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Los Angeles Weighs Bringing Its Wall Street Cash Home

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(Bloomberg Businessweek) -- When revenue from sales taxes and parking fines comes in, the city of Los Angeles does what every other local government in America does: deposits it in safe, boring bank accounts or invests it in safe, boring short-term securities. The city has about $11 billion deposited with or managed by the country’s biggest banks, which use the capital for their own needs and ultimately their own profit. This arrangement has Los Angeles and some of its more adventurous brethren considering an alternative. Why not create a public bank that would support investment within city limits, backing such things as small-business loans and affordable housing instead of sending the money out?

On Nov. 6, Los Angeles will hold a referendum to ask voters just that. If the answer is yes, the city will amend its charter and become the first U.S. metropolis to take this step toward creating a public bank, giving a big boost to similar campaigns around the country.

The only public bank in the 50 states is Bank of North Dakota. Established in 1919 to support North Dakota’s agriculture industry, it returns profits to the state for reinvestment and works with other financial institutions to stimulate local economies. Outside the 50 states, American Samoa won the Federal Reserve’s approval to tap into its payment system for a public bank earlier this year. The impetus there was pragmatic and urgent: The territory needed a replacement after the commercial Bank of Hawaii said it would close its branches there.

Despite the scarcity of public banks, the idea has been gaining notice since the near-collapse of the global financial system a decade ago, and it’s won the backing of some key politicians. New Jersey Governor Phil Murphy, whose campaign platform included establishing a state bank, has a bill in committee, making New Jersey 1 of 10 states considering such legislation—near the number at the height of the Occupy Wall Street protests in 2011, according to data compiled by the National Conference of State Legislatures. At the local level, efforts are under way from New York to St. Louis to San Francisco.

The path to the ballot in Los Angeles began with environmental protests about two years ago, when activists from the group Divest LA descended on city hall to lobby officials to stop doing business with Wells Fargo & Co., a major financier of the Dakota Access Pipeline. Then last year, following revelations that the San Francisco-based bank opened millions of unauthorized customer accounts, organizers began considering wider issues as well. Soon they formed an advocacy group called Public Bank LA, proposing that Los Angeles form an institution using Bank of North Dakota and local banks in Germany as models.

Herb Wesson, L.A.’s City Council president, saw merit in the suggestion and decided to take it to voters, with the support of Mayor Eric Garcetti. “Our hope is that people look at this as an opportunity to take control of the city’s financial future and declare independence from Wall Street and demand a bank that delivers on that,” says David Jette, legislative director for Public Bank LA, which is leading the “Yes on B” campaign.

Although details of the bank’s structure aren’t specified in the referendum, its backers envision that it would have an independent board of directors and that its first task would be handling the city’s $11 billion in deposits. The next phase, Jette predicts, would take longer: extending loans to support voter priorities, from affordable housing to investment in economically depressed neighborhoods. Once the money started to go out, the public bank would work with community banks and hire auditors to monitor its portfolios. In the long run, Wesson says, the city could save money on investment fees and would send a message to commercial operations about accountability. “I would like to have a people’s bank that puts the city first and puts the people first,” he says.

Private banks say a public alternative would place them at an unfair disadvantage. The California Bankers Association describes the L.A. measure as a “significant threat to commercial banks” on its website, and it’s collecting donations in hopes of lobbying voters against it. A spokeswoman, Beth Mills, says no mailers or ads are in the works yet. “Setting up a public bank and putting taxpayer dollars at risk wouldn’t be the best direction for the city to go in,” she says.

The anticipated startup costs have derailed past attempts to found public banks. Massachusetts abandoned a proposal for one in 2011 after an analysis pegged the required capital at $3.6 billion. The chief legislative analyst for the L.A. City Council issued a report in February saying the costs there could be “exorbitant.” She also pointed out that creating one would require changes to state and federal regulations requiring that public funds be invested safely and follow competitive bidding processes.

“The trade associations, the regulators, the investment bankers—none of them are going to stand up as proponents,” says Eric Hardmeyer, president of Bank of North Dakota. “It would have to be some sort of populist movement that might carry the day.” He credits the success of his bank, which isn’t federally regulated and has no Federal Deposit Insurance Corp. backing, in part to its “healthy relationship” with other financial institutions. While the bank is public, it works with lenders to administer its loan programs. Hardmeyer also touts his bank’s transparency and the familiarity between officials and legislators that results from being in a small state.

Lately, Hardmeyer says, he’s been fielding inquiries about how Bank of North Dakota’s model might be adapted to cannabis banking. Public banking could be an option for states seeking a place to park revenue that’s off-limits for commercial banks because the drug is still illegal at the federal level. “If you’re not replacing private-sector financing but adding to it, then you also have an opportunity for success,” he says.

Cannabis hasn’t been a big part of the calculation in Los Angeles, even though California legalized the drug for recreational use this year and became its largest legal market. Activists are relying instead on broader public sentiment. Ellen Brown, co-founder of Santa Clarita-based Public Banking Institute, which helps states and cities evaluate the option, is optimistic that Angelenos will vote yes. “People are ready for change here,” she says.

To contact the editor responsible for this story: Jeremy Keehn at jkeehn3@bloomberg.net, Eric Gelman

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