Should City Hall Lend Money to Small Businesses?
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State Senator Anthony H. Williams has an interesting idea. He wants the City of Philadelphia to form a municipal bank that would lend money to small businesses that he says are overlooked by traditional lenders.
It’s a notion that is sure to freak a lot of people out. Williams’ opponent Lynne Abraham is among them: “That scares me,” Abraham said at a mayoral forum earlier this month, when Williams mentioned his loosely-formed plan. It’s an understandable reaction. City Hall often struggles to deliver basic municipal services as well as city residents would like. Now it’s supposed to act as a banker, too? And what about the potential for corruption? How seriously should we take any of this?
But first, what is a municipal bank? There aren’t very many models to point to, at least not anymore. In the past, publicly-owned banks were fairly common. The Public Banking Institute says Quakers brought the concept to America, and some of the first public banks were established in Pennsylvania. But they’re all but extinct in the U.S. now, with the very notable exception of the Bank of North Dakota, which is owned, yes, by the state of North Dakota. That bank has had a pretty terrific track record, particularly in recent years.
In the wake of the Great Recession, and the many banking bad calls that helped create it, a number of states are kicking around the notion of creating public banks, though so far without success. At the city level, there’s been some flirting with municipal banks in San Francisco, Santa Fe and Seattle, but as near as I can tell, there’s no big city in the nation that owns a bank. So, points to Williams for boldness.
Now, why does he want a municipal bank? He offered up the example of Cakes by Denise, the North Philadelphia bakery that’s been baking elaborate cakes for weddings and other big events since 1990. “She’s got a business opportunity to expand across Philadelphia. If she had a bank to back her, she could be all over Philadelphia,” Williams said. He hastens to add that a city owned bank wouldn’t lend to businesses with poor credit. But it would focus on small businesses that Williams says are too puny for big mainstream banks to care about.
A few weeks ago, while campaigning for votes on the commercial corridors of 52nd Street and Woodland Avenue, Williams mentioned his municipal bank concept to virtually every shop owner he met. They seemed receptive, and Williams seemed committed to the concept. Giving well-run local businesses capital to grow, Williams contends, will prop up sagging commercial corridors throughout the city. And neighborhood commercial corridors play central roles not just in economic development, but in community quality of life.
Williams is pretty hazy on the details, however. And that’s being generous. Williams couldn’t say exactly how the bank itself would be capitalized, which might count as more than a detail. When I asked if he was proposing part of the city’s pension fund assets go into the bank, he replied “exactly.” Later in our conversation, though, he seemed to be talking about the city’s regular cash holdings. He also mentioned repeatedly the money the city could save by investing its money directly instead of entrusting it to “Wall Street middlemen.”
But how necessary is any of this? There already are local, state and federal programs designed to fill the financing gap left by the market. PIDC’s Community Capital program, for instance, makes loans to small businesses.
Yet there’s widespread sentiment in many political circles that those programs don’t go near far enough. At-large City Councilman Wilson Goode Jr.—who has made equitable economic development his chief agenda item for many years—said he’s open to any mechanism that can increase the flow of capital to small businesses in under-invested sections of the city, including a municipal bank. Indeed, a municipal bank is an idea Goode’s been batting around for a while himself, though he said he had not discussed it with Williams.
The Williams campaign has assembled a two-page primer (scroll down to see the whole thing) on the prospect of a municipal bank that gets into a bit more detail than the candidate himself has. For instance, in addition to providing capital for small businesses, the primer suggests a municipal bank could “support homeowners in transitioning neighborhoods” by lending property owners cash to pay rising property taxes; cash they’d qualify for because of their rising equity in those appreciating homes.
The paper also claims a public bank could lower the cost of debt service and debt issuance by a staggering 35-50 percent. How would that work, exactly? The proposal glosses over that pretty quickly: “public banks can be a reliable buyer of municipal bonds without requiring fees or escalating returns.”
If the plan ever gets fleshed out enough to develop into a firm proposal, it would likely face a lot of hurdles—both legal and political. Municipal banks clash with the constitutions of a lot of states, though it’s not clear that would be the case in Pennsylvania. Then there’s the more basic political challenge of selling the public on the notion that City Hall ought to run a bank.
The bank Williams has in mind doesn’t come with branches, or ATMs or even loan officers. He suggests instead designating local credit unions or banks to vet applicants for the city’s money.
“I can appreciate that a civil servant behind plexiglass telling you to take a number is not what people want in a bank,” Williams says. “But that’s not what this is.”
Some more information on precisely what it is, then, would be welcome.