No More Detroits: The Philadelphia Public Bank Solution
Saturday, October 12 / 8:30 AM
The Arch Street United Methodist Church
50 North Broad St.
Using Existing Government Funding to create a Public Bank in Philadelphia
What is a Comprehensive Annual
Financial Report (CAFR)?
What is a Comprehensive Annual
Financial Report (CAFR)?
It is not the “Budget.”
A "Budget Report" is a selective funding of x accounts from y resources - set up to be primarily
funded with taxation and done for the year.
An ”Comprehensive Annual Financial Report" is the showing of all income: Investment, Taxation, and
Enterprise, plus the accumulated wealth over decades. Budgets are for the year, a CAFR is for it all
since creation of the government entity.
There is a big difference between the two. A correct analogy would be: The annual budget to operate your
house vs. your statement of net worth.
Every Government entity has a CAFR – there are ~184,000* of them, totaling
10s of trillions of dollars, almost all online.
CAFRs describe the assets of government agencies and pensions.
Note, due to GAAP and especially due to some recent “standardizing” rule changes, CAFRs tend to project
future liabilities years, even decades, out, while offsetting them only with current assets and revenue
projections based on current receipts. This leads to a false deficit projection. It’s as if you were expected to pay
your entire 30-year mortgage with only the assets you have now and the income you will have based on your
current level of income (…and sometimes not even that!)
How is money raised for Philadelphia currently, besides
taxes and investments? The city issues Bonds.
Types of City Issued Debt (http://www.phila.gov/investor/Homepage.html)
The debt program managed by the City includes general obligation debt, lease and
contract debt issued by related authorities,* debt of the Water and Sewer and Aviation
Departments, and debt of the Philadelphia Gas Works (PGW). Debt of the Pennsylvania
Intergovernmental Cooperation Authority (PICA), School District of Philadelphia (SDP),
and the Philadelphia Parking Authority (PPA) is managed independently. Types of debt
managed by the City include the following:
General Obligation Debt
The City can issue general obligation debt, backed by the full faith, credit and
taxing power of the City, subject to voter approval and subject to adherence to
the Commonwealth Constitution….
Contract and Lease Debt
In addition to general obligation debt, the City issues tax-supported
obligations through the use of its related authorities….
The City oversees the issuance of revenue bonds for the Water and Sewer
Department, the Aviation Department, and Philadelphia Gas Works (PGW).
* As of 2007: http://cafr1.com
* Related authorities include 8 separate entities we will discuss later
Philadelphia Bonds, rated by Moody’s,
Standard & Poor’s, and Fitch (page 23):
General Obligation Bonds
Water Revenue Bonds
Aviation Revenue Bonds
The City is subject to a statutory limitation established by the Commonwealth of Pennsylvania as to the
amount of tax supported general obligation debt it may issue. The limitation is equal to 13% of the
average assessed valuations of properties over the past ten years. As of June 30, 2012 the legal debt
limit was $1.622b. There is $1.543b of outstanding tax supported debt leaving a legal debt margin of
Philadelphia is paying 2% to 5% interest on bonds for credit it could create itself
from a Public Bank that pays the city dividends.
If the city can issue debt (bonds), why can’t it deposit
tax dollars in a public bank?
We are NOT interested in changing fund uses, we are
interested in changing fund investments.
In fact, we are trying to preserve the ability for government
agencies and pensions to cover their expenses in the future.
Can investments in a Public Bank be more:
Prudent and safe?
Able to provide consistent returns?
Supportive of the local community/job-creation?
Note: Although money will be used throughout the year, this usage is predictable
and the remainder can form the deposit base for making loans from a Public
Bank until then. (this is how North Dakota does it with the Bank of North Dakota).
The real question is: Is this strategy safer and better, for reasons listed above,
than current investment strategies?
Philadelphia CAFR Investment holdings – as of June, 2012
Partial Breakdown of Pension Fund Investments.
What kinds of risks are there?
(not including 8 separately reporting agencies)
Breakdown by investment type on CAFR – page 47: (amounts in thousands)
% of Total
U.S. Government Agency Securities
Miscellaneous - Limited Partnership
U.S. Government Securities
Other Bonds and Investments
Short-Term Investment Pools
Collateralized Mortgage Obligations
Certificate of Deposit
Equity Securities subject to Foreign Currency Risk (in thousands of USD) – page 50
Broker-Dealer Repayment Risk: “Statutes permit the Municipal Pension Fund to lend its
securities to broker-dealers and other entities with a simultaneous agreement to return the
collateral for the same securities in the future. The Pension Fund has contracted with a thirdparty securities lending agent to lend the Pension fund’s securities portfolio. The agent lends
securities of the type on loan at June 30, 2012 for collateral in the form of cash or other
securities at 102% of the loaned securities market value plus accrued interest. The collateral
for the loans is maintained at greater than 100%. Securities on loan as of June 30 are
unclassified with regards to custodial credit risk.” Securities of securities – it’s risk, squared!
