On March 3, 2022, the Philadelphia City Council will likely vote on Bill 210956, proposing the establishment of the “Philadelphia Public Financing Authority,” the first municipally owned “public bank” in the United States. The bill’s primary author, Councilman Derek Green, argues that this public bank will use public dollars to underwrite loans to disenfranchised minority populations within Philadelphia that have been excluded from obtaining funds from traditional financial institutions. While Councilman Green’s goals are laudable for a city with a large minority population that owns fewer businesses and suffers from higher poverty rates citywide, hundreds of years of history and practice show that voters do not support their tax dollars going to private economic enterprise. They even went so far as to amend the Pennsylvania constitution to prevent the practice.
First, let’s ask a simple economic question based on Green’s premise: if a private bank wouldn’t underwrite a loan to a specific individual or business for fear of failure to recoup, why should the taxpayer? Recently, Philadelphia’s elected officials have protested against taxpayer dollars going to private enterprise. For example, Philadelphia City Council’s former liberal icon David Cohen sued the City in an attempt to prevent taxpayer dollars from being used to build professional sports stadiums. Twenty years later, tax breaks for real estate developers are hotly debated in City Council. If Council doesn’t think real estate can help bring prosperity to disenfranchised Philadelphians, why should we think a public bank would be any different?
And while it is certainly worth noting that some private banks such as Wells Fargo have engaged in discriminatory lending practices among Philadelphia residents, that doesn’t mean that the City has the qualifications or expertise to get into the banking business. Recent city treasurers — the officers in charge of the city’s finances — do not inspire confidence in maintaining a municipally owned deposit-and-loan type institution without the fear of corruption. In the mid-2000s, former City Treasurer Corey Kemp was sent to prison for attempting to steer city taxpayer funds to Commerce Bank; in 2020, City Treasurer Christian Dunbar was fired after he was found to have embezzled funds from bank accounts during his time as an employee at Wells Fargo.
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With this record of corruption around public funds, Philadelphia’s citizens should be skeptical of a municipally owned “public bank” holding and loaning money. Furthermore, creating a city-run entity that acts as a depository for taxpayer funds and a lender to private parties runs against any honest, originalist view of the Pennsylvania Constitution.
Philadelphia has a history of giving money to feel-good commercial enterprises that go bust. In the railroad boom of the 1850s, Philadelphia went out of its way to exchange railroad bonds for city-issued bonds. When these railroad companies overpromised and underdelivered, the taxpayer was left holding the bag. The ensuing economic fallout of the railroad craze led to voters reversing the Supreme Court, adopting in 1857 what is now the language of Article IX, Section 9 of the Pennsylvania Constitution.
The text of Article IX, Section 9 prohibits the General Assembly from authorizing any municipality “to become a stockholder in any company, association or corporation, or to obtain or appropriate money for, or to loan its credit to, any corporation, association, institution or individual.”
In 1929, the court noted that Article IX, Section 9 was enacted to “prevent municipal corporations from joining as stockholders in hazardous business ventures, loaning its credit for such purposes, or granting gratuities to persons or associations where not in pursuit of some governmental purpose.”
It further stated that this amendment was adopted “[t]o remedy the evils incident to subscriptions by municipalities to stock of railroads and like enterprises the constitutional prohibition against purchases of securities, and pledges of credit” as well as to “prevent municipal corporations from joining as stockholders in hazardous business ventures, loaning its credit for such purposes, or granting gratuities to persons or associations where not in pursuit of some governmental purpose.”
Today, the court views Article IX, Section 9 as merely prohibiting the type of bond-trading seen in the railroad days. The city is relying on this interpretation to create this revolutionary municipal public bank.
The Pennsylvania Economic Development Financing Law (EDFL) is currently one of the pieces of enabling legislation from the General Assembly that allows public funds to be leveraged into private ventures. Green and his supporters rely on it to create their public bank. The EDFL was passed in its final form in 1993 with a host of broad policy declarations that encompass nearly all forms of economic activity, granting broad powers to these state-controlled authorities to engage in activities that would be seemingly prohibited based on the Pennsylvania Constitution all under the purpose of going towards the “health, welfare and safety of the residents of [the] Commonwealth.”
The current version of the EDFL has not been constitutionally challenged. Since the EDFL’s amendment, new authorities have been created and due to their status as entities of the commonwealth are able to provide large bonds to private parties for development. But history will likely repeat itself, and with so much depository money on the line that would be transferred to this “public bank,” there will be a court challenge to this legislation.
It will not be hard to find a plaintiff. Any Philadelphia taxpayer would have legal standing to challenge the Philadelphia Public Financing Authority on the grounds that the public bank uses taxpayer funds.
Despite the distaste one may have when thinking of the poorest big city in America’s taxpayer dollars going to private enterprise, Article IX Section 9 does state that “[t]he General Assembly may provide standards by which municipalities . . . may give financial assistance or lease property to public service, industrial or commercial enterprises if it shall find that such assistance or leasing is necessary to the health, safety or welfare of the Commonwealth or any municipality.”
Any authority created under the EDFL and similar legislation is a Commonwealth entity, and therefore the Commonwealth may step in at any time and exercise control over it without offending the city’s home rule charter. For example, In 2004, the city sued the Governor and the city parking authority, challenging the governor’s authority to exercise control over the city parking authority. The Pennsylvania Supreme Court ruled against the city, noting first, that any power derived through home rule must occur according to enabling legislation from the General Assembly. And second, that even if the Parking Authority did fall within the powers granted by the Home Rule Act, the General Assembly “retains express constitutional authority to limit the scope of any municipality’s home rule governance.”
Do we want Harrisburg to take over yet another failed city agency after lengthy litigation?
Harrisburg will step in when they feel Philadelphia is mismanaging its own assets: the Philadelphia School District was under control of the state School Reform Commission for nearly twenty years before being returned during the Kenney administration, and the PPA has been under control of the state for decades after a deal with lawmakers in Harrisburg. In both of these contexts, the city failed to see the benefits of the operation by the state.
Thus, even if Philadelphia believes it has the power under the EDFL to create this public bank by calling it a municipal authority, the Commonwealth will likely muscle its way into having some control over the proposed municipal public bank. Do we want Harrisburg to take over yet another failed city agency after lengthy litigation? Or do we want their buy-in and approval first?
Ultimately, the idea of the Philadelphia Public Financing Authority willfully ignores the city government’s repeated historical mistakes and frustrates the will of the voters who added Article IX, Section 9 into the Pennsylvania State Constitution over 150 years ago. It also relies on the EDFL enabling legislation that is woefully overdue to be challenged in court for Philadelphia’s repeated overbroad reading and use of it. If City Council votes to approve the creation of this municipal public bank, they should not do so without some level of bipartisan support from Harrisburg. Otherwise, they should prepare to explain to Philadelphia’s citizens why and how they got the city entangled in more lengthy litigation. Are we really certain that history won’t repeat itself again?
Christian Matozzo is a J.D. Candidate at Temple University Beasley School of Law, and a Visiting Student at Notre Dame Law School. Prior to going to law school, he worked in multiple positions for Councilwoman Cindy Bass.
Lorenzo Riboni is a J.D. Candidate at Temple University Beasley School of Law where he is a Law & Public Policy Scholar.