Brief Outline of the Rationale, Creation, and Benