Community Development Bank Put on Notice

The City Council is stepping up pressure on the Los Angeles Community Development Bank, giving officials two months to craft a comprehensive plan to create jobs for residents of low-income neighborhoods or face a loss of funding.

The action comes amid increasing concerns by city officials that the bank--chartered to spur employment by financing business in blighted pockets--has been ineffective.

The bank has channeled only 11% of the jobs it created to the people it was designed to serve, rather than the 51% required by its funder, the U.S. Department of Housing and Urban Development, according to the most recent city and bank reports.

“The clock is ticking on whether or not we stay actively involved or we cut the moorings loose,” said Councilman Eric Garcetti, who chairs the council’s committee on Economic Development and Employment. “This is the last chance to show some accountability and to show a turnaround.”

Council members last week decided against funding bank operations for an entire year, instead appropriating $701,000 to cover its costs for just three months. It also directed bank officials to report back within 60 days with “specific strategies and commitments ... for upgrading job placement of Empowerment Zone residents.” The council will decide at that time whether to release funds for the remainder of 2002.

Of particular concern, several council members said, is a partnership with venture capitalists that poured $35 million of bank funds into high-tech start-ups at the height of the Internet boom. The Times reported earlier this year that those venture capital investments--which bank officials hoped would yield a quick payoff--resulted in few benefits for the communities the bank was designed to serve.

Of 570 jobs created by those tech companies by last spring, only six went to residents of the Empowerment Zone--the neighborhoods of Pacoima and East, Central and South Los Angeles. Furthermore, the companies are not based in the bank’s core service area and are headed by savvy entrepreneurs who critics contend can easily obtain financing elsewhere.

Garcetti said the bank’s deal with venture capital firm Zone Ventures shows “clearly egregious violations in the spirit and the letter of what the bank was supposed to be doing.”

Councilman Mark Ridley-Thomas also has sharply criticized the program, prompting the council to request a report from the bank and city attorney on whether the agreement can be severed. The bank still owes Zone Ventures millions of dollars under the terms of the contract.

“The bank is under more intense scrutiny than it has ever been, and in 90 days these issues will either be resolved or the bank board will have to make a major decision about the future of the bank,” Ridley-Thomas said. “The bank’s future hangs in the balance.”

The council is “increasingly reluctant to put good money after bad,” he said. City officials are also concerned that the city could be held liable for the bank’s mistakes.

“It is not clear to me that they can straighten this mess out,” Ridley-Thomas said.

City officials also are hoping to review a pending audit of the bank by HUD’s Office of Inspector General. Auditors from the government watchdog agency began reviewing all bank programs in February.

Bank officials say they welcome the oversight and agree that the bank must redouble job creation efforts in low-income neighborhoods.

The bank has begun to recover from a financial crisis over the last year, paying off some debt to the federal government and resolving six of seven lawsuits filed against it by early borrowers, Chief Executive William Chu said.

The bank dramatically reduced its staff and suspended most lending activity to cut costs. But in recent months, it has started lending again, forging new co-lending relationships with other banks to spread the risk.

The city’s Community Development Department has dedicated staff to help match companies financed by the bank with potential hires from the Empowerment Zone. Through its work force development division, the city also plans to arrange training for residents who need it.

Zone Ventures has stepped up its efforts to pressure the companies it financed with bank dollars to meet their hiring obligations. At a lunch meeting late last month, Zone Ventures executives introduced the CEOs of the tech companies to bank and city officials who are eager to help the companies comply, said Zone Ventures partner David Cremin.

Zone Ventures, the Southern California arm of Silicon Valley-based venture capital firm Draper Fisher Jurvetson, is bound by the terms of its contract with the bank to “use all reasonable efforts” to get companies to hire Empowerment Zone residents. Zone officials have acknowledged that previous recruiting efforts were limited to such things as quarterly Zone Club networking parties.

HUD created the bank in the wake of the 1992 riots with $430 million, making it the largest community development loan fund in the country. The combination of loans and grants is primarily channeled to the bank by the city, which also backs much of the financing and stands to lose future HUD grants if the bank fails.

Early defaults and subsequent litigation haunted the bank, which still faces a $10-million legal judgment for breach of contract in connection with a loan. The bank has appealed the judgment.

But the increased job creation efforts and co-lending deals could signal a turning point for the bank, which concentrated nearly all its energy on maintaining its financial solvency in the last few years, said bank board Chairman Peter Taylor.

“I’m more optimistic now that there will be a clearly understood focus, both with the bank and the city, on job creation,” said Taylor, who steps down from his board post Monday.

In the last two years, “getting our financial house in order was my No. 1 priority,” he said. “The financial pressure, while still real, isn’t quite so enormous [now], and people feel they can focus on other things.”

Garcetti said he believes “the bank is turning a corner and there has been significant progress.” The bank has new leadership that was not involved in the early missteps, he said. Regardless, the city must decide whether the bank can effectively direct jobs and capital “to areas of the city that still need it, almost a decade after the civil unrest.”

“I think the leadership is sound. I think they understand banking and the goals of what the bank should be doing,” Garcetti said. “They inherited some of these problems just like we [the new council members] did. But that doesn’t mean we’ll hold them any less accountable.”