Advertisement

Can Los Angeles start a public pot bank? City study says costs could be 'exorbitant'

Can Los Angeles start a public pot bank? City study says costs could be 'exorbitant'
L.A. City Council President Herb Wesson speaks before a vote on new regulations for the marijuana industry last year. Wesson has proposed the city create a municipal bank that would work with cannabis businesses. (Luis Sinco / Los Angeles Times)

How hard would it be for the city of Los Angeles to create its own bank? Very.

That's the upshot of a report released this week by the city's chief legislative analyst, which identified a bevy of potential roadblocks, including the need for changes to state and city law and potentially "exorbitant" start-up costs.

Advertisement

"Formation of [a public bank] under existing law and regulation would be a very difficult process, would be very costly, and would result in an institution that would not likely qualify to receive city business," the report found.

Los Angeles city leaders have been studying the creation of a bank since July, when Council President Herb Wesson unexpectedly included the idea in a speech laying out his priorities for his final term.

The idea of public banks — financial institutions owned by cities or states — has long been supported by economic-justice groups and other advocacy organizations that see them as an alternative to the profit-motivated, investor-owned institutions. More recently, the idea has gained support among cannabis-business owners, who believe public banks may be able to serve them since most private banks are not willing to do so.

Wesson, in his speech, envisioned the bank would make small business loans and help finance affordable housing, as well as provide services to cannabis businesses.

"Do you know, we've got people that are going to go home tonight and sleep on a mattress that's worth $2 million?" Wesson asked, alluding to cannabis business owners who stash cash at home instead of at a bank. "We have to figure out a way to make this industry work. We in government are supposed to push the envelope, not protect the status quo."

Other cities, including Oakland and San Francisco, as well as state officials are analyzing the idea. In January, California Treasurer John Chiang announced that his office and the state attorney general's office would study the creation of a state bank that could serve the cannabis industry.

Despite the flurry of interest, creating a public bank at the state or city level would be a challenge. And it's not clear if such an institution could provide key bank functions — such as processing payments and accepting insured deposits — if it openly worked with cannabis businesses.

Leaving aside the potential legal and regulatory hurdles tied to cannabis, the Los Angeles legislative analyst report lays out numerous other challenges such an institution would have to overcome. Cost is among the biggest.

The U.S. is home to just one public bank: the Bank of North Dakota, founded in 1919. It used the proceeds of state bonds to provide its initial capital — the monetary cushion that is at the heart of a bank's balance sheet and protects the institution from insolvency. But John Wickham of the city legislative analyst's office told a council committee on Wednesday that bonds can only be used for brick-and-mortar projects and could not be the source of start-up capital.

"We can't see how using bonds would work in any way, shape or form," Wickham said. "That leaves using general fund money or finding philanthropists willing to bankroll, literally, a municipal bank."

It's not clear precisely how much capital an L.A. bank would need, but the report cited a 2011 study from Massachusetts that suggested a statewide public bank there would need $3.6 billion to open its doors.

"That's a very scary number to come throw at us," Council member Bob Blumenfield said during Wednesday's meeting. "That's going to be one of our bigger challenges."

L.A.'s population of about 4 million is greater than half that of Massachusetts, suggesting the capital needed to start a bank here could still run into the billions.

If the city can find the money, it would also need to get voters on board with the public bank idea.

Advertisement

L.A.'s city charter prohibits the city from entering into a "purely commercial venture" — a bank probably qualifies — without voter approval, according to the report.

What's more, the charter gives the city treasurer the authority to choose the financial institutions that hold city deposits, and also requires a competitive bidding process for banking services and other big contracts. Without changes to the city charter, which would also have to be approved by voters, that means a city-owned bank would not by default be chosen to hold the city's deposits.

The city treasurer, the report found, must invest and deposit city money in ways that ensure it is safe and earns a return. If city money were deposited in a public bank, that bank would have to try to earn some return for depositors.

Banks make a return by lending money. Depending on the types of loans it might make, that could put the city-owned bank — and the city — into awkward and politically fraught situations.

What if, Wickham said, the city made a mortgage loan and the borrower stopped paying?

"It would be difficult for a city-owned bank to be foreclosing on property owners in the city of Los Angeles," he said. "The city probably doesn't want to be in the position of foreclosing on properties. That's a very bad place for us to be in."

At Wednesday's meeting, Wesson suggested that the report, while detailed, painted too dour a picture of the public bank's prospects and asked Wickham to return with a report laying out precise steps the city should take to create a public bank.

"When you come back to us, say, 'This is what you need to do.' Let us determine how difficult that is," he said. "If it was going to be easy to create some kind of municipal bank, it would have already been done."

Follow me: @jrkoren

Advertisement
Advertisement