipated. A bank run in a conservative, steady fashion will result in a tremendous benefit to the member governments and their citizens. The projections show a bank with assets approximately six times the size of its capital—substantially more conservative than the 10-to-1 or more that is typical of private banks—while still doubling in size over the course of its first few years, as it fills out its loan portfolio. Because these projections are conservative, the Bank may grow more quickly than these projections suggest. For clarity, the PBEB’s pledged deposits and accrued earnings are presented separately in the financial projections. How the earnings accrue to the Bank’s original investors and how much is reinvested is a matter to be determined by the member governments and Bank management. The design of the PBEB assumes that some portion of the cash and investments of each of the member governments will be made available for investment by the Bank. In making estimates of how much might be available, it is important to consider not only the economic cycle of boom years and busts, but also the annual cycle of tax payments. Municipal governments in California tend to be flush with tax revenue in April and May of each year, and at a low ebb a few months later, as fall approaches.

23 The above graph shows the annual cycle of collective cash and investments for all four prospective member governments. At the low ebb in 2017, the treasuries of those governments still held more than $5 billion. For the sake of financial projections, we assume that only a little more than 1% of the funds available for investment at the low ebb of August and September of that year might be invested in the PBEB in 2022. Except for the initial capital investment, these would be time deposits or notes, available for liquidation at the end of the investment term, though we assume that most or all are normally reinvested when their term is complete. The sponsoring agencies already make longer-term investments with these funds. The graph below shows the levels of investments for terms longer than three years. Again, looking back to the low ebb of these funds in 2017 and 2018, there were more than $250 million invested at these terms by the member governments. There is considerably more today, almost $2 billion according to annual treasury reports, as the second graph indicates.

The financial projections envision these notes to be issued in 1, 3, and 5-year terms, currently estimated at 0.5, 1.0, and 1.5% interest. The projections assume that the member governments invest in the Bank proportionally to the relative size of their portfolios. The projections show that with a $40 million investment, the member governments will create a bank able to invest many times that number in their local economy. Assuming moderate growth and making conservative assumptions about investments, the PBEB will have loaned over $120 million by year 3. By the end of a decade, the original investment will result in over $250 million in assets, and almost $400 million in loans made. Basic financial projections are on the next three pages. The full spreadsheet of the financials is available on request; please email [email protected].

Balance Sheet (dollar figures in thousands) Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Assets Term Loans and Lines of Credit Municipal Bonds 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Electrification Loans 11,760 27,440 43,120 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Other Green Energy 1,323 3,087 4,851 6,651 8,451 10,251 12,051 13,851 15,651 17,451 Small business participation lending 2,026 4,637 7,248 9,968 12,688 15,408 18,128 20,848 23,568 26,288 Affordable Housing Loans 1,386 2,178 2,970 3,770 4,570 5,370 6,170 6,970 7,770 8,570 Pre-development Housing LOC 6,831 13,891 20,880 28,080 35,280 42,480 49,680 50,000 50,000 50,000 CDFI Small Business Lending LOC 1,584 2,360 3,129 3,929 4,729 5,529 6,329 7,129 7,929 8,729 Loan Loss Allowance -113 -144 -30 -117 -158 -199 -240 -268 -294 -321 Total Loans and LOCs 74,797 103,449 132,168 152,281 165,559 178,838 192,117 198,530 204,623 210,716 Other Investments Government Securities 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 Mission-aligned short-term investments 32,491 12,849 12,104 3,388 2,216 1,842 174 1,557 3,502 5,697 Total Other Investments 72,491 52,849 52,104 43,388 42,216 41,842 40,174 41,557 43,502 45,697 Clearance Account / Cash 800 800 800 800 800 800 800 800 800 800 Total Assets 148,088 157,097 185,072 196,469 208,575 221,480 233,091 240,887 248,925 257,214 Equity Capital founding agencies 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 Retained Earnings -642 -518 -82 301 350 452 526 476 434 388 Total Equity 39,358 38,839 38,757 39,058 39,408 39,860 40,386 40,863 41,296 41,684 Liabilities Agency Loans 1 year loans 61,898 67,322 73,081 79,193 85,678 92,554 98,647 102,593 106,697 110,965 3 year loans 22,925 24,934 27,067 29,331 31,732 34,279 36,536 37,998 39,517 41,098 5 year loans 23,908 26,003 28,227 30,588 33,092 35,748 38,102 39,626 41,211 42,859 Total Agency Loans 108,730 118,258 128,375 139,112 150,502 162,581 173,285 180,217 187,426 194,923 Non-profit deposits 0 0 17,940 18,299 18,665 19,038 19,419 19,807 20,203 20,607 Total Equity and Liabilities 148,088 157,097 185,072 196,469 208,575 221,480 233,091 240,887 248,925 257,214 25 Profit and Loss (dollar figures in thousands) Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Income Asset Income Municipal Bonds 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 Electrification Loans 240 870 1,498 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Other Green Energy 27 98 168 266 338 410 482 554 626 698 Small business participation lending 54 186 317 498 634 770 906 1,042 1,178 1,314 Affordable Housing Loans 36 75 107 151 183 215 247 279 311 343 Pre-development Housing LOC 137 368 598 913 1,147 1,381 1,615 1,625 1,625 1,625 CDFI Small Business Lending LOC 36 57 79 108 130 152 174 196 218 240 Default Losses 0 -117 -262 -403 -490 -531 -572 -614 -641 -668 Total Loan and LOC interest income 1,904 2,914 3,879 4,908 5,317 5,772 6,226 6,458 6,692 6,928 Other Investment Income Government Securities 300 300 300 300 300 300 300 300 300 300 Mission-aligned short-term investments 1,059 526 369 85 55 46 4 39 88 142 Total Other Investment Income 1,359 826 669 385 355 346 304 339 388 442 Total Income 3,264 3,740 4,548 5,293 5,672 6,118 6,531 6,797 7,080 7,370 Expenses Debt service expenses Interest paid on non-profit deposits 0 0 56 91 93 95 97 99 101 103 Interest paid on agency loans 889 956 1,051 1,148 1,242 1,342 1,430 1,487 1,547 1,609 Total debt service cost 889 956 1,107 1,240 1,335 1,437 1,527 1,586 1,648 1,712 Operations Total Operations Expenses 862 964 997 1,031 1,066 1,102 1,140 1,178 1,217 1,258 Staff Total personnel cost 2,156 2,338 2,527 2,721 2,920 3,126 3,338 3,556 3,781 4,013 Total Number of staff 11 12 13 14 15 16 17 18 19 20 Total Expenses 3,906 4,258 4,630 4,991 5,322 5,665 6,005 6,321 6,646 6,982 Net Income -642 -518 -82 301 350 452 526 476 434 388 26 Key Ratios

