Can Public Banks Help Fix Local Finance?

Are public banks the answer for the recession-induced decline in municipal revenue and other ills that plague our cities? It’s a solution being discussed in more than one American city.  

Mike Krauss, a founder of the Public Banking Institute and a chairmen of the Pennsylvania Pubic Bank Project, both non-profits that promote public banking, said this month an ad hoc committee made up of Philadelphia City Council members and civic groups started working on the adoption of language for a public bank in the city. He also said the measure is being adopted out of a need for “affordable and sustainable credit.” The PPBP is leading the effort for public banking in the city.

The recession’s impact on municipal taxes and anger at Wall Street were factors in the push for a public bank. Krauss described the losses to Philadelphia’s school district, street, police and fire departments as “phenomenal.”  

Krauss mentioned North Dakota’s public bank, founded in 1919 to promote agriculture, commerce and industry in the state, as a role model for cities. The North Dakota bank arose in reaction to farmers’ anger over the predatory practices of East Coast and Minneapolis banks. The bank’s revenues come from the state’s general revenue fund. Krauss cites the Bank of North Dakota’s 2.9 billion portfolio in a state with a population of roughly 600,000 as an example of its success. Philadelphia has a population of approximately 1.5 million. Krauss also said a public bank would be a job creator for cities and again used the BND as an example, as it produced a job for every 100,000 dollars it loaned.

Like North Dakota’s bank, the proposed public bank in Philadelphia wouldn’t be a commercial bank that offers checking and savings accounts. It would lend money for city projects and also partner with local commercial banks on loans. There are also efforts underway for public banks in San Francisco and Boston, according to Krauss. 

Public Banking Institute Chairmen Marc Armstrong said that over a trillion dollars in revenue from states and municipalities are deposited in big Wall Street banks every year. Armstrong also said many of the deposits are used to provide loans for transnational corporations that don’t invest in their states and cities. Public banks can provide loans as low as one percent interest, and Wall Street banks consider their existence as a threat, said Armstrong.  When it comes to taxation and other issues that confront cities, a public bank could be used as a weapon against the rent-seeking – meaning using social and political circumstances to extract more money out of the public – activities by financiers. The public bank would instead invest in higher education, automotive and banking industries and as a tool for productive economic enterprises and individuals. This weapon could in turn create more vibrant activities in urban economies.  

Krauss admitted the possibilities for the use of revenue generated by a public bank are endless, and he said investment in the school district, infrastructure and public safety would be positives. However, other job creating services and projects could be a reality – free wi-fi, the construction of affordable rental housing for retired people and low income residents, rent-to-own home ownership (or condo) programs, research and development to support public science, scientific innovation and high technology industries, childcare facilities, higher education for city residents, public media, new parks, free or reduced utilities for businesses and individuals, and also investments in energy efficiency, recycling, renewable energy and car sharing.  

The positive impacts of the above mentioned investments go beyond public banking, as it is the starting point for a more vibrant urban economy, education system and ecology. With a new source of revenue, business taxes could be slashed to promote business formation in public banking inclined cities, and more businesses within city limits would mean even more revenue.    

Similar to slashing taxes for business, free or reduced costs on wi-fi and utilities would also help local businesses and individuals by reducing their overhead costs and in turn create more jobs, as more money could be spent in the form of investment by businesses themselves and in increased individual purchasing power that works its way back into local businesses.  

Recycling would have a similar effect, as it’s cheaper for a city to recycle, if the program is a well-run, than to pay for waste collection, land filling and incineration. By reducing the costs of waste, cities could again reduce business taxes and once again create more business formation, and at the same time reduce greenhouse gas emissions. Recycling reduces pollution not only by reducing the waste sent to landfills, but it also reduces the need for cutting down more trees and the inputs needed to manufacture a product.

Urban and non-urban citizens all create waste and for that reason recycling is a bigger job creator than renewable energy which cannot produce all of our energy due to intermittency and also the cost, as it’s still more expensive than traditional forms. Despite these drawbacks, new revenue could be used to create jobs in solar energy by installing solar panels on public buildings – school district offices, schools, and city hall. Also worth thinking about is the possibility of constructing biogas plants that break down organic waste – which can come from the vast amount of sewage a city creates – to create another, perhaps more reliable form of renewable energy.       

The additional revenue produced by the use of public banking and increased business formation could also be used to lift the burden of rent-seeking higher education institutions by offering lower interest loans to help young people attain a higher education, affordable rent and affordable home or condo ownership without acquiring crushing debt. Cities could offer a few years of free vocational, art, culinary and business education. The media is full of stories of urban residents burdened with student loan debt which benefits universities, colleges and the government and decreases the amount of money circulating into local businesses. Also, cities would benefit from this investment by creating a new generation of productive workers, chefs and artists and the businesses that are created along with them.

Low interest loans could also be offered to local real estate interest for rent-to-own condo and house programs and affordable apartments could be constructed with low-interest loan portfolios. Of course, landlords would have to abide by low-rent policies if they are to take advantage of the policies, blunting the rent raising effects of gentrification while maintaining its’ positive side.

Cities could also put public dollars behind a new innovation in transportation – car sharing - which has been pioneered by Zipcar. Cities could help expand the company’s business by offering it low tax rates and subsides to locate within their borders; those arguing they would wasteful should take a second look at what’s spent on sports stadiums. Or maybe cities could building their own car sharing industry with local business leaders. The expansion of car sharing would mean less impact on the infrastructure and reduce the amount spent on infrastructure. It would also reduce traffic congestion and make it possible for residents of surrounding suburbs to enjoy the city’s attractions.      

Cities can and should be hubs for creative people and immigrants, as they see life in almost-dead neighborhoods and create gentrifying enterprises such as restaurants, cafes, music venues, art galleries, artisan manufacturing, coffee roasting, small boutique retailers and all sorts of internet and technology businesses. However, cities can’t and shouldn’t lose focus on what sustains critical functions such as public safety, infrastructure and education – revenue. The public bank offers an opportunity for cities to invest in themselves, not the profit portfolios of Wall Street.

Jason Sibert is a freelance writer who has lived in the St. Louis Metro Area since the late 90's. He worked for the Suburban Journals for a decade and his work has appeared in various publications over the last four years.

Photo by David Shankbone.