This is as of the end of FY 2012, but we had a pretty
good year in the markets since then, so the total is
Hedge funds underperform. According to Matt Taibbi of Rolling Stone: “And
underperforming is likely. Even though hedge funds can and sometimes do post
incredible numbers in the short-term – Loeb's Third Point notched a 41 percent
gain for Rhode Island in 2010; the following year, it earned -0.54 percent. On Wall
Street, people are beginning to clue in to the fact – spikes notwithstanding – that
over time, hedge funds basically suck. In 2008, Warren Buffett famously placed a
million-dollar bet with the heads of a New York hedge fund called Protégé
Partners that the S&P 500 index fund – a neutral bet on the entire stock market,
in other words – would outperform a portfolio of five hedge funds hand-picked
by the geniuses at Protégé.
What about hedge funds?
Is investing in hedge funds safe and prudent?
From the Philadelphia Inquirer:
Philly Deals: Hedge fund loses money for Pa.*
Discussion from the minutes of a June 27, 2013 meeting of the Board of Pensions and Retirement Investment Committee (emphasis added):
Agenda Item #2 – Additional Capital Recommendation – Mason Capital Management (the pension's chief investment
officer) Mr. Handa stated that Staff and Cliffwater are recommending additional allocation to Mason Capital, to bring the
total allocation up to $50,000,000. Mr. Handa said they believe it is between $26,000,000 and $27,000,000 million will
be added but are not sure and that is why the recommendation is up to $50,000,000. They have invested with Mason
Capital almost four years and the returns over that period of time have been very good. The performance from 2013 has
been extraordinary. The hedge fund has made money on both sides, long and short. At the end of May they were up
13%. In 2012 they were down when the market went up.
(Chairman & Director of Finance) Mr. Dubow asked Mr. Handa how they were doing this month.
Mr. Handa said he spoke with Michael Martino on Tuesday. Mr. Martino said they were doing fine and would not give
specific numbers. Over a four year period they’ve done very well for us. Over the last six plus months the results have
been fairly consistent.
Mr. Dubow asked Mr. Handa how does this fit in our asset allocation.
Mr. Dubow wanted to know where the funding would come from.
Mr. Handa said the funding would come from domestic equity, where we are currently over allocated at 28%. Mr. Handa
said it would come from the S & P 500. We have approximately a little fewer than 6.9% of our portfolio in the S & P 500.
One of the reasons why the plan has done well is because of our over allocation to domestic equity.
Mr. Albert made a motion to allocate up to $50 million to Mason Capital. (Trustee) Mr. Stagliano seconded it. There
was no discussion. All were in favor. There were no oppositions or abstentions. The motion passed.
1. Invest in funds based on past performance, even though this is no guarantee of future performance.
2. Invest in hedge funds that go both long and short, even though most of them never beat the S&P and they
charge high fees. (During the FY 2012 being discussed, the pension fund returned 12.8%, while the S&P
was up over 20%).
3. Assent to motions without discussion to remain “team players.” (Groupthink)
4. Above all, don’t invest in anything that might help the local community!
“A hedge fund based on New York's Park Avenue that failed
to deliver the profits that Pennsylvania's state pension
system had been counting on has decided to cut its losses
and shut down - even after the state begged it to try again.
The Pennsylvania State Employees' Retirement System
(SERS) gave New York-based Tiger Management $250
million in 2012, expecting Tiger's genius investors would
generate 8 to 12 percent annual profits. That would be $20
million to $30 million a year, without the usual up-and-down
volatility of stock investments.
But instead of performing to hype, Tiger's custom-built Tiger Keystone Partners portfolio lost
$1 million in its first year. One of Tiger's managers bet on gold, which fell, more than wiping out
the profits its other managers made from the rising stock market…The system has about $26
billion invested, more than $17 billion short of its target if it is to keep paying all the pensions it
owes. It can't afford losses.”
Tiger lost money in a year (2012) when the S&P rose by 13%. Most S&P index funds charge <0.2%
Swell. I feel safer already, don't you?