27 Staffing The PBEB is designed to be as lean as possible. Programs are to be run in partnership with existing institutions and overhead is to be kept as low as feasible. Salaries are projected to be in line with comparable jobs in the government and non-profit sectors. Following are short, high-level descriptions of the work involved in each of the envisioned programs. Housing Most of the labor involved in supporting the housing program will involve negotiating arrangements with the nonprofit affordable housing developers who want to take advantage of the line of credit program. We anticipate working with one to two dozen of these agencies over the course of the first three years. Much of the time involved will be in the original negotiation of agreements, including reviewing proposed collateral. In addition, the housing program will involve establishing partnership agreements with lenders who wish to support the proposed rehabilitation lending. Some of these may be the agencies getting a line of credit, and some may be different lenders. We anticipate a relatively small number of lenders relative to the line-of-credit agencies, so not a tremendous additional burden. Climate The climate lending, including both electrification and renewable construction, will involve making arrangements with a small number of partner underwriters and seeking ways to delegate the paperwork to the customer points of contact—plumbers and electricians for the electrification work and installation contractors for the renewable energy lending. This will involve working with a small number of partner lenders, along with software vendors that might produce applications for doing the paperwork, as well as associations of contractors to get the word out. Small business lending Developing relationships with the co-operative businesses, CDFIs and local banks that are to be the backbone of the operation will make this likely the most labor-intensive program included. The underwriting judgments are to be carried out by the partners, but considerable work will be involved in reviewing the terms and outcomes of the partnerships. Municipal finance Municipal finance operations are important to the vision laid out here, but the actual transactions will be relatively few and large compared to the lending programs described above. Managing these transactions, and any potential subsequent repurchases and sales related to the market-making operation, requiring relatively small contributions of time from the CEO, CFO, and treasury management. Treasury operations The treasury operations for the PBEB include managing the sales of the notes that fund the operation, managing collateral, and investing excess funds that are not currently invested in a core lending program. Eventually this will also include deposits from non-profits and foundations. 28 The treasury will also be involved in the repurchase and resale of municipal securities for which the PBEB is providing market-making service. This must be done daily, and as a consequence requires adequate backup plans, but the number of transactions per day is probably small and can be handled by one person in a morning’s work. Data processing/IT A certain amount of baseline IT overhead accrues to every office operation: maintaining the local area network, wi-fi, a computer on each desk, and so on. It is plausible that this can be addressed by colocation of the PBEB in space maintained by one or the other of the founding agencies and participating in their IT system. Beyond that basic level of support, the PBEB will require financial software in order to support organic growth of future business. Most data processing overhead will be focused on the development and maintenance of that platform. Because this is supplied by an outside vendor, most development and maintenance will happen there, but the PBEB must provide adequate oversight of that outside vendor, as well as local expertise to assist in development and addressing unforeseen situations. In addition to the backbone software, some lending programs may require specialized software to assist in the underwriting process. For example, we envision a tablet application that plumbers and electricians can use to initiate the underwriting process on behalf of their electrification customers. Because financial software requires a high degree of security, much of this development will probably not be done in-house, with local expertise available to consult and direct. Some development may be done with grants or donations prior to startup. We project that these tasks can be serviced by a “hands-on” CTO, along with a relatively technical assistant, who will serve as the local point of contact for the networking and other local technology concerns. Compliance officer The PBEB has budgeted a staff member to oversee the Bank’s compliance with all the relevant state and federal regulations. In addition, the officer has a budget to employ outside accountants and auditors as required by management and regulatory law. Pre-Opening Budget Some budgeted funds will need to be spent before the start of the financial projections. These funds are being raised separately, via foundation grants and donations and some contributions from member governments. The rough numbers below were generated through conversations with experienced bankers and banking attorneys in California. 29 Developing business plan in collaboration with government agencies $ 250,000 Vetting and compensating founding board members 380,000 Hiring and retaining executive staff 650,000 Additional legal and consulting fees 250,000 Technology & Fixed Assets 725,000 Misc. Fees 90,000 Total $ 2,345,000 Risk Analysis Banking is all about how to manage the risk of taking in money at one set of terms and lending at another. While history has shown that these risks exist, it has also shown how to manage an institution to be resilient against inevitable economic fluctuations. Many banks failed during the Great Depression, for example, but there were also many that did not. Many banks became overextended and collapsed during the bank crisis of 2007-2008, but again, many, including the public Bank of North Dakota, did not. The secrets of resilience are not obscure, but they are routinely ignored in the stampede for greater profit and the quick buck. The PBEB will manage its risk in many small ways: demanding adequate security for its lending, healthy loan-loss reserves (the financial projections assume loan default rates between 1-4%, depending on the program and in line with industry standard), sharing its risk with local bank partners, transparency and auditing, regulatory oversight, governance controls on self-dealing, and more. It will also manage it in a global sense by simply limiting its leverage. Leverage is the ratio between the bank’s equity (what it owns) and what it lends out (its assets). The more a bank lends, the more interest payments it receives and the more profitable it can be. However, the more a bank lends, the more it relies on all its borrowers to repay their loans. A bank with $50M in capital and $500M in loans will be rendered insolvent with a 10% default rate, while a bank with the same capital and only $250M in loans will obviously be hurt, but will survive. Following the urge to extract every penny possible from their investments, commercial bank management typically pushes leverage up to the regulatory limits. Asset-to-capital ratios approaching 10-to-1 (often written as 10%) are not uncommon. The PBEB is to be run conservatively and carefully to make it resilient, and the financial projections show that this can be done successfully at 6-to-1 (or 16%). Apart from small-scale provisions like loan-loss reserves, this level of capital provides a substantial cushion for when hard times inevitably hit. Obviously, there is default risk to any loan, but concentration restrictions and other internal controls can address those. Systemic risk must be considered as well. The important risks are a change in