The Philadelphia City Council is moving toward the nascent nation’s first municipal bank

The City Council voted 15-1 to pass legislation Thursday that will usher in the creation of the Philadelphia Public Financial Authority.

The company aims to provide credit and improve access to credit and other financial services for disadvantaged communities. It is also seen as the first step towards establishing its own city bank, which would be the first in the nation.

Although the PPFA won’t initially offer checking or savings accounts, it could potentially do so in the future, which some of the bill’s supporters are hoping.

The agency “will be able to provide letters of credit as well as guarantees to businesses, particularly black and brown businesses … who traditionally haven’t had these types of financial products,” said Councilor Derek Green, who introduced the bill.

These financial instruments are essentially a promise by the authority to traditional lenders that they will repay whatever an entrepreneur borrows.

Green, a former banker himself, said he began work on the bill when he first took office six years ago. He knows many residents who could have benefited from the program, including a friend who owns a small tech company.

The business owner contracted with the city back in October 2021 and has provided the agreed services but has not been paid due to problems on the city side. The owner then had to borrow money to do the payroll.

“They went to their traditional lender, who they had a 17-year relationship with, and that lender wouldn’t increase their line of credit that they would need for cash flow,” Green said. “They actually considered going to a non-traditional lender and paying a much higher interest rate just to make money for their employees.”

The agency’s focus on entrepreneurs of color stems from the country’s long history of redlining and credit discrimination. Green says these factors have resulted in African Americans and Latinos owning just 10% of Philly’s employee businesses, even though they make up 44% and 15% of the city’s population, respectively.

According to Green, the PPFA was created under the Pennsylvania Economic Development Funding Act, which allows municipalities to create an agency that can borrow money to provide loans and letters of credit to residents.

Municipalities in Pennsylvania aren’t allowed to create their own municipal banks, so this is one way to get around that rule, Green told Billy Penn.

But some of the bill’s supporters would like to see Philly enter the retail banking space, given that 10% of households in the city don’t have a checking or savings account and 22% are underserved. As a result, they have limited access to credit and financial services such as payday loans or check cashing services that are not offered by the banks where they have accounts.

The PPFA is governed by a nine-member board appointed by the mayor, reports the Philadelphia Business Journal. For every vacancy, the city council has the opportunity to propose candidates. These directors will appoint a nine-member political board that will oversee the agency’s day-to-day operations.

At least five members of the board would need to have five years of experience working on issues such as neighborhood small business development, public transportation, and environmental and racial justice.

Additionally, a board member must be an officer of the Pennsylvania Community Development Financial Institutions Network — a coalition of financial institutions focused on community development. Another must be a board member of a minority-owned bank and another must have worked for two years defending the economic interests of consumers and the community.

But not everyone thinks starting a public bank is a smart idea. The city administration is far from free from its own financial problems.

“Do you really have faith that a city that hasn’t reconciled its bank statements in seven years can reliably take taxpayer money and play banker with it?” Larry Platt, the co-founder of the Philadelphia Citizen, wrote in a comment on the site last month.

In the article, he points out that the city would need large public subsidies to get the project off the ground, noting that a study examining the creation of a public bank in San Francisco found that it took 56 years would take before the project is profitable.

Platt also points out that there are other ways to increase access to credit in underserved communities of color, some of which are already being implemented in Philly.

Several organizations have been formed in recent years that focus on improving the flow of capital in communities like those that Green focuses on.

These include the Philadelphia Growth, Resiliency, Independence, Tenacity Fund — a $100 million collaboration between 30 financial institutions to provide credit to black and brown communities through the Pennsylvania CDFI.

Platt added that there is currently a movement to create more black-owned banks in the country. Currently, only 21 of the country’s more than 4,000 banks are owned by African Americans, but many believe they would do a better job of providing credit to communities of color.

About Bradley J. Bridges

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