Ambitious Bank Plan Would Aid Poor Areas : Economics: L.A. seeks federal and private funds for lending institution to help start or expand businesses in distressed neighborhoods.

Say you run an industrial metal-treating company that employs 120 people. You want to expand your operations in one of Los Angeles’ poorest neighborhoods. But you need to borrow $2 million for the plant and equipment, and the project doesn’t pencil out if you have to pay the going interest rates.

Under a plan being developed at City Hall, you could turn to the Los Angeles Community Development Bank, a Clinton Administration-backed program that would combine federal grants and loan guarantees with private funds to form a potentially huge lending pool--half a billion dollars or more. The funds would be used to start new businesses and help existing ones expand, creating jobs and boosting the economies of the city’s most depressed communities.

Mayor Richard Riordan, a successful venture capitalist who made business revitalization a big part of his campaign for office in 1993, said he views the proposed bank as “a powerful new tool of job creation and economic development” in distressed areas.

Rushing to meet a March 9 deadline to get a formal application to the U.S. Housing and Urban Development Department, city officials have been hammering out their proposal in workshops with finance and business representatives in the mayor’s City Hall conference room. A public hearing on the development bank proposal is scheduled for 6 p.m. Wednesday at Manual Arts High School, 4131 S. Vermont Ave., in South-Central Los Angeles.

Many details have yet to be worked out, but the proposal basically goes like this: The bank would provide loans--probably at least some at low interest rates--loan guarantees, investment capital, grants and technical assistance. The funds would be available to small and medium-sized businesses, community-based organizations and developers who want to locate or expand in a 20-square-mile zone stretching from Pacoima through Watts.

Other of the bank’s funds also could be used in neighborhoods outside the zone that have poverty rates of 20% or higher. Interest on loans made by the bank would be put toward funding social services in the project areas, city officials working on the bank proposal said.

The bank would not take deposits, provide checking accounts or offer any other services that would require a state or federal charter, and would cooperate rather than compete with other financial institutions in the targeted communities. With the help of commercial lenders and smaller, nonprofit organizations, it would concentrate on amassing an unprecedented amount of funds in areas traditionally hard-pressed for capital.

“There is no other such institution of this magnitude for providing venture and working capital,” Deputy Mayor Mary Leslie, Riordan’s chief economic adviser, told a City Council committee meeting last week. “It’s in its own league.”

The federal start-up money for the bank would come in part from the $100-million Economic Development Initiative grant the Clinton Administration promised Los Angeles as a “consolation prize” for leaving the city out of a more generous “empowerment zone” package of business tax breaks and social services grants. The bank would get another $100 million in federal loan guarantees for the neighborhoods included in the city’s unsuccessful empowerment zone bid.

In addition, the city will seek yet another $200 million in loan guarantees that could be used in the zone or in other distressed communities. By teaming up with Los Angeles County, which also received a promise of grants and loans, the city could pump a total of $430 million in federal aid into economic development efforts.

City officials expect participation from private lenders to leverage the bank’s funds into a much larger pool. Already, Riordan said last week, the proposed bank has commitments from Bank of America, First Interstate and Wells Fargo, and he said officials of several pension funds also are interested in joining the effort.

Community development banks have worked well in other areas, most notably in Chicago, where the South Shore Bank has been operating for more than two decades. It was cited by President Clinton as a model when he shepherded federal legislation last year to encourage investment in the nation’s crumbling urban cores. But the concept seems especially suited to the Riordan Administration, which clearly prefers economic development to social services as the tool of choice for revitalizing troubled neighborhoods.

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Reaction to the development bank proposal has ranged from enthusiasm to concerns about its risks, where its investments would be made and the degree of benefit it could provide.

Most troubling to some council members is the provision that the city use its future federal social services block grants as collateral to guarantee the loans. The Community Development Block Grant is pumping $83.6 million into struggling neighborhoods this fiscal year, and that amount is expected to rise to almost $97 million for the coming annual budget cycle.

“We cannot afford to mortgage our future--it is bad public policy,” said Councilman Mark Ridley-Thomas, whose 8th District includes South-Central Los Angeles. He said the block grant is the city’s “primary source of funds for social services, economic development and housing.”

Attorney and City Hall lobbyist George Mihlsten, one of several private-sector legal or financial specialists who are contributing their time to the city’s bank project, said steps are being taken to minimize the chances that any block grant funds would be lost because of bad loans.

Mihlsten, who is working on the legal structure of the proposed bank, said the steps would include setting aside a reserve and writing regulations aimed at ensuring that the bank’s total portfolio is sound enough to absorb losses should individual projects fail. The block grant funds would be jeopardized only if the bank itself failed and not by defaults on one or more of its loans, he said.

“A lot of thought has been given to protecting future (block grant) dollars. We do understand this is a very significant issue for the city,” Mihlsten told last week’s workshop.

Still not fully clear is what HUD means when it says about $200 million of the funds must be spent in the empowerment zone or be “of benefit” to the zone. Although HUD representatives at the workshops have said projects would have to have some clear connection with the zone, the “wiggle room” has fed concerns among some community leaders that the project will not be confined to the parts of the city that need it most. City officials are considering writing their own definition into the application to ease those concerns.

Councilwoman Rita Walters of the 9th District, which includes Downtown and Skid Row and impoverished neighborhoods to the south, has been the most openly leery of the bank proposal. She has questioned everything from the propriety of having some of the early meetings on the project in private to how much the bank would cost to operate and how its expenses would be covered.