interest rates that squeezes the spread between the rates the bank pays and the rates the bank receives, and a recession where default rates go up and borrowing goes down. The financial projections contain a crude stress test where, in year 4, the default rates double and the growth rate in borrowing drops 90%. As a result, the losses from some lines of business triple and the bank loses money that year. But even so, the losses are much smaller than the cushion available and 30 though the bank has a negative cash flow, it does not require more cash. The growth of subsequent years quickly makes up for them, though note that those years assume the same conditions as before the recession, and not the typical above-average growth that is usual in the years immediately after such an event. Following is a discussion of the individual lines of business, their risk, and how they would be impacted by a change in interest rates or a recession. Housing Bridge finance for housing agencies carries some risk because not all complex deals work out in the end. However, the structure of these loans is lines of credit secured by equity the agency already owns, which will limit the risk to the Bank. Importantly, these loans do not depend on the success of any particular deal to be secure. The sum of the debt of each participating agency is indefinite, though subject to an overall limit, but the terms of each drawdown of that credit is a 3- to 5-year term, which will limit the interest rate risk to the Bank. These lines of credit could also be structured with a floating rate, which would eliminate the interest-rate risk, though it might also make the program less attractive to the housing agencies. The financial projections assume a fixed rate for this line of business. Loans for affordable housing rehabilitation have longer terms, so the interest rate risk exposure opened by this line of lending is more substantial. Because the PBEB is young and its equity new, it would be best to make this kind of longer-term lending as floating-rate loans. This might reduce the appeal of these loans, but the market is unserved at present, and with low overhead, the PBEB should be able to hold that floating rate down even so. Since many of the debts that built these properties are already fully amortized, these loans can be secured with the property to be rehabilitated, in part or in whole. Electrification lending The loans involved in the electrification program are small and the terms limited to 5-10 years at the outside. Because the terms are relatively short, the risk of rising interest rates is low. The relatively high turnover means that rates to borrowers can be adjusted relatively easily if rising rates produce pressure on the cost of funds. Automating the underwriting paperwork and delegating some of it to the plumbers and contractors will reduce the administrative burden, but will necessarily increase the borrowing risk somewhat. Adequate loss reserves are thus necessary to make the program successful. If the repayment can be done through the utility bill, this will dramatically lower the risk of default. Business The business lending proposed at the outset is largely in the form of relatively short-term lending to small businesses: loans averaging $40,000, with terms of 5-7 years. These might be in the form of lines of credit for buying goods or business expansions/construction. This lending will be conducted jointly with other underwriters, who will share some of the risk. The interest rates may float, depending on the risk appetite of the participating bank or CDFI. The relatively short terms will help insulate against interest rate risk. 31 Other business lending envisioned in this proposal is essentially the maintenance of a guarantee fund, where the risk involved is essentially limited to misapprehension of the default risk for these kinds of loans. The CalCAP program has 20 years of history to draw on, which means that there is good data available for making risk estimates in different economic conditions. The interest rate risk involved in these loans is no more than the partner bank wishes to take on. Much business lending uses a floating rate, so the risk of rising interest rates will be borne by the borrower. Again, the PBEB’s low overhead can offset the disadvantage of the floating rate. Municipal lending The default risk for municipal bonds is very low. A small number of California cities have gone bankrupt in recent history, so the risk is not negligible. But the ledger has two sides: the PBEB will possess not only the debt of its member governments, but some of their assets as well, which will serve as a certain amount of insulation against default risk. Interest rate risk for municipal obligations is more of a concern, since the likely terms can be substantially longer. The PBEB can address this by limiting its purchase of any particular issue, but also by committing to making a market for that issue. To see how this could work, imagine one of the member governments is planning to issue a $30M bond for some purpose. The PBEB can buy a third of it at a yield of 2.5%, and use some of its liquid holdings to guarantee a purchaser for the other two-thirds of it. Because the Bank will be required to hold collateral against its deposits, it will always have an ample store of liquidity, and this can be put to use by promising to buy back bonds, which can also serve as collateral. If interest rates rise, the Bank can buy bonds back from bondholders who wish to divest, and resell them. This is the traditional role of the underwriter, but with low enough overhead, the PBEB can afford to support a good price for the bonds, keeping them a good investment for other bondholders. Alternatively, of course, the issuing government could make the bonds a floating rate, in which case a private placement would not entail interest rate risk. However, it is valuable to develop the risk- management capacity of the PBEB, so this might perhaps be a strategy kept in abeyance as a way to address problems that might occur in the future. Liquidity risk Any bank must address the risk that its investors or depositors will seek to put their money elsewhere. The three scenarios to contemplate are the short-term, and temporary, embarrassment of one of the member governments; some member government wishing to withdraw from the PBEB; and a widespread economic downturn that limits member liquidity. First, consider the possibility that a member government experiences a budget catastrophe that forces it to withdraw its liquid assets from the PBEB and makes it unable to roll over its investments. In this case, the PBEB would seek to make up the difference from the other members. One member is much larger than the others, but by limiting the amount of investment from each, it should still be feasible for the other members to make up the difference. The projections here envision only 1-2% of all cash and short- term investments going to the Bank, so the difference will be small. If the cities had to make up the difference from losing Alameda County, their contribution might rise from 1% of their investments to 4%. 