How Philadelphia is laying the groundwork for a public bank

Philadelphia is inching closer to becoming the first U.S. municipality to operate a public bank.

In the latest step forward for a nationwide movement that has been gaining steam, the Philadelphia City Council voted on March 3 to establish a public financial authority — a move that supporters see as a precursor to chartering a public bank that would eventually serve as a depository for municipal funds.

The interim authority won’t take deposits, instead focusing on providing credit enhancements and loan guarantees in partnership with private-sector banks and credit unions. The credit enhancements and loan guarantees will benefit women-owned and minority-owned small business owners and entrepreneurs who traditional lenders might deem too risky.

“The city has limited resources to replace the missing wealth of Black and Brown family members and friends, but it can substitute for its effect by guaranteeing loans and providing other credit enhancement products,” Philadelphia Councilmember Derek Green wrote in a recent op-ed.

The City Council’s 15-1 vote catapults Philadelphia ahead of a growing number of cities, towns and states where public banking initiatives are also underway, said Walt McRee, senior advisor and chair emeritus of the Public Banking Institute. Cities such as San Francisco and Oakland, California, are pursuing similar strategies — trying to establish interim facilities that can direct city funds until a bank charter is obtained.

“But Philadelphia at this particular moment is ahead of the pack in terms of who’s going to get something organized and operating first,” McRee said. “This is the first concrete step forward.”

Still, like other public bank projects across the country, there are a lot of hurdles to overcome. For starters, Philadelphia has to figure out how to fund the authority and who’s going to run it.

Part of the funding question may be answered when Mayor Jim Kenney presents his annual budget proposal, which is tentatively scheduled to happen on March 31. The mayor’s office has declined to say whether any funds will be set aside for the authority.

“These are technical questions that are being felt out,” McRee said. “But one would think that with a vote of 15-1, the mayor would support the funding of it on some initial basis.”

Interest in public banking has been gaining traction in recent years, as more states and municipalities look for ways to use their capital to help their communities, while also potentially saving money by cutting out certain fees and lowering their borrowing costs. Last year alone, 18 public banking bills were introduced in the United States, the Public Banking Institute said.

To date, the Bank of North Dakota, which was founded in 1919, is the only public bank operating in the continental U.S. The Puerto Rico Government Development Bank and the Territorial Bank of American Samoa have been open since 1942 and 2016, respectively.

In Philadelphia, advocates have been pushing hard for public banking for at least three years, according to a timeline drafted by the Philadelphia Public Banking Coalition.

In a feasibility study, which was released in the fall of 2020, consultants from HR&A Advisors determined that a city-controlled authority would be a faster way to direct capital into the community than setting up a full-fledged public bank. Last year, legislation to set up such an authority was introduced to the City Council.

Derek Green, a former banker who has been a city councilmember since 2016, is leading the charge locally.

Green has argued that a public bank could help bring down the city’s poverty rate — which was 24.5% in 2020 — and narrow the racial wealth gap by getting more money into the hands of Black and Hispanic small business owners who often don’t have access to credit.

Setting up the public financial authority will give the city a near-term tool to tackle poverty and racial disparities in commercial banking while it works toward spinning off a public bank, the councilmember wrote in a recent op-ed.

While Black residents represent 44% of Philadelphia’s population, they make up just 6% of the city’s business owners, Green wrote. Latinos comprise 15% of the city’s population but only 4% of business owners, he noted.

“The city has limited resources to replace the missing wealth of Black and Brown family members and friends, but it can substitute for its effect by guaranteeing loans and providing other credit enhancement products,” wrote Green, a onetime lender at Meridian Bank in Paoli, Pennsylvania.

Philadelphia’s strategy stands out from most prior public banking efforts, said McRee, who has been involved in devising the initiative. By tapping into Pennsylvania’s Municipal Authorities Act, the city will be able to set up an interim facility that can begin the process of putting money toward its “targeted investment objectives,” McRee said.

“The financial authority is not a bank, so it can’t take deposits,” McRee said. “But it does address the right of a city to create its own mechanism for its own public interest purposes.”

The initiative has drawn sharp criticism from some segments of the banking industry, including the Independent Community Bankers of America, a trade group that opposes public banks generally.

The Philadelphia authority “has the potential to be an unmitigated disaster” for potential borrowers as well as taxpayers, said Aaron Stetter, ICBA’s executive vice president for policy and political operations. He expressed worry that the authority won’t be regulated by the state of Pennsylvania.

“One of our concerns with public banking in general is the concern around how you wall off political influence from the impartial allocation of credit, which is what banks do,” Stetter said.

According to the legislation, Philadelphia’s mayor will be responsible for selecting nine individuals to serve on the board of directors, which must hold at least one meeting each year that is open to the public. The board will be in charge of establishing a separate nine-member investment and lending policy advisory board that will make all capital formation, lending and investment policies.

The policy board will then hire an executive director, who may not have any direct or indirect financial interest in any of the projects to be financed; may not be employed by any of the financed entities; and may not hold any office or job with the city or any other government. The executive director will be a non-voting member of the board of directors.

Such a structure has “enough independence from the city” that it might even qualify as a community development financial institution, Green wrote in his op-ed.

Moreover, the authority has been authorized under the Pennsylvania Economic Development Financing Law and is therefore subject to the same regulatory structure as other authorities that operate under the same law, according to Frank Iannuzzi, Green’s legislative director.

Advocates argue there is enough space between the city and those who will be running the authority to mitigate concerns about political interference. They also say that public banks — whether in Philadelphia or elsewhere — would see community banks as partners, not competitors.

“We’ll say it all day long: these banks do not and will not compete with community banks or credit unions or local financial institutions,” McRee said. “Rather than competing, the concept is dependent on the interplay and integration of local lenders participating with public banks in getting more money out into the communities.”

What’s happening in Philadelphia is being closely watched in other municipalities that are working to establish public banks. California has been a particular hotbed of activity. Legislation is active in Los Angeles, San Francisco, Oakland and other parts of the East Bay region, and nine cities and counties along the state’s Central Coast, according to a roundup provided by the California Public Banking Alliance.

On the East Coast, New Jersey is considering the idea of establishing an “interim bridge bank” that would start the process of creating a public bank. There are also ongoing discussions about establishing public banks in both New York and Massachusetts.

“I think it’s going to be an exciting year for public banking,” McRee said. “People now know what it is … and strength is building.”

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