Los Angeles Needs a Public Bank

by Public Bank LA
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By David Jette, Sydiot.com. Los Angeles has 44 departments and bureaus who manage $5,549,000,000 in annual revenue collected from tax, fee and fine payers, as much as the whole country of Iceland.

At any given time, there is an average of $45 billion in public money sitting in various operational accounts, reserve funds or short- and medium-term investments. That money is currently held in accounts at commercial banks, where it earns next to zero interest. The city paid over $109 million in annual and transactional fees to these commercial banks last year. The banks then use these deposits to bolster their own lending activity, earning interest for their shareholders.

Commercial banks are under no obligation to lend money to businesses within the city of Los Angeles, or to extend credit to projects which aim to make a positive impact on its residents and communities. Instead, the power and resources we give to banks is used in the most profitable lending sectors, where they add to artificially high housing prices, subsidize industries with harmful externalities like fossil fuels and defense, and even engage in widespread fraud against their customers, all in the interest of greater shareholder profit.

 


Divestment of public funds from financial institutions and long-term investments which run contrary to the values of Los Angeles voters and residents should be a policy priority for all progressive organizations. Divestment has been a particularly visible tool for social and economic justice efforts in the United States and around the world. And while its economic impacts are limited, there is a moral duty for the citizens of any democracy to demand their governments and representatives divest public funds from programs and institutions that do harm to the environment, and which exploit working people and nature for private gain. Instead, we must invest pubic resources into enterprises committed to widespread economic welfare and social justice.

The call for a public bank for the City of Los Angeles goes a step further and creates a feasible, socially and fiscally responsible plan to take financial power back from commercial banks and put it into the hands of democratically elected bodies so that a more holistic model of public financing and fiscal stewardship can be realized. The city and its taxpayers hold tremendous lending power in city reserve and operating accounts, and as a borrower, the city and its departments have special advantages that make financing them low-risk, predictable, and generally good for working people.

Moving profit-seeking banks out of the public finance equation, and allowing the city to lend to itself, will save hundreds of millions of dollars annually in fees while lowering infrastructure spending by up to 50%.


Divestment as a Tactic is Not Enough

The most visible case of a successful divestment campaign is the effort by students and activists to compel American college endowments, and later banks, municipalities and mutual funds, to divest from businesses operating in apartheid South Africa in the 1980s. The campaign was memorable, and it drove more attention to the injustices of a racist regime. And while Nelson Mandela and South Africans freed themselves through decades of struggle, the divestment effort is remembered for forcing colleges and other funds to justify their participation in that injustice. That effort mothered several others, and remains a model for contemporary divestment and boycott movements for animal welfare and BDS.

Did it work? Studies show that divestment had a minimal economic impact on South Africa or the companies doing business there. In general, divestment does not exact a measurable financial toll on its targets. When capital is reallocated for a reason external to price (and profit), the market gives a chance for even higher profits to the next buyer who, of course, doesn’t care about the ethical or social consequences of the investment. This is how capitalism is engineered. Social well-being is not a part of the equation unless the state can force financial consequences like lawsuits, fines, and other regulations. Democratically sensitive institutions like college trustee boards and City Hall aren’t the only customers for these businesses, but they are important ones.



Economic consequences aren’t the only thing that banks like Wells Fargo and companies like Energy Transfer Partners care about. The damage done to the reputations of those companies after massive fraud (Wells Fargo) and paramilitary occupation of native land (ETP at the Dakota Access Pipeline) was more widespread because it threatened their wider growth. When a company becomes famous for fraud, customers may avoid it, and even well- funded politicians may abandon them. Regulations get written. Fines can be paid and pass on to consumers, but a cultural shift in how money is invested by public entities represents a bigger danger to the entire industry.

The tactic of divestment and boycott is effective despite its limitations. It even fits into a ‘market-based,’ voluntarist approach to social organizing – “it’s my/our money, we can spend/invest it how we please.” Cultural consumerism is a simple entry point into a materialist understanding of everyday life. But it’s only the first step toward real economic justice.


Public Deposits and Pension Funds Should Not Finance Harm to the Public

Deciding which industries and investments rise to the level of ‘socially responsible’ is a line that must be drawn. DivestLA, the leading group in this effort, names financial institutions like Wells Fargo that have a history of widespread fraud, but a case could be made that nearly all major financial institutions had a hand in the massive frauds that led to cyclical failures of banking and finance in the last 25 years. They also name companies invested in pipelines and fossil fuels, both worthy targets, but how would an ethical investment strategy deal with retail and fulfillment companies like Amazon and Apple, who use massive amounts of dirty fuel to ship products across oceans, and depend on unsafe and exploitative labor practices?

