The Future is Within Reach: How Public Banking and Employee Ownership Can Create Resilient Local Economies

Institute For The Future
Urgent Futures
Published in
11 min readJul 24, 2023

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By Alison Lingane, co-founder of Project Equity

© 2023 Institute for the Future.
  • Employee ownership offers multiple benefits to businesses, owners, employees, and the local economy, including faster growth, higher profits, better wages and benefits, and business retention.
  • Mainstream lenders face challenges in financing employee ownership transitions, but specialized and nonprofit loan funds play a crucial role in bridging the financing gap.
  • Public banking provides an alternative avenue for public funds to support local economies and can help bridge the financing gap for employee ownership.
  • Legislative and policy changes are necessary to support the growth of public banking and employee ownership, with advocacy efforts underway in various states and localities.
  • The future lies in the collaboration between public banking and employee ownership, working together to create a resilient and equitable economy by closing capital gaps and empowering local businesses.

Listen to an interview with author Alison Lingane in episode 7 of IFTF’s Future Now Podcast.

Financing employee ownership in the Silver Tsunami

Scott Atthowe was determined that he would not sell his 3rd generation family logistics and shipping business to a competitor or private equity. He morphed the family business to focus on transporting fine art, serving art museums and private art collectors. The company is highly regarded, so much so that they were the primary partner of the San Francisco Museum of Modern Art for the job of moving a 30-ton Diego Rivera mural.

Scott created a supportive work environment designed for artists, making health insurance accessible and allowing shorter work weeks for artists to focus on their craft. He wanted to maintain the quality jobs he provided for his 40+ employees. Seeing so many of their niche industry competitors being bought up and consolidated, he also wanted to maintain the local ownership and control of his business for generations to come.

Because of this, Atthowe Fine Art Services became employee-owned in 2021. Scott received a sale price that enabled him to retire, and the company embarked on its next chapter in this shared ownership model.

Our communities are full of companies like this, in which the owner wants the legacy of their company to live on. With half of all privately held employer businesses in the U.S. owned by the baby boomer generation — whose retirement has been dubbed the silver tsunami — these companies need buyers en masse. Employee ownership provides just this.

One of the major barriers to employee ownership is financing. Unfortunately, you can’t walk into most banks and take out a loan for an employee ownership business sale. These transactions aren’t familiar to the typical banker. They are like a square peg in a round hole, given that the typical small business loan relies on a single personal guarantee. In a company of 20, 50, or hundreds of employees, which one person should be on the hook for the entire loan?

Today, most employee ownership loans are financed by specialized national and regional Community Development Financial Institutions (CDFIs) or nonprofit loan funds. Capitalizing these lending institutions is critical to meeting the need of the silver tsunami business owner retirements.

What is a public bank?

Publicly-owned banks exist, and are legally obligated to serve the public good. These are banks — not grant-making organizations — that are run by professional bankers. Based on local laws, state or local governments can set them up, and create the mission and guidelines for how the public bank serves the public good and grows the real, wealth-building local economy.

There is currently only one public bank in the U.S., the Bank of North Dakota, which was founded in 1919 to help the state gain control of its own economic destiny. A “banker’s bank,” it focuses on providing capital to support local lending institutions: North Dakota-based banks, community banks, credit unions and other lenders. Its loan portfolio of nearly $4B has helped the state maintain a very robust local banking sector compared to other states and the U.S. as a whole.

The great innovation of public banks — as I see it — is that it is a new route for public monies (our monies, the monies of our governments) to be put to work for the public good. Deposits that are currently sitting in Wall Street banks, helping to fuel the profits of banks’ shareholders can instead sit in public banks, helping to fuel positive outcomes within the local community. State or local governments can choose to park their cash in one financial institution over another, investing in a different set of outcomes as a result.

Why is public banking so important now?

Trinity Tran, co-founder and lead organizer of the California Public Banking Alliance and Public Bank Los Angeles, recently wrote about how the regional bank collapses has put a spotlight on the value and importance of public banks. From her op-ed, titled “The SVB and Signature Bank Crashes Show Why We Need Public Banking”:

“Choosing public banking means prioritizing stability, transparency and public welfare over fleeting profits. The case for public banks has never been stronger, and the moment for action is upon us to usher in a transformative era for banking — one that uplifts communities, fortifies economic resilience and forges a just and inclusive financial future for everyone.”