32 This is a comparable risk to having some member withdraw from the Bank. Presumably the written agreement of the initial investment will preclude sudden large withdrawals from the Bank’s capital. In the event that the obstacles to withdrawal are overcome, the mitigation strategy is roughly the same: to have the other governments step in to make up the difference. Insulation against these risks is another reason to cultivate a certain level of investments from local non- profits. While few of these organizations could be considered counter-cyclical, their finances are affected in different ways from the member governments. Like the governments, there are social and political reasons for them to support the PBEB, and if stepping in to help alleviate a potential liquidity crisis only involves moving investments from some other bank to the PBEB, this is a small ask to make in a time of crisis. Finally, consider the effect of a recession. Obviously, a recession reduces the amount of cash and investments available to each of the member governments, and increases their demand for liquidity, too. Here, there are two lines of defense for the PBEB. The first is simply the small demand on the member governments. Again, the financial projections here assume only a small percentage of the available funds are invested in the Bank. Presumably these can be among the last to be liquidated by a government in distress. In the event of a liquidity crisis caused by these events, the PBEB can turn to its non-profit depositors, its correspondent bank, or even the Federal Reserve, for help. Recent recessions have seen the Fed flooding the zone with very cheap or free liquidity to help financial institutions through these kinds of events. Because those efforts have been largely successful, there is ample reason to suspect the same will be true in future recessions. In addition to these risks, there is liquidity risk involved in the similarity of the PBEB customers. Unlike many other banks, the primary funders of the PBEB are a small and homogeneous group. Their finances are roughly synchronous with each other, with the annual ebbs and flows of their funds occurring in the same months of the year. For this reason, the financial projections depend on allocations derived from the annual minimum balance of cash and investments for the member governments. The PBEB can absorb a certain amount of these ebbs and flows through adjusting investments in a managed investment fund rather than trying to adjust its loan balances. It is certainly possible—indeed it is to be hoped—that the PBEB will eventually ask for a higher level of investment from its member governments.48 The flip side of the uniformity of customers is that the finances of the PBEB member governments are highly predictable. Each of the governments makes a budget with short- and long-term financial projections. As the PBEB grows and becomes more successful, these member projections can be made available to the PBEB for liquidity planning purposes. Governance The governance design of the PBEB is a critical component to committing to its community objectives while also ensuring financial viability and compliance with banking regulations. Democratic, local control of the PBEB places community members in control of local finance decisions. Community 48 Though not too much. California law limits the percentage of its investments a county or city can make in a single entity to 10%, though exceptions may apply. There is a considerable distance between 1-2% and 10%, but expansion of the bank ultimately will depend on accumulating equity or on expanding membership. 33 members serving as Directors are more likely to make decisions that will benefit the communities they live in when compared to the traditional private banks that are solely focused on maximizing profits. Additionally, incorporating community priorities and values into the charter of the Public Bank further ensures that the Bank's decisions will balance those important public interests with the fiscal and regulatory considerations. The PBEB’s Governance Plan, attached as Appendix A, calls for a majority of community representatives on the Bank’s Board. Specifically, the Board will provide seats for five governmental agencies (one from each of the three cities and two from the County), two bankers or financial experts, five representatives of grassroots community organizations, and three community representatives who are also financial experts, making a majority of eight community representatives out of a total of 15 Directors. All Board members will be fully vetted and approved by state and federal regulators as part of the process of approving the business plan and the Bank’s charter. PBEB’s draft Governance Plan also recognizes that it is critical for all Directors to have a solid foundation in “board member responsibilities, fiduciary responsibility, financial and banking principles, and decision-making processes.” The Board of Directors will have responsibilities similar to the directors of community banks and corporate boards, with a much greater emphasis on mission alignment, community participation, and transparency. To accomplish this goal, PBEB will establish an “Academy” to train new Directors and administer a test to Directors before they are seated on the Board. The Academy ensures that Directors all have the requisite banking and financial knowledge to competently serve on the Board and makes Board service available to people who may not have formal knowledge or experience in the financial sector. The existence of the Academy makes Board service accessible to anyone who is interested in serving. Furthermore, the Academy ensures that all Directors will be full participants in Board activity and decision-making. The PBEB’s draft Governance Plan establishes that the Bank will approve a Conflict of Interest Policy to protect against unlawful insider transactions and conflicts of interests. The Academy will also train Directors as to their roles and responsibilities which will include the necessary education to identify and avoid insider transactions and conflicts of interest. The California Department of Financial Protection and Innovation will supervise the Bank closely for its first three years, as will the Federal Deposit Insurance Corporation. The Board policies, Director training, and regulatory agencies provide multiple layers of protection from double-dealing. PBEB’s draft Governance Plan embeds community priorities into PBEB’s decision-making process. The Bank has a robust mission statement with five stated values: equity, social responsibility, fiscal responsibility, accountability, democracy. Furthermore, the draft Governance Plan establishes broad loan policies that require Directors to consider the Bank’s external policy goals, including “projects that benefit the economic, environmental, and social health of the entire community.” Traditional banks have charters that generally focus only on the fiscal health of the bank at the cost of all other considerations. Regulatory agencies focus on consumer protection and the fiscal health of the bank. The PBEB’s unique loan policy framework will allow the Bank to make lending decisions that balance the advancement of community benefits, fiscal responsibility, and regulatory expectations. 