L.A. Expected to Reject Bank Plan

Los Angeles city officials are calling for the rejection of the Los Angeles Community Development Bank’s new business plan, throwing the future of the beleaguered institution into question.

The City Council is expected to act on the recommendation today.

The business plan lays out the budget for the quasi-private bank, which cannot operate without city approval. The bank was created in the wake of the 1992 riots to revitalize business in the city’s poorest pockets. But it has fallen short of its mandate to create jobs for local residents.

In making their recommendation, city officials said the bank plan didn’t do enough to correct the job problem. The report also said the plan did not address a funding shortfall that has crippled the bank’s ability to lend.

The bank--funded with $430million from the Department of Housing and Urban Development--still sits on almost $200 million in potential loan funds. But it has nearly run out of the federal grant dollars needed to administer those funds.

City Council members, increasingly impatient with the bank’s performance, questioned the annual business plan in December, giving the institution three months to come up with an improved strategy to solve its problems.

But the bank’s efforts fell short, said Councilman Mark Ridley-Thomas.

“Many of us have grown weary,” he said Monday. “The bank’s problems and challenges are not small ones. The city has to proceed in a way that protects the public’s interest and taxpayers’ dollars.”

The city controls the bank’s purse strings and guarantees hundreds of millions of dollars in federal loans to the bank. That means that if the bank fails, the city stands to lose future grants critical to community development programs.

Rejecting the business plan--which would be unprecedented--would continue bank funding for 90 days and trigger a new round of negotiations between the city staff and bank executives.

If the issues are not resolved, the city has the option of shutting down or taking over the bank, hailed as a community development milestone by the Clinton administration when it was launched in 1995.

Still, bank officials who have worked hard to save the institution were optimistic.

“It’s an opportunity ... to sit down over the next 90 days and determine what this bank should be,” said Robert Sausedo, the recently appointed chairman of the bank’s board.

Sausedo said he is working on several restructuring efforts. Although he declined to discuss them yet, he said he is confident that a plan will be negotiated “that the city will be willing to live with, that brings continued expertise to this kind of lending and meets the objectives of the public good.”

But one source familiar with the city negotiations say the bank’s continued survival is unlikely.

“It’s over,” the source said.

The action comes as HUD’s Office of Inspector General is preparing to release an audit of the bank begun more than a year ago.

The report submitted by staff to the council for today’s vote acknowledges the “many recent accomplishments” outlined by the bank in its revised business plan.

For example, the bank has loaned $130 million to businesses in poor neighborhoods since its inception and provided a bridge loan to Chesterfield Square, the largest commercial development in South-Central Los Angeles in two decades.

In 2001 alone, it closed $6 million in transactions, stepped up its job creation efforts and resolved several lawsuits, the business plan said.

Bank officials say most of the problems stem from early missteps that predate current Chief Executive William Chu, who has worked hard to rebuild the institution. Many of the bank’s early loans soured, including one that ballooned to $24 million. And the bank is appealing a $10-million judgment on behalf of one early borrower.

Of particular concern to council members is a $35-million program to channel venture capital into small technology companies in the hopes of a fast payoff in the stock market.

The start-ups--many of which faltered as the economy soured--were not located in the core neighborhoods the bank aims to serve and have created almost no jobs for residents there.

That program pushed the bank far afield of its mission. According to the most recent reports available, by last summer the bank had channeled only 11% of the total jobs it created to the people it was designed to serve, rather than the 51% required by HUD.