Retaining longstanding local businesses, creating ownership opportunities for workers and building community wealth — all of which employee ownership does in spades — are priorities that are squarely aligned with the ethos of public banks.

Public banking provides an opportunity to shape a different future in our local business community through expanding employee ownership. By capitalizing lenders that know how to finance employee ownership, companies like Atthowe Fine Art Services, and the other 2.9M baby boomer business owners can more readily choose employee ownership and thereby strengthen our local economies.

Employee ownership creates real impact

In the U.S., there are an estimated 15 million employee-owners in everyday businesses ranging from local bakeries to manufacturers to service businesses like your local plumber, engineering firm, or consultancy. Companies and trusted brands like Publix Super Markets, Gore-Tex and Davey Tree have all found that employee ownership helps them build stronger businesses.

The Case for Employee Ownership offers a deep dive into the data that demonstrates how employee ownership provides benefits to:

  • businesses (faster growth, higher profits, outlasting competitors in business cycle downturns),
  • selling / retiring business owners (finding a buyer for a market rate sale, potentially significant tax benefits),
  • employees (higher wages, better benefits, voice in their workplaces, asset building), and
  • the local economy (business retention, local spending multipliers).

Each of the three main types of broad-based employee ownership — Employee Stock Ownership Plans (ESOPs), worker cooperatives and Employee Ownership Trusts (EOTs) — is slightly different. (For more on each, see Project Equity article on the three main forms of EO.)

In an EO transition — in which the current owner(s) sells the business to enable employee ownership — it is the business (not the employees) that takes out the loan to finance its sale. Over time, the employees’ work generates profits, which are used to pay down the loan, typically over a 5–7 year period.

At Project Equity, we see the benefits every day in the companies we support, whether it is in profit sharing that enables frontline workers to become homeowners in expensive housing markets, or in professional opportunities for employee-owners like serving on the company’s board of directors. During the worst of the COVID shut downs, employee-owners came together to save their jobs and their businesses, innovating and turning on a dime in response to public health orders. These businesses prioritized both their workers AND their profits, finding ways to deliver on both fronts.

Employee ownership financing gap

Today, there is a financing gap for employee ownership transitions that mainstream lenders are not able to meet and that holds back its growth.

Existing EO lending in the US is most established for the ESOP form of employee ownership. Most major banks have a (small) ESOP lending arm, but it is easiest to secure ESOP financing for companies over $20M in transaction value. Mainstream banks do not lend to worker cooperatives or EOTs.

The federal government programs that have successfully opened up bank lending to small businesses writ large have overlooked this form of small business. For example, the SBA loan guarantees (e.g. the 7a product) are not a fit for employee ownership, given the personal guarantee requirement.

There have been important efforts to address the SBA loan guarantee issues, including the 2018 Main Street Employee Ownership Act which unfortunately resulted in no policy changes. In 2020, during COVID, co-op advocates succeeded in having the personal guarantee requirement removed from the Economic Injury Disaster Loan and Paycheck Protection Program loans to cooperatives. Yet, we have been recently advised by Director Guzman of the SBA that there will need to be a legislative fix to require the SBA to make permanent changes.

Until then, for companies smaller than $20M in transaction value (the vast majority of small businesses), and for all companies interested in worker cooperatives or EOTs, it is critical to ensure that the nonprofit loan funds and CDFIs that bridge the financing gap are well capitalized.

Regulatory changes and policy recommendations

We are at an important juncture in the United States for public banking. Seeing the success of the Bank of North Dakota, including how it helped its state avoid local bank collapses during the aftermath of the 2008 banking crisis, advocates around the country are working to enable and establish public banking.

There is a tremendous amount of legislative activity in states across the U.S., with dozens of active campaigns at the federal, state and local levels, and organizing momentum in localities including New York City and Philadelphia.

In California, A.B. 857, which was passed in 2019, allows cities and counties to establish public banks for the first time. There are at least ten efforts across the state to leverage this legislation, and multiple local governments including in San Francisco, Los Angeles, the Central Coast, and the East Bay, have passed legislation to advance local bank implementations.