34 The PBEB’s governance structure, including the structure of the Board of Directors and the loan policy framework, will ensure that the Bank leverages its role in the financial ecosystem to advance projects with just, equitable, and democratic principles in mind. Furthermore, Board training, and the appropriate regulatory oversight will protect against unlawful insider transactions and conflicts of interests. Compliance with AB 857 Requirements 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. (p. 3 and throughout) (2) A fiscal analysis of costs associated with starting the proposed public bank. (p. 22-30) (3) An estimate of the initial amount of capital to be provided by the local agency to the proposed public bank. (pp. 18-27) (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. (pp. 25-27) (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 attorney-client privilege attaching to that legal analysis. (Appendix B) (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. (pp. 34-36) (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. (Not included because of methodology concerns.) (2) A qualitative assessment of social or environmental benefits of the proposed public bank. (This is included throughout and specifically discussed in Introduction [p. 4] and Programs [beginning on p. 8].) 35 (3) An estimate of the fees paid to the local agency’s current banker or bankers. (Not included in this draft.) (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. (Not included.) 36 Appendix A Governance Plan I. Mission Statement The mission and values of Public Bank East Bay are set forth on pp. 6 of the Viability Study to which this document is attached. II. Board of Directors PBEB will be a 501(c)(6) mutual benefit corporation under California law, and regulations regarding directors of a mutual benefit corporation will govern. The Board of Directors of any bank, including this one, sets general policy for the Bank, ensures continuing integrity and alignment with the Bank’s mission, and is responsible to the stakeholders, in this case the founding depositors and all residents of the East Bay for the Bank’s decisions and policies. The Board is also subject to additional scrutiny from the various regulatory agencies that will oversee the safety and soundness of the Bank. The initial Board members will be chosen based on their ability to make sound banking decisions, their adherence to PBEB values, and the understanding that people closest to the problems being addressed are the people with the most robust, innovative, and productive solutions. Board Composition The Board will be composed of people with banking and financial expertise, including the CEO of the Bank, and people who can represent and convey the needs of the various East Bay communities, with an emphasis on financial experience along with representatives of systemically underserved and under- represented communities. In addition, the Board will also oversee the safe and sound operation of the Bank. Directors will be chosen from a substantial pool of applicants identified and initially vetted by the experts creating the bank charter application for Friends of the Public Bank East Bay, and then further vetted and examined by state and federal regulators, specifically including California’s Department of Financial Protection and Innovation (DFPI), the Federal Deposit Insurance Corporation (FDIC) and representatives of depositing agencies. All Directors will be accountable to the mission and values of the Bank. In addition, the treasurers of member agencies, if they are not their agency’s appointed representative, will be ex officio non-voting members of the Board of Directors. In our research, we determined that a Board of at least 15 members, all committed to the same mission and values, is key to keeping the representation diverse and ensuring that the Bank is connected to the needs and concerns of the people it serves. When we posed the question of recruiting and selecting Directors to several community leaders and all of our supporter organizations at the time, geographic representation was one of the most supported criteria for community representation, along with race/ethnicity, issue representation (such as experts in environmental concerns or affordable housing), and gender. 37 All potential Directors are required to fill out an application and go through an initial organizers’ interview process, as well as undergo formal vetting by an appropriate professional third party. By California law and DFPI process, all Directors will be subject to a rigorous state-run vetting including a conflict-of-interest evaluation and also background checks and fingerprinting. Also per California law, no one will be permitted to serve on the Board if they cannot resolve any issues which arise in the vetting process to the satisfaction of the DFPI and other regulators. The Board will also be subject to a Code of Conduct related to their continued service on the Board. Applicants will be asked to commit to serving for up to a three-year time period. One-third of the initial Board members will be appointed for a one-year term, one-third for a two-year term, and one-third for a three-year term. Once a complete operating Board is chosen, preliminary vetting of future Directors will be turned over to a committee of the Board. After three financially sound years of operation, we expect the regulators to leave Director screening entirely in the hands of the Bank Board. Creating a Board of Directors with as much community representation as possible is worth the challenge and will result in a Bank that meets the needs of the residents. Because many community representatives may not have had previous financial experience, providing educational resources to such Directors is essential. In the future, the advocates plan to create a public-bank focused Academy to educate Bank Directors; in the interim, the start-up costs will pay for educational resources for Directors, such as the programs at Bank Director and the FDIC. Existing manuals for bank directors will also be used as reference material. All Directors will be required to participate in trainings and to demonstrate sufficient familiarity with banking theory and practices. Terms and Removal of Directors Most Directors will serve a three-year term; however, the initial Board appointees will serve staggered terms (as discussed above) so that one-third of the Board Members’ terms end each year. Once the initial Directors have served their three years, the financial and community Directors’ terms will become staggered, so that five people’s terms will expire at the end of the third year and five at the end of the fourth year. Initial Directors will opt for one of these term lengths, with a fallback of a lottery if the opting does not work out appropriately. In addition, the initial Board will be tasked with creating a process, in compliance with California law, for removing Directors if legal or reputational disqualifications are uncovered after their appointment, or for inactivity. This process can be defined by the initial Board, or in the business plan for the Bank. Relationship to Bank management, staff, and city and county governments The initial Chief Executive Officer (CEO) of the Bank and other key senior management personnel must be chosen before the DFPI application is submitted and will have initial three-year contracts. After that, the Board will be responsible for renewing the CEO’s contract or selecting a new CEO. If the Board is fully operational prior to launch, the Board will have the right to review and approve appointment of senior management other than the CEO. Otherwise, while the application is in progress, the Board 38 candidates will review and recommend the appointment of additional Bank management, some of whom will then have to be confirmed by state and federal regulators. Directors will have access to confidential customer financial information and will be subject to confidentiality and privacy constraints as required by law and by the Bank’s own regulations. Directors will not participate in Bank management’s decisions with respect to extending or denying credit