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Update March 3: Council approved the bill to create the PPFA, voting 15-1 in favor. Councilmember Brian O’Neill was the sole dissenting vote.
Philadelphia is moving closer to becoming the nation’s first city to charter a public bank. City Council scheduled to vote March 3 on creating a Philadelphia Public Financial Authority.
Proponents believe it would help Black and brown entrepreneurs and provide much-needed financial services to disadvantaged residents. Critics worry about set-up costs, and question whether funds deployed by a public bank would truly be independent from political influence.
One of the idea’s boosters is Brittany Alston, research director at the Action Center on Race and the Economy, one of the organizations that formed the Philadelphia Public Banking Coalition
“[This could] fundamentally reshape how we think about financial systems,” Alston told Billy Penn, “and introduce a level of democracy that does not exist in any traditional banking systems.”
The PPFA wouldn’t be a place for personal banking — yet. That would take a few more steps, said Councilmember Derek Green, who’s spearheading the initiative.
But it would be able to provide loans for entrepreneurs and other financial services in economically distressed neighborhoods, with a goal to “enhance access to credit” for small businesses run by Black and brown residents, Green told Billy Penn.
Loan discrimination has long existed in the U.S. private banking system. Philadelphia sued Wells Fargo for discriminatory lending practices as recently as 2017, eventually receiving a $10 million settlement.
The discrimination is reflected in the rates of business ownership for Black and brown Philadelphians. African American-owned businesses with employees only amount to 6% of similar firms in the city, while Latino-owned businesses make up 4%. That’s just one-tenth of all Philly businesses with employees, while those demographics make up nearly 60% of city residents.
That’s one reason the PPFA will have “a preferential directive to serve the financial needs of underserved residents, small businesses and economically distressed areas,” per the pending legislation.
The help will allow businesses to complete contracts, developers to secure projects without having to sell off properties to meet equity requirements, and entrepreneurs to be more prepared to handle the cash flow concerns that come with doing business, Green said.
Councilmembers Jamie Gauthier and Katherine Gilmore Richardson are co-sponsoring the bill to create the PPFA, along with Green.
What powers will the PPFA have — and what couldn’t it do?
Pennsylvania law doesn’t allow cities to directly charter a bank, so the PPFA is part of a legal route around the prohibition, Green said.
It was formed under provisions of Pennsylvania’s Economic Development Financing Law, which allows municipalities to incorporate an authority that borrows public and private money and provides loans or provides letters of credit to residents.
The PPFA could buy and sell property and securities, and design projects that forward its goal of community economic development.
It would also have the power to coordinate financial initiatives with other orgs concerned with economic development, like implement a program in tandem with the Community Development Financial Institutions, or put funds towards a grant for a CDC.
Supporters say its financial structure has the potential to save taxpayers money, because the government can borrow capital funds without paying interest to another institution.
Eventually, once it’s fully capitalized, the PPFA could create an affiliate institution that can go beyond loans and provide personal banking services, something advocates are pushing for.
Going beyond loans to personal banking services
Proponents say the effort will be even more effective once it can offer 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 utilizing banking services is what makes an individual unbanked, with no access to credit. Being underbanked means having limited access to credit or primary access to predatory financial services with high rates and fees, like payday loans, Western Union transfers, and check cashing services.
“We want to create communities that have the services and resources that people need. I think that, you know, public banking provides this alternative to that because the focus is not profit,” said Alston.
With a different focus public banks can make different choices, like choosing to locate a branch in an area of the city that private banks deem too risky, and coordinate with community financial institutions to solicit community members to use banking services.
Who will run the PPFA?
As currently defined in Council legislation, the PPFA will be overseen by a nine-person board of directors, appointed by the mayor.
The directors will then appoint a separate policy board who will be directly responsible for setting guidelines that drive day-to-day activities and interactions. The policy board will consist of “a diverse mix of people” with financial, business, and community backgrounds, Green said
For instance, at least five members of the board would have to have five years of experience in and dedicated commitment to these issues:
- environmental justice
- racial justice
- public economic education and health
- co-operative development
- neighborhood-based small business development
- gender justice
- public transportation
The Board of Directors would hold at least one public meeting a year, where they would deliver audits and reports on their activities and holdings to the public with time for open feedback. To ensure overlapping tenures the initial appointees will serve on three different timescales, with termination dates ending in 2023, 2025, and 2027. From there, people will be appointed for six-year terms.
As for the Policy Board, this body would craft the lending and investment policy, run the approval process for letters of credit, and fine tune the strategic financial decisions of the PPFA. Membership on this board comes with qualifications you likely won’t find at a private institution.
When the mayor selects new appointees for the Board of Directors, Council will recommend qualified candidates who also have similar qualifications.
Other Policy Board qualifications include one board member who is an officer of the Pennsylvania CDFI Network — a coalition of community development financial institutions — an individual who serves as a board member or officer of a minority-owned bank, and someone “from an organization that has represented consumer or community economic interests for at least two years.”
Is municipal government any more shady than the private sector?
Some people have expressed concern that Philadelphia, not known for its stellar money management, is taking on control of yet another financial authority.
Although the PPFA would be beholden to all the ethical requirements of other city departments and public servants, critics counter that those requirements haven’t stopped enough officials from acting unethically to assuage their fears.
That’s still better than the private sector, argued Conni Billé, co-founder of the Philadelphia Public Banking Coalition.
“What checks and balances were there on Wall Street in 2008?” Bille wrote in an email rebutting a piece critical of Philly’s proposal published in the Citizen.Public, suggesting it was doubtful “private bankers are more righteous than those who can be hired and fired by us citizens.”
Can the PPFA raise enough capital to get off the ground? The cost of setting it up hasn’t been publicly announced, even as the vote to establish the entity nears.
Multiple critics have pointed towards a study the city of San Francisco conducted in 2019, which estimated that a bank would require an investment between $184 million and $3.9 billion depending on its stated goals, and could take as long as 56 years to break even.
Is a municipal bank even the best way to achieve the goal? Several other nonprofit organizations have new initiatives to provide loans to Black and brown business owners, like the new GRIT Fund.
Green said the many conversations his office has had with financial advisors and legal regulators in the city and state make him confident the initiative will be a success.
“I understand any type of new idea, you’re going to have resistance and challenge,” Green said. “You get better legislation and better policy when you are open and willing to have real conversations, even with people that totally disagree with your idea.”