Supporting the passage of state legislation (like California’s A.B. 857), then supporting local advocacy groups to pass local legislation are key steps towards enabling our local governments to put their deposits to work to strengthen local economies.

The future of public banking and employee ownership

Opportunity for public banking to bridge financing gap for EO

As “banker’s banks,” public banks are limited to doing wholesale lending. This means that they don’t lend directly to the end borrower (in the case of EO transition loans, it means they don’t lend directly to the business that is completing its EO transition). Instead, they lend to intermediaries–CDFIs, community banks, credit unions, local banks or loan funds that themselves do the underwriting and lending to the borrowers.

Public banks are typically able to offer capital at attractive rates, given their mission of community benefit and that they don’t need to maximize shareholder profits.

This creates an important opportunity to more deeply capitalize loan funds and CDFIs that specialize in employee ownership and are designed to bridge the financing gaps left by the SBA.

Opportunity for public banking to unlock mainstream capital for EO
Wholesale lending by public banks can also help unlock increasingly mainstream capital for employee ownership.

Utilizing capital from a public bank, EO loan funds can co-lend with, or offer participation on EO transactions to CDFIs, community banks or other lenders that are newer to EO lending. These lenders get access to deal flow, and — perhaps most importantly — gain experience to overcome perceived risk about EO lending.

By seeing their own track record and demonstrated risk profile of their EO lending, over time they will likely take on more direct EO lending themselves. This could open up a broader pool of capital for EO lending than is currently available through the specialized loan funds.

California IBank loan guarantee can serve as a demonstration
In California, we have a special opportunity in the California Infrastructure Bank (IBank) loan guarantee.

The CA IBank loan guarantee program shares some similarities with the SBA 7a loan guarantee, which has been instrumental in opening up mainstream bank lending to small businesses (noting that there are still meaningful gaps; without this SBA product, the gaps would be even more enormous). One major difference is that the IBank does not require a personal guarantee for employee ownership or cooperative loans if the lending institution that is issuing the loan does not itself require it.

Project Equity’s Employee Ownership Catalyst Fund has demonstrated that the IBank loan guarantee can be utilized for cooperative loans, and we have been told that it has also been utilized for ESOP loans. We are continuing to work to show that it can be utilized for all forms of broad-based EO.

If EO practitioners that are supporting California transactions could come together and utilize this guarantee for all of their California loans–WITHOUT a personal guarantee–we could have a strong demonstration of a successful public loan guarantee program for EO loans. By proving this is viable in California, this could influence the SBA or support a Congressional legislative fix to the SBA loan programs.

In addition, this opens up an intriguing opportunity to create a secondary resale market for EO loans. A set of EO loans that are all guaranteed by the California IBank becomes much more appealing for an upstream bank to purchase. This gets that upstream bank’s capital committed to EO, freeing up the loan funds to originate more new loans, thus recycling their capital faster, and likely giving greater confidence to help them attract more traditional investors.

We can see the future, and must continue to move towards it

We are at an important juncture in the United States for public banking. In California alone, there are numerous efforts across the state to leverage A.B. 857, which allows cities and counties to establish public banks.

We have a visual throughline into a future in which public banking has closed the capital gaps for employee ownership financing, helping communities all across the U.S. retain locally-owned businesses like Atthowe Fine Arts that prioritize their customers and their employees, and keep the legacy of our small business economy thriving for generations to come.

We can see this future in which the growth of employee ownership has been fueled by cities and counties that have puts their deposits into public banks instead of wall street banks.

Recognizing the connection between public banking and employee ownership is an important step towards realizing the broader benefits that the mission of both efforts share: creating more public good within our local economies. Policymakers, lending institutions, and businesses alike should take steps toward this future where public banking and employee ownership work together to create a robust, equitable, and resilient economy.

About the Author

Alison Lingane is an award-winning social entrepreneur who has dedicated her career to leveraging business as a force for good, and to building creative solutions that deliver scalable impact. She is the co-founder of Project Equity, a national leader in the movement to harness employee ownership to maintain thriving local business communities, honor selling owners’ legacies, and address income and wealth inequality. She raises and deploys impact capital to advance employee ownership, including in her role as founder and manager of the Employee Ownership Catalyst Fund.

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Institute For The Future
Urgent Futures

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