to any individual or entity where such Director has any conflict of interest. Directors will be responsible for ensuring that the Bank has a robust and reliable policy specifically drafted to prevent unlawful insider transactions and Board Member conflicts of interest while also ensuring that partnerships, loans, lines of credit, and other Bank services are scrutinized for potential conflicts both before they are initiated and while they are active. The Bank charter will include a provision for non-liability of Directors, and the initial budget includes professional errors & omissions insurance. The CEO and the Chair of the Board will report to the sponsoring agencies and other government stakeholders every six months for the first three years and at least annually after that. The ex officio members of the Board will present ongoing reports to their agencies. Internal and external audits will be conducted at least annually to ensure that bank assets are being reported honestly and used constructively. The Bank will incentivize managers and loan officers with long-term benefits like job stability and community recognition, not with exorbitant salaries, short-term performance metrics, or bonuses. In addition, the Board should establish a maximum executive compensation ratio; for example, the Bank’s lowest-paid worker should earn no less than 1/5 of what the CEO earns, with a Bay Area living wage as the baseline for lowest-paid workers. The Bank’s charter or other governance instruments should also establish a mechanism, such as an annual performance audit by an independent third party, by which the Board can evaluate management performance and take appropriate steps if the Bank incurs consistent losses. Compensation Directors will be paid a modest annual stipend for serving on the Board to make the position more accessible to all community members. They may refuse the stipends if they so choose. The feedback we received through interviewing activists and organizational leaders supported the need for these stipends. Frequency of Meetings The Board should, at minimum, meet quarterly, and more frequently at the discretion of the Directors. We anticipate that the initial Board meetings will need to be more frequent, until procedures are in place and the Bank is running smoothly. Public Access Modeling city councils and county boards of supervisors, community college districts, and many other public bodies, we propose that meetings be open to the public as much as possible, with closed-door sessions as needed. We also recommend an annual public meeting, widely publicized, followed by food 39 and celebration of the arts, to encourage community awareness of, connection to, and appreciation of the Bank. In especially sensitive situations, the Directors may desire to hold regular or special meetings at which no Bank senior management is present. At these meetings, Directors may frankly discuss any concerns they have with Bank management. The Board is also strongly encouraged to undertake periodic formalized self-assessments of its processes and practices. 40 Appendix B Legal Analysis Friends of the Public Bank East Bay retained attorney Sylvia Chi to provide a legal analysis of whether the proposed structure and operations of PBEB would likely comply with the California Constitution as required by Cal. Gov. Code § 57606(a)(5). While the statute explicitly allows preservation of attorney- client privilege for such legal analyses, Friends of the Public Bank East Bay is making a copy of the memo available for viewing in the interest of transparency and full disclosure. Attorney Chi found that under California Assembly Bill 857 the proposed structure and operations of public banks in general and more specifically, PBEB’s proposal, would be in compliance with the California Constitution. Attorney Chi’s memo follows: To: Friends of Public Bank East Bay From: Sylvia Chi, Esq. Re: Section 6, Article XVI of the California Constitution and the Proposed Public Bank of the East Bay Date: October 21, 2021 Introduction In 2019, Governor Gavin Newsom signed into law AB 857, establishing the nation’s first framework for licensing and regulating city- and county-owned public banks. Under this law, California cities and counties can apply to the Department of Financial Protection and Innovation (DFPI) for a license to operate a public bank. Prior to a local agency submitting a license application to DFPI, AB 857 requires local agencies to conduct a study to assess the viability of the proposed public bank and specifies mandatory elements of the study. Various elements of this study are specified in the law, including: 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 attorney-client privilege attaching to that legal analysis. Gov. Code § 57606(a)(5). This memorandum analyzes Section 6 of Article XVI of the California Constitution and its interpretation by the courts, its implications for AB 857 public banks in general, and provides a preliminary assessment of its application to the structure and operations of the proposed Public Bank East Bay. This memorandum is intended to provide a starting point for the legal analysis required in the Gov. Code § 57606(a)(5). The proposed structure and operations of any AB 857 public bank, and the proposed public bank to serve the East Bay in particular, is likely to comply with Section 6 of Article XVI of the California 41 Constitution. The Legislature’s findings in AB 857 establish that the extension of the state’s credit for the creation of public banks qualify for the public purpose exception to the Constitution’s prohibition on subscribing for stock. This prohibition would not apply to AB 857 public banks, since the law requires that such public banks take the form of nonprofit corporations which do not issue stock. Section 6, Article XVI of the California Constitution Section 6, Article XVI of the California Constitution prohibits the California State Legislature from making public gifts. Specifically, Section 6 imposes three types of restrictions on the Legislature: 1. No giving, lending, or authorizing giving/lending of credit of the State or any of its political subdivisions 2. No gifts, or authorizing making of any gifts, of public money or things of value 3. No authorizing the State, or any political subdivision thereof, to subscribe for stock or become a stockholder in any corporation After these prohibitions were added to the Constitution, and because many contemporaneous activities of the Legislature appeared to violate them, the courts recognized a “public purpose exception” to resolve the apparent contradiction. This “public purpose exception” applies where an expenditure of public funds or extension of credit is made in furtherance of a public purpose, i.e. expenditures “which may tend to make that government subserve the general well-being of society….” Veterans' Welfare Board v. Jordan, 189 Cal. 124, 141 (1922). It is well settled that such expenditures for a public purpose “are not a gift within the meaning of [Section 6 of Article XVI]” because “an expenditure for a ‘public purpose’ is in the nature of consideration and the funds expended are therefore not a gift even though private persons are benefited therefrom.” County of Alameda v. Janssen, 16 Cal.2d 276, 281 (1940). In addition to direct expenditures made or authorized by the Legislature, the courts have applied the public purpose exception to the lending of public credit. For example, the California Supreme Court confirmed the constitutionality of the Veterans' Welfare Bond