Do managed investments outperform benchmarks
like the S&P? Well, maybe on a risk-adjusted basis, or
maybe not. But not on an absolute basis, with strict
City of Philadelphia Board of Pensions and
What about the safest kinds of investments?
Breakdown of Non-Pension City Fund
Investments (in thousands)
City investments in U.S. Government Securities or Corporate Bonds
<1 year: $ 159,819
1-3 years: $1,705,906
“The City’s policy to limit credit risks is to invest in US Government securities
(11.26%) or US Government Agency obligations (13.50%). The US
Government Agency obligations must be rated AAA by Standard & Poor’s Corp
or Aaa by Moody’s Investor Services.” – page 48
Question: Could an investment of some of these funds in a Public Bank meet
the city’s ratings policy for safety?
Standard & Poor's (S&P) maintained Bank of North Dakota's (BND) credit ratings in its
latest review of the Bank released July 23, 2013. Its long-term issuer credit rating
remained "AA-" and its short-term issuer credit rating to "A-1+” http://banknd.nd.gov/financials_and_compliance/credit_rating.html
Proper risk analysis should include more than that for the BND and should account for
the community banks. North Dakota has not had a bank failure in over 20 years, while
nationwide, there have been 517 through the end of Sept, 2013, since 2000, says the
cash-strapped FDIC which has to pick up the pieces:
Five years later, Buffett's zero-effort, pin-the-tail-on-the-stock-market
portfolio is up 8.69 percent total. Protégé's numbers are comical in
comparison; all those superminds came up with a 0.13 percent increase over
five long years, meaning Buffett is beating the hedgies by nearly nine points
without lifting a finger.”
The 2012 Philadelphia CAFR lists 8 Philadelphia Agencies
With Separate Investment Portfolios, reported apart from
the financial information presented for the primary
government (page 12), in thousands (page 36):
Total assets, excluding capital
Philadelphia Gas Works
Philadelphia Redevelopment Authority
Philadelphia Parking Authority
School District of Philadelphia
Community College of Philadelphia
Community Behavioral Health, Inc.
Delaware River Waterfront Corporation
Philadelphia Authority for Industrial Development
What does the repeated shutdown of the federal
government (closed as of October 1, 2013….again) do to
the ratings of Government Securities (Treasuries)?
What about the impending debt ceiling October 17?
Are Treasuries still really AAA or Aaa? Is anything?
Additional Investment Sources in CAFR 2012
Additional Investment Pools in CAFR 2012 (continued)
In thousands. Capital Assets not listed
Governmental Funds - Page 26
In thousands - Capital Assets not listed
Governmental Activities & Business Type
Cash on Deposit and on Hand
8 Agency Component
Equity in Pooled Cash and Investments
Equity in Treasurer's Account
Due from Component Units
Due from Primary Government
Amounts Held by Fiscal Agent
Notes Receivable - Net
Interest and Dividends Receivable
Accounts Receivable - Net
Due from Other Governments - Net
Current Assets (includes $195,634 in Equity in Treasurer’s Account)
Deferred Outflow – Derivative Instruments, Non-Current Assets (Restricted)
(includes $862,766 in Treasurer’s Account)
Non-major governmental fund (Combined) – page 123
Debt Service, Capital Improvement, Permanent Funds Total
Combining Statement of Fiduciary Assets - Page 126
Gas Works Retirement Reserve Fund Total
Municipal Pension Fund Total
Enterprise Funds: Water & Sewer, Aviation, Industrial & Commercial Development – page 31
Deferred Outflow - Derivative Instruments
Restricted Assets: Cash and Cash Equivalents
Restricted Assets: Other Assets
Enterprise Funds + Non-major Gov. Fund + Combining Statement of Fiduciary Net Assets: $6,941,785
Gov’t Activities/Business Type Activities + Component Units (previous page): $5,500,161
Grand Total of Governmental/Bus Activities, Enterprise Funds, and Fiduciary Assets: $12,441,946
Total of Governmental Activities & Business Type Activities + Component Units = $5,500,161
Note: Asset classes have various restrictions, penalties, and other factors affecting reallocation
strategies using a Public Bank. What are these and how easy is it to change them?
Capital Assets are not listed since they cannot be used to
fund a public bank. I don’t mean to imply that money
could simply be swapped from certain investments into a
public bank. However, two of the biggest categories –
Treasurer’s Accounts and Restricted Assets – are often
highly liquid pools of cash and short-term investments,
which could be reinvested elsewhere at will, or through a
simple change in the law.
Management fees for pension
Standard fund management fees – there are >100 investment
managers paid by the pension board! Are there too many cooks?
