Councilmember Derek Green hopes to create a public bank for Philadelphia. Here’s how it could work.

City Councilmember Derek S. Green has been working for more than four years to establish a public bank in Philadelphia, with the goals of helping disadvantaged businesses access credit and managing the city’s money with the public interest in mind.

Thanks in part to limitations in state law, the proposal has moved forward in fits and starts. Green’s latest plan, which won committee approval in December, would first establish a Philadelphia Public Finance Authority that could aid underserved businesses seeking loans from private lenders right away and later help establish a separate public bank to hold city deposits.

Philadelphia has long struggled to boost the participation of minority- and women-owned businesses in public projects, and Green said it’s critical to set up the finance authority before funding from the $1 trillion federal infrastructure bill adopted this year is doled out at the local level.

“Even if a firm gets a contract, they’re going to need to have access to credit to be able to hire more employees and have additional cash flow,” he said in an interview. “And without having that access to credit, they’re not going to be able to do the work.”

Green is hoping to get his bill over the legislative finish line before Mayor Jim Kenney unveils his budget proposal in March. The bill is awaiting final approval from the full Council but may be amended on the floor before moving forward.

Here’s what you need to know about Green’s plan, and how public banking could work in Philly:

A public bank is a taxpayer-owned financial institution that holds and lends the city’s money in lieu of a private bank. Proponents say they allow taxpayers to better use their own money to invest in their communities and point out that private banks have a well-documented history of racial discrimination. Critics say public banks are costly to start and could open up taxpayer funds to fiscal mismanagement caused by political influence.

For Green, a primary benefit would be having a financial institution that helps “hard-to-lend-to” businesses in low-income neighborhoods access credit, diminishing racial disparities in business ownership. Although 43% of Philadelphians are Black, only 6% of businesses in the city with employees are owned by Black people. Similarly, the city’s population is 15% Latino, but only 4% of Philly businesses with employees are owned by Latinos.

“Many small businesses, especially Black and brown businesses, don’t have friends and family that can say, ‘Hey, here’s X amount of dollars to help start your business,’ or, ‘I’ll be a cosigner,’” Green said in an interview.

Since the 19th century, public banks have been rare in the United States, with the Bank of North Dakota, established in 1919, and the five-year-old Bank of America Samoa the only major public banks currently operating.

California recently passed legislation allowing municipalities in the state to establish public banks, and San Francisco has taken steps to become the first large U.S. city to establish one — if Philly doesn’t beat them to it.

Unlike California, Pennsylvania does not have legislation that lets cities directly establish public banks, but Green’s proposal provides a potential workaround.

First, the city would create the Philadelphia Public Finance Authority, a city-controlled quasigovernmental entity that could issue letters of credit to guarantee loans to qualified businesses borrowing from private banks.

Further down the road, Green says the city and the Finance Authority would work together to create a third entity that could directly receive and manage city funds. Although state law does not permit cities to create public banks, it does allow city-related organizations like the proposed Finance Authority to create new entities as special projects, and Green is hoping that will be the avenue for a future public bank.

The mission of the bank could be much more expansive than helping underserved businesses. The Bank of North Dakota, for instance, issues student loans with favorable rates for state residents and for out-of-state natives attending school in North Dakota.

Under Green’s proposal, which is still subject to amendment, the authority would be overseen by a nine-member corporate board appointed by the mayor.

The corporate board would then select a separate nine-member policy board that would run the authority and handle all lending decisions.

Green would also subject the authority to the rules and regulations of the city Board of Ethics, which otherwise would not have jurisdiction over the authority as it is a separate entity from the city. Doing so, Green hopes, will prevent conflicts of interest and political influence.

There are several ways the city could fund the authority, such as a direct cash infusion from the general fund or issuing bonds.

And once the authority is funded, it will have options for how to manage its money. With a $50 million bond infusion, for instance, it could hold $25 million in reserves while using the other $25 million to back up letters of credit for businesses.

Alternatively, the authority could seek an insurance policy to cover the risk from the credit it extends to businesses that would cost only a fraction of its portfolio, freeing up a greater portion of its money to aid businesses.