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

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.

"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 — have long been supported by economic-justice groups and other advocacy organizations who 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.

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.

Learn more at Los Angeles Times