Broker fees or trading costs
Reporting fees to JP Morgan for “City of Philadelphia Municipal
Pension Fund Excess Return Report” that lists pension fund
What other fees are there? Hedge fund 2 and 20? – 2% for
Why A Public Bank?
“showing up” and 20% of any profits? Fund expenses? Fees
states pay for withdrawing from certain hedge funds?
Banks with low levels of loans to assets, like JPMorgan Chase & Co. (JPM - Free
JPMorgan Stock Report), where loans are 31% of assets, have more diversified
sources of revenue, including from investment banking and asset management.
“It seems likely that larger, mostly out of state, banks were the big loan generators
for the oil and gas exploration companies as they ramped up operations in the
state; thus the effect on smaller, in-state banks (the BND’s target audience) was
A typical Megabank like
JP Morgan has just a
31% Loan to Asset ratio
– less than ½ of what
ND’s community banks
have. Large banks
don’t make many loans!
Substitute “City” for “State” and add community banks in
between City Bank and City Projects. Don’t forget
community banks! In North Dakota, there hasn’t been a
bank failure in over 20 years. Nationwide, there have
been over 500 bank failures just since 2000 (FDIC).
Public Banks support community banks! Which system is
“CSI analysis shows that banks in North Dakota reduced
lending 33%-45% less than comparable states, and we
believe that this is in no small part due to the stabilizing
effects of its state bank.”
Center for State Innovation - State Bank Legislative
Guide, pg. 59
Learning from the example of the Bank
of North Dakota
Standard & Poor's (S&P) maintained Bank of North Dakota's (BND) credit ratings in
its latest review of the Bank released July 23, 2013. Its long-term issuer credit rating
remained "AA-" and its short-term issuer credit rating to "A-1+” http://banknd.nd.gov/financials_and_compliance/credit_rating.html
Proper risk analysis should include more than that for the Public Bank itself.
North Dakota has not had a bank failure in over 20 years, while there have been 517
bank failures through the end of Sept, 2013 nationwide since 2000, says the cashstrapped FDIC which has to pick up the pieces:
What about “key man” risk? What is the risk of key executives leaving and what does
that portend for the safety of the bank? Maybe this is an over-rated fear. While Jamie
Dimon makes millions running JP Morgan Chase, the president of the Bank of North
Dakota – a Civil Servant - makes less than $300 thousand a year. Which is the safer,
better-run bank? Well, JP Morgan recently paid over a billion dollars in fines related
to multiple government agency Civil violations (not criminal…so far). The BND has
never been found guilty of securities or bank fraud.
What are we paying for?
Other Municipalities are Investigating
alternate CAFR Investment strategies
Detroit, MI and Stockton, CA are in bankruptcy proceedings. Funding and
outlays from pensions and agencies will be
cut, yet their CAFRs contain billions.
See Detroit is Not Broke:
22 States* are considering some form
of State Banking Legislation – and many
municipalities are too. Many of these
proposals look to fund a Public Bank with
By law, all taxes from North Dakota and
the Chickasaw Indian Nation Banc2 in
Oklahoma, go first to the Public Banks.
Existing Public Banks in Green:
North Dakota: Bank of North Dakota
Oklahoma: Chickasaw-owned Bank2 of Oklahoma City.
Is it a better fiscal solution for Philadelphia to reallocate some CAFR Funds
into a Public Bank?
* http://www.nytimes.com/roomfordebate/2013/10/01/should-states-operate-public-banks/many-states-see-the-potential-of-public-banking - citing National
Conference of State Legislatures
The biggest banks are
now even bigger than
Are they still Too Big To
Fail…or will they
actually Fail next time?
The operations of the TBTF
banks have been compared
to a Casino, but this is
unfair…to Casinos! In a
Casino, you have consistent
rules, and if you go bust,
you don’t get bailed out, you
get thrown out.
Does anyone still believe the money center banks
are a safe place to store the public’s money?
From the Office of the Comptroller of the Currency:
Just in case you have forgotten what kinds of things the
TBTF banks were speculating upon…Note the multitrillion dollar notional value of derivatives of the top 8
banks trading in that space. Don’t forget to add 6 zeros.
Source: Office of the Comptroller of the Currency, 2 qtr,
2012 report: http://www.occ.treas.gov/topics/capitalmarkets/financial-markets/trading/derivatives/
The TOTAL size of the Derivatives market? $1.2
Think about this the next time a large commercial bank
says there’s no need for a Public Bank because they
have “everything under control.” Where do you think
the state’s money is safer?