DivestLA proposes a three-tier system of qualifications for financial institutions in receipt of public funds, either for city operating accounts or longer-term investments, such as for pension funds. They prioritize B-Corps and Community Development Financial Institutions (CDFIs). There are not enough Tier 1 institutions to handle the city’s business, so they provide for a second tier of local businesses with no known infractions or unethical investment. Tier 3 is for reformed companies with a commitment to avoid being the worst.

They also propose adding a social investment guideline for city investments, a practice that is already in place in San Francisco, Boulder and Portland.


Whether this list sufficiently defines the many ills that capital inflicts is beyond the scope of this analysis. But we can look at one of the largest long-term city pensions funds, the Los Angeles City Employee Retirement System (LACERS), and how they allocate their members’ money. Here’s the top 20 from their top 100 investments:


In total, LACERS holds about $14B in investments for employee pensions and invests them in a fairly standard, long-term portfolio, investing in a mix of blue chip stocks, US treasury bonds, and emerging market funds. There seems to be a bias towards pharmaceutical and telecom stocks, reflecting the market predictions of the LACERS fund managers. A large portion is invested in low-yield, low-risk US Treasury Bonds, another type of public debt. But you can also see $56M in

ExxonMobil, $41M in Nestle, and $36M on JPMorgan Chase. There’s a moral and political case to be made against basically every investment on this list. There’s an $18M investment in Japan Tobacco Inc NPV.


Moving that $14B into funds which follow socially responsible investment guidelines would be a big challenge. Most funds do not bother with ethics because, theoretically, they come with a price. Socially responsible investments often come with higher fees needed to run a more labor intensive and ultimately disadvantaged fund. Except for perhaps green energy funds, socially focused investment can be at a disadvantage compared to other investments. The ultimate fiscal consequence might mean a dip in the return earned by city funds.

It’s possible to roughly estimate the fiscal impact of a more socially responsible strategy compared to the current one taken by LACERS. With the current strategy, LACERS earned a 5.9% return (gross of fees) from its 10-Year investments and 7.2% with its five year plays. The iShares MSCI KLD 400 Social ETF, an index fund that limits its stocks to socially responsible businesses and green energy development, has earned a 10.73% CAGR (compound annualized growth rate) since its beginning in 2006, before the recent recession. If LACERS had handed their $9.3B balance they had in 2006 to iShares instead of their own fund managers, who put it into major US financials, industrials and techs, they would have nearly doubled their gains since 2006. Hindsight is 20-20, but it’s a valuable example.


Lastly, considering how irresponsible practices by these same banks caused the loss of millions from pension funds prior to 2009, moving pension and operating funds into less speculative, more principled financial stewardship might mitigate the impact of the next big meltdown.

A tiered approach that allows for flexibility in how the city services its debt and checking needs ensures no interruption in city finances or operations, and puts the best-run banks, development funds and ‘social businesses’ at the front of the line, and it cuts off access for the worst of the worst. Overall it would be a big step in the right direction.

The only true divestment from anti-social finance is a move to public banking.

Money and capital are not the same thing, and banks control too much of both. Banks create our money supply through lending and reap the rewards of that control by securitizing and selling our economy to the richest people. This is true on a global, national, state and municipal level, and there are efforts at every level to create public banks to capture more of the money and lending power for the people.

As mentioned in the introduction, the city has as much as $15B in operational ‘fund’ accounts and over $31B in capital investments, which include everything from demand deposits, CoDs, and other low-interest paper, and this is just at the Controller level. Los Angeles takes in billions of dollars in revenue from the sale of electricity alone. These public utilities and tax agencies collect funds from regular people to operate our city’s government, provide public services and to maintain our commons. But most people would be outraged if they knew how much of their money is spent on interest paid to big banks. Up to half of infrastructure spending goes to bondholders who finance the projects, often before a project even begins. Bonds are issued well in advance of a project’s readiness to move forward, as city projects face bureaucratic and political approval, in addition to other challenges, before a dollar is truly spent. This doesn’t stop banks and bond holders from collecting massive origination fees and a steady stream of debt service, paid by you and me.


A public bank would allow public funds to back loans made to the same city projects that cost the public billions in interest and fees. Activities like this sometimes don’t even require a new bank charter. The City of Santa Fe just completed a feasibility study and named a task force to explore a public bank, and found they could lend against operational deposits without even becoming a bank. Every city is different, and a comprehensive feasibility study would be warranted to understand the laws, regulations, and operational limitations of servicing city debt and managing banking operations.

