The city council voted 15-1 to pass legislation that will launch the creation of the Philadelphia Public Financial Authority on Thursday.
The entity is supposed to provide loans and improve access to credit and other financial services to disadvantaged communities. It is also seen as a first step towards the city establishing its own municipal bank, which would be the first in the country.
Although the PPFA does not initially provide checking or savings accounts, it could potentially do so in the future, which some supporters of the bill hope.
The authority “will have the ability to provide letters of credit as well as guarantees to businesses, especially black and brown businesses…that have not traditionally had this type of financial product,” council member Derek Green said. , who introduced the bill.
These financial tools are essentially a promise from authority to traditional lenders that they will repay whatever an entrepreneur borrows.
Green, who was himself a banker, said he started working on the bill when he took office six years ago. He knows many residents who could have benefited from the program, including a friend who has a small tech business.
The business owner entered into a contract with the city in October 2021 and provided the agreed services, but was not paid due to issues on the city side. The owner then needed to borrow money to pay 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 needed for their cash flow,” Green said. “They were actually thinking of going to an alternative lender and paying a much higher interest rate just to generate cash flow for their employees.”
The authority’s focus on entrepreneurs of color stems from the country’s long history of redlining and loan discrimination. Green says these factors have left African Americans and Latinos owning just 10% of businesses with employees in Philadelphia, even though they make up 44% and 15% of the city’s population, respectively.
Green said the PPFA was formed under Pennsylvania’s Economic Development Financing Act, which allows municipalities to create an agency that can borrow money to provide residents with loans and letters of credit.
Municipalities in Pennsylvania are prohibited from creating their own municipal banks, so this is a way around that rule, Green told Billy Penn.
But some of the bill’s supporters would like to see Philly enter the realm of personal banking, given that 10% of households in the city don’t have a checking or savings account and 22% are underbanked. This leaves them with limited access to credit and financial services such as payday loans or check cashing services not offered by the banks where they have accounts.
The PPFA will be governed by a nine-person board of directors appointed by the mayor, reports the Philadelphia Business Journal. Whenever a position becomes available, the city council will have the opportunity to recommend candidates. These trustees will appoint a nine-person policy council that will guide the day-to-day operations of the authority.
At least five board members would need 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 member of the board of directors of a minority-owned bank and another must have worked for two years to defend the economic interests of consumers and the community.
But not everyone thinks creating a public bank is a good idea. The city government is far from free from its own financial problems.
“Do you really trust that a city that hasn’t reconciled its bank statements for seven years can reliably take taxpayers’ money and play banker with it?” Larry Platt, the co-founder of the Philadelphia Citizen, wrote in an op-ed on the site last month.
In the article, he points out that the city would need large public subsidies to launch the project and notes that a study of starting a public bank in San Francisco found that it would take 56 years for the project reaches the break-even point.
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 Philadelphia.
Several organizations focused on improving the flow of capital in communities like the ones Green focuses on have been created in recent years.
This includes the Philadelphia Growth, Resiliency, Independence, Tenacity Fund – a $100 million collaboration between 30 financial institutions to provide credit to black and brown communities through Pennsylvania’s 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 providing credit to communities of color.