Act of 1921, which authorized the lending of public credit through the issuance and sale of state bonds to assist war veterans in acquiring property. Jordan at 140-1. Likewise, the California Supreme Court upheld the constitutionality of the Zenovich- Moscone-Chacon Housing and Home Finance Act (Health & Saf. Code § 51000 et seq.), which authorized the California Housing Finance Agency to issue revenue bonds, the proceeds of which would be made available to both public and private housing developers in the form of various types of loans to encourage the construction of housing, as well as the purchase of loans from mortgage lenders and refinancing of existing mortgages. Cal. Hous. Fin. Agency v. Elliott, 17 Cal.3d 575 (1976). In Elliott, the court found that the Act did not violate the constitutional prohibition against the extension of public credit, citing the close relationship between elements of the program and the broad public purposes supporting the program, as identified by the Legislature. Id. at 586. In general, courts defer to the Legislature’s discretion regarding what constitutes a public purpose, as long as that determination has a reasonable basis. County of Alameda v. Janssen, 16 Cal.2d 276, 282 (1940). Thus, courts have upheld against constitutional challenges a “wide variety of welfare and other social programs.” County of Alameda v. Carleson, 5 Cal.3d 730, 746 (1971). The Court held in Jordan that an action is not made unconstitutional if, “incidental to the main [public] purpose there was an 42 advantage to the purchaser of the land ultimately derived from the credit of the state.” Jordan at 141. In Carleson, the California Supreme Court analyzed the challenged state action, disregarding a portion of a household’s earned income in determining eligibility for welfare, and found that “the Legislature could reasonably conclude… that employment incentives are essential to accomplish the goal of self- sufficiency, and that the income-disregard provision was a necessary and proper device for encouraging employment.” Carleson at 746. The public purpose exception has not been recognized by courts as applicable to the third type of restriction in Section 6, Article XVI, regarding subscribing for stock in any corporation. The California Supreme Court has upheld state legislation creating city or county housing authorities, finding that this action did not constitute subscribing for stock or becoming a stockholder in a corporation, since the housing authorities “are public corporations and do not issue stock.” The Housing Authority v. Dockweiler, 14 Cal.2d 437 (1939). Although they are not binding, California’s Office of the Attorney General has issued several opinions interpreting this clause, finding that it “operated to prohibit public retirement funds from operating in common stock” and applied to “all public bodies and agencies in the state whose powers and functions are derived from the Legislature,” including hospital, transit, and water districts, but not charter cities. See Ops. Cal. Atty. Gen. No. 83-1002 (1984), 10 n.10. Section 6, Article XVI of the California Constitution Likely Does Not Apply to AB 857 Public Banks in General The legislative findings in Section 1 of AB 857 specify that the Legislature’s intent was to “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.” In enacting AB 857, the Legislature determined that the lending of public credit to public banks served the public purposes of achieving cost savings, strengthening local economies, supporting community economic development, and addressing localities’ infrastructure and housing needs. Although such legislative findings are not binding upon courts, courts give them great weight unless they are found to be unreasonable and arbitrary. In the case of public banks proposed under AB 857, courts are likely to find that the Legislature acted reasonably in concluding that establishing a public banking system is necessary and proper to accomplish the broad economic purposes identified in the findings, thus applying the public purpose exception to any public bank organized under AB 857. As discussed in Part II, supra, the courts have found that a “public purpose” exception applies to the California Constitution’s Section 6, Article XVI prohibition on giving public money and credit, but have not found such an exception to the prohibition on subscribing for stock in corporations. However, as provided in AB 857, public banks must take the form of either a nonprofit mutual benefit corporation or nonprofit public benefit corporation. See Gov. Code § 57600(b)(1). Neither type of nonprofit corporation provides for the issuance of stock. Thus, consistent with both Dockweiler and the Attorney General’s opinion, it seems likely that courts would find that the constitutional prohibition on subscribing for stock does not apply to the creation of AB 857 public banks as nonprofit corporations. 43 Section 6, Article XVI of the California Constitution Likely Does Not Apply to the Proposed Public Bank East Bay’s Structure and Operations While local agency owners of a public bank may be described as “shareholders,” the Corporations Code describes nonprofit corporation “owners” as “members.” In the case of the proposed Public Bank East Bay, the members of the public bank have not been finalized, but may include cities such as Oakland, Berkeley, and Richmond, as well as Alameda County and potentially other cities and/or counties. As required by AB 857, the proposed Public Bank East Bay will be organized as either a nonprofit mutual benefit corporation or nonprofit public benefit corporation, and, as discussed in Part III, supra, neither type of corporation issues stock. At this stage, the proposed public bank’s potential activities include lending to government agencies, small businesses, minority-owned businesses, worker cooperatives, and affordable housing developers. If these lending activities are ultimately approved by the local agency owners and Board of Directors of the proposed Public Bank East Bay, it is likely that a court would find that the local agencies acted reasonably in authorizing such activities. Even if particular individuals or businesses, such as minority- owned businesses or private sector affordable housing developers, benefit from the public bank’s lending activities, these benefits are incidental to the main public purpose of the lending activities. Because these activities are closely related with the broad public purposes expressed in AB 857 regarding supporting community economic development and meeting local needs for infrastructure, and housing, it is likely that a court would apply the public purpose exception to the lending of public credit for the proposed Public Bank East Bay. While the details of the structure and operations of the proposed Public Bank East Bay have yet to be fully developed, the high-level plan does not appear to introduce any obstacles that would implicate the prohibitions in Section 6, Article XVI of the California Constitution. 