Advances from public banks in Philadelphia would be the first in the nation

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Philadelphia is nearing the goal of becoming the first city in the country to establish a public bank, and the City Council is close to approving the creation of a Philadelphia Public Treasury Board.

Proponents believe it would help black and brown entrepreneurs and provide much-needed financial services to disadvantaged residents. Critics fear acquisition costs and doubt whether the funds of a public bank would really be independent of political influence.

One of the promoters of the idea is Brittany Alston, director of research at the Action Center on Race and the Economy, one of the organizations that founded the Philadelphia Public Banking Coalition

“[This could] fundamentally reshaping the way we think about financial systems,” Alston told Billy Penn, “and introducing a level of democracy not found in any traditional banking system.”

The PPFA would not be a place for personal banking – not yet. That would require a few more steps, said council member Derek Green, who is leading the initiative.

But it would be able to provide credit for entrepreneurs and other financial services in struggling neighborhoods, with the goal of improving “access to credit” for small businesses run by black and brown residents, Green told Billy Penn.

Credit discrimination has long existed in the US private banking system. Philadelphia sued Wells Fargo for discriminatory lending practices as late as 2017, finally received a $10 million settlement.

The discrimination is reflected in the proportions of company ownership for black and brown Philadelphians. Black-owned businesses with employees make up just 6% of similar businesses in the city, while Hispanic-owned businesses make up 4%. That’s only a tenth of all Philly businesses with employees, while this demographic makes up almost 60% of the city’s residents.

That’s one of the reasons the PPFA will have “a priority policy to meet the financial needs of underserved residents, small businesses and economically distressed areas” under pending legislation.

The aid will allow companies to close deals, developers secure projects without having to sell properties to meet equity requirements, and entrepreneurs will be better prepared to manage the cash flow issues associated with doing business, Green said

Council members Jamie Gauthier and Katherine Gilmore Richardson are co-sponsors the statement to create the PPFA which is now in second reading,

Pennsylvania law doesn’t allow cities to directly incorporate a bank, so the PPFA is part of a legal way to circumvent the ban, Green said.

It was incorporated under the provisions of Pennsylvania Economic Promotion Financing Actwhich allows municipalities to create an agency that will borrow public and private funds and provide loans or letters of credit to residents.

The PPFA could buy and sell property and securities and design projects that further its goal of community economic development.

It would also be empowered to coordinate financial initiatives with other organizations concerned with economic development, such as B. to implement a program jointly with the community financial institutions for development or to provide funds for a grant to a CDC.

Proponents say its financial structure has the potential to save tax money because the state can borrow capital without paying interest to another institution.

Finally, once fully capitalized, the PPFA could create an affiliate entity that can go beyond lending and offer personal banking services, which proponents are pushing for.

Advocates say the effort will be even more effective if it can provide services to the many Philadelphians who live in unbanked or underbanked households. 10% and 22% of the city’s households, respectively.

Not having access to or not using banking services results in a person being unbanked and unable to access credit. Having subbanks means having limited access to credit or primary access to predatory financial services with high interest rates and fees, like payday loans, Western Union wire transfers, and check cashing services.

“We want to create communities that have the services and resources that people need. I think public banking offers that alternative to that because the focus isn’t on profit,” Alston said.

With a different focus, public banks can make different decisions, such as establishing a branch in a neighborhood that private banks deem too risky and coordinating with community financial institutions to encourage community members to use banking services.

Danya Henninger / Billy Penn

As currently defined in Council legislation, the PPFA is overseen by a nine-member Board appointed by the Mayor.

The directors then appoint a separate policy body directly responsible for setting policies that guide day-to-day activities and interactions. The political board will consist of “a diverse mix of people” from financial, business and community backgrounds, Green said

For example, at least five board members would need to have five years of experience and dedicated engagement in these issues:

  • environmental justice
  • racial justice
  • public economic education and health
  • cooperative development
  • Neighborhood-based small business development
  • gender equality
  • public transportation

The Board would hold at least one public meeting per year at which it would provide the public with reviews and reports on its activities and interests, with time for open feedback. To ensure terms of office overlap, those originally appointed will serve in three different timescales, with termination dates ending in 2023, 2025 and 2027. From there, the people are appointed for six years.

The Policy Board would draft lending and investment policies, conduct the letter of credit approval process, and fine-tune the PPFA’s strategic financial decisions. Membership of this body brings with it qualifications you are unlikely to find in a private institution.

When the mayor selects new appointments to the board of directors, the council will propose qualified candidates with similar qualifications.

Other policy board qualifications include a board member who is a board member of the Pennsylvania CDFI Network — a coalition of financial institutions for community development — an individual who serves as a board member or board member of a minority-owned bank, and someone “from an organization that has been representing consumer or community business interests for at least two years.”

Some people have expressed concern that Philadelphia, not known for excellent money management, is taking control of yet another financial authority.

Although the PPFA would be committed to all the ethical requirements of other municipalities and public officials, critics counter that those requirements have not prevented enough officials from acting unethically to allay their fears.

That’s still better than the private sector, argued Conni Billé, co-founder of the Philadelphia Public Banking Coalition.

“What were the checks and balances on Wall Street in 2008?” Bille wrote in a refuting email a bit critical of Philly’s proposal, published in Citizen.Public, suggesting that it is doubtful “private bankers are fairer than those who can be hired and fired by us citizens”.

Can the PPFA raise enough capital to take off? The cost of the facility has not been publicly disclosed, even as the vote to form the company draws closer.

Several critics have pointed this out a 2019 study by the City of San Franciscowhich estimates that depending on its stated goals, a bank would require an investment of between $184 million and $3.9 billion and could take up to 56 years to break even.

Is a city bank the best way to achieve your goal? Several other nonprofits have new initiatives to provide credit to black and brown business owners, like the new one GRIT fund.

Green said the many meetings his office has had with financial advisers and statutory regulators in the city and state give him confidence that the initiative will be a success.

“I understand any kind of new idea, you’re going to have resistance and challenge,” Green said. “You get better legislation and better policy when you’re open and willing to have real conversations, even with people who totally disagree with your idea.”