Total Banking Fees Recaptured, Annual: $109,000,000

Debt Service Payments Recaptured: $2,351,584,000

That’s just for interest reserves for presently allocated projects. Nearly half of all infrastructure spending could be saved or redirected. An independent board of directors for the bank would ensure ‘arms-length’ pricing of public debt, and collateral requirements could be stricter than in the private sector, where executives receive huge salaries as they risk depositors’ money to inflate dividends for shareholders. The dividends paid by a Los Angeles City Public Bank could be directed to back into public investment, tax mitigation, and rainy-day funds to cushion the impacts of cyclical recessions on public welfare. A public bank could also partner with local banks to underwrite small business and community impact loans, multiplying public leverage and growing the economy directly.

This same analysis applies to the idea of a public bank for California. The state holds hundreds of billions in operational accounts and the Rainy Day fund. It currently services $460B in bonds, paying interest to bondholders and private banks when it could be paying itself. This could take a chunk out of the cost of single payer healthcare or even tax relief. If the bank were allowed to lend against a more aggressive fractional reserve requirement, it could create a mechanism by which the government could honor commitments to providers in recessionary years when tax income drops.

I believe the movement for a public bank in Los Angeles, and solidarity with movements to do the same in Oakland and at the state level in Sacramento, should be a part of the organizing efforts of all progressive and workers rights organizations in the California. I’m proud to that DSA Los Angeles has overwhelmingly supported this effort. And it’s encouraging that Herb Wesson and the LA City Council are actively pursuing divestment and public banking as a way to bring ethics to the management of public funds.

Resources:

New Yorker, ‘Does Divestment Work,’ 10/05/2015: http://www.newyorker.com/business/currency/does-divestment-work

The New Republic, ‘Divestment Won’t Hurt Big Oil, and That’s OK,’ 05/20/2015: https://newrepublic.com/article/121848/does-divestment-work

LA Times, ‘Weighing the cost and benefit of divestment,’, 01/15/2016: http://www.latimes.com/business/hiltzik/la-fi-hiltzik-20160117-column.html

Harvard Political Review, 10/02/2012: http://harvardpolitics.com/harvard/does-divestment-work/

Ellen Brown, ‘Taking Back the Money Power: The Public Option in Banking,’ 10/30/2016:



Santa Fe Public Bank Feasibility Study, January 2016, http://www.santafenm.gov/document_center/document/4520

Ellen Brown, ‘How Public Banking Supports Sustainability,‘ 06/10/2015


Los Angeles City Controller, ‘Net Position by Category – Liabilities and Assets,’ 01/2017 https://controllerdata.lacity.org/Liabilities-and-Assets/Net-Position-by-Category/87im-rub8

DivestLA, ‘Proposal’ https://www.divestla.com/resources/

Los Angeles City Controller, ‘Checkbook LA,’ https://lacity.spending.socrata.com/#!/year/2016/

LA Times, ‘Wells Fargo to pay $110 million to settle lawsuits over unauthorized accounts,’ 03/28/2017, http://www.latimes.com/business/la-fi-wells-fargo-settlement-20170328-story.html

City of Los Angeles, ‘Investment Report,’ April 2017, http://finance.cityofla.acsitefactory.com/sites/g/files/wph641/f/Apr%202017%20Investment%20Report.pdf

City of Los Angeles, ‘Statement of Investment Policy,’ 12/12/2016, http://finance.lacity.org/sites/g/files/wph641/f/2016%20Investment%20Policy-Final%2012-12-16.doca_.pdf

LACERS, ‘Top 100 Holdings,’ 06/30/2016, http://lacers.org/investments/reports/LACERS%20TOP%20100%20Holdings.pdf

Morningstar, ‘The Benefits and Costs of Socially Responsible Investing,’ 01/07/2015, http://news.morningstar.com/articlenet/article.aspx?id=679225

City of Los Angeles, Investment Report 07/11/2017, http://finance.cityofla.acsitefactory.com/sites/g/files/wph641/f/Apr%202017%20Investment%20Report.pdf

Los Angeles Fire and Police Pensions, Portfolio Market Value and Asset Allocation, 06/30/2017, https://www.lafpp.com/sites/default/files/reports/portfolio-at-a-glance/quarterly-update-portfolio-market-value-asset-allocation-6-30-17.pdfhttps://www.lafpp.com/sites/default/files/reports/portfolio-at-a-glance/quarterly-update-portfolio-market-value-asset-allocation-6-30-17.pdf

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