44 Appendix C About This Study This study was directed and written by Tom Sgouros, with writing assistance from Dawn Euer. Tom Sgouros has worked for over 33 years as a policy consultant specializing in public budgeting, finance, taxation, and other technical issues of public policy. He has consulted to campaigns and office- holders, to activists and media outlets, and has been invited to testify about public finance issues to legislatures in four states. He was Senior Policy Advisor to the Rhode Island General Treasurer, and is now a fellow at The Policy Lab at Brown University, where he is also a member of the research faculty in Computer Science, working on projects in data science, visualization, and information theory. Dawn Euer owns the Law Office of Dawn Euer in Rhode Island where she works with nonprofits, social enterprises, and small businesses. She also serves as a State Senator in the Rhode Island Senate where she is Chair of the Environment & Agriculture Committee and a member of the Judiciary Committee and the Rules, Ethics & Oversight Committee. Attorney Sylvia Chi, a co-author of AB 857, provided the legal analysis included as Appendix B. We had extensive professional assistance from Gary Findley, principal banking attorney at The Findley Companies, and Graham Seel, Strategic advisor to community banks and community development non-profits. Friends of the Public Bank East Bay conducted significant research and editing on the final document. Primary contributors include Susan Harman, Debbie Notkin, George Quaye, and Benjamin Streim. Additional help was provided by Alexis Frasz, Thomas Hanna, Margie Lewis, Valerie Myers, and George Syrop. Friends of the Public Bank East Bay commissioned the Oakland-based organization Bay Area Organization of Black Owned Businesses to conduct a survey of the borrowing needs of Black-owned small businesses in the East Bay. The final report is published as “Borrowing Needs of Black Owned Businesses.” To inform the research on potential lending demand and programs, Friends of the Public Bank East Bay met and spoke with the following experts. For the purposes of clarity, the people on this list have not reviewed the final Study and are not necessarily endorsers or supporters of this effort. ● José Quiñones, CEO, Mission Asset Fund (small business lending) ● Sara Razavi, CEO, Working Solutions (small business lending) ● Scott Lewis, CFO, Main Street Launch (small business lending) ● Tom Duryea, CEO, Summit Bank (small business lending) 45 ● Shanna McClearn, Director, Sales & Partnerships, Accion Opportunity Fund (small business lending) ● David Green, CEO, 1st NorCal Credit Union (small business lending) ● YaVette Holts, CEO, Bay Area Organization of Black Owned Businesses (BAOBOB) (small business lending) ● Dan Leibsohn, CEO, Community Development Finance (small business lending) ● Sally Smith, Community Development Underwriter, LISC Bay Area (affordable housing lending) ● Aubra Levine, Director of Real Estate Development, Unity Council (affordable housing lending) ● Eve Stewart, Director of Real Estate Development, Satellite Affordable Housing Associates (SAHA) (affordable housing lending) ● Louis Chicoine, CEO, Abode Services (affordable housing lending) ● Jim Lutz, local green energy consultant (electrification) ● Michael Theroux, California environmental project consultant (green project opportunities) ● Renee Roy Elias, recently at Center for Community Innovation (UC Berkeley) (small business landscape) 46 Appendix D Local Community Banks and CDFIs List of community banks and Community Development Financial Institutions (CDFIs) that are doing business in the East Bay and are potential partners for public bank lending programs Community Banks County Headquarters Assets Fremont Bank Alameda County $5.1B Beneficial State Bank Alameda County $1.2B Community Bank of the Bay Alameda County $600M Summit Bank Alameda County $300M Metropolitan Bank Alameda County $180M Gateway Bank F.S.B. Alameda County $170M United Business Bank Contra Costa County $2.3B California Bank of Commerce Contra Costa County $1.9B Amalgamated Bank New York (strong presence in the Bay Area, recently acquired local New Resources Bank) $4.7B CDFIs Headquarters Cooperative Center Federal Credit Union Berkeley Self-Help Federal Credit Union Oakland ICA Fund Oakland Main Street Launch Oakland Accion Opportunity Fund San Jose Pacific Community Ventures Oakland Community Vision San Francisco Low Income Investment Fund (LIIF) San Francisco SixUp Lending San Francisco Mission Economic Development Agency San Francisco Mission Asset Fund San Francisco Working Solutions San Francisco Capital Impact Partners Arlington, VA RSF Social Finance San Francisco 47 Other local lending institutions that are mission aligned and potential partners for PBEB Headquarters C-Note Oakland The Runway Project Oakland CDC Small Business Finance San Diego Oakland Black Business Fund Oakland Kapor Capital Oakland Kiva San Francisco Local Initiatives Support Corporation (LISC) Nationwide, Oakland Cutting Edge Capital Oakland TMC Community Capital Oakland The Bay’s Future Oakland REAL People’s Fund Oakland Community Development Finance Oakland Appendix E Next Steps Finalize Governance Structure Approve how Bank will be governed December 2022 Form 501(c)(6) Mutual Benefit Corporation Legal structure for founding members49 Complete by March 2023 Recruit and Hire CEO CEO will work with Bank Attorney, must be in place to create Business Plan, work with regulators Begin in January 2023 Finalize Bank Board Applicants Confirm remainder of Board seats, including finance experts and community representatives, set up banking policy trainings, pay partial stipends to non-agency members. Agencies will select who will represent them on Board.

January 2023
Develop Business Plan Involves identifying capitalization sources and deposits to be moved into PBEB. Requires a full financial model, detailed explanations/ assumptions, corporate governance, and more. To be led by the Friends' banking consultant and the CEO Ongoing through mid 2023
49 This step has been moved up since the March 2022 version of this Study in response to guidance from the Federal Deposit Insurance Corporation (FDIC). More information available on request. 48 Host Pre-Filing Meeting Entire Board candidate slate holds meeting with regulators prior to submitting charter application Mid 2023 Approve Business Plan Locally Agencies review and obtain formal authorization to apply for a public banking charter Summer – Fall 2023 Submit Business Plan Submit charter application to DFPI and FDIC. Submitted by banking consultant on behalf of the cities October 2023 Application Review Business plan will undergo rounds of feedback and modification, led by the regulators and managed for all other parties by the banking consultant and CEO Fall 2023 – Spring 2024 Bank Staffing & Setup Infrastructure, technology, hiring, etc. (pending application approval), all led by the eventual CEO January 2024 Legal and Consulting Fees We anticipate the need for legal services, but cannot provide specifics until situations arise. 2023 - 2024 Federal Reserve Approval Gain access to Federal Reserve services 2024 Move Capital & Deposits The founding cities place funds into the Bank 2024 Cut the Ribbon! 2024 49 Errata March 30, 2022: Our first draft inaccurately stated that Alameda County has voted to divest from fossil fuels. That statement has been removed. November 9, 2022: In response to questions and comments from the City of Oakland’s Finance Director, we have: 1) made a small set of clarifications and expansions of definitions at the request of the City of Oakland Finance Director. A list of these is available on request. 2) added a link to the United Nations Declaration on the Rights of Indigenous People 3) provided a revised timeline which has some significant changes based on guidance from the Federal Deposit Insurance Corporation (FDIC), which we are happy to discuss in more detail in meetings with the elected officials and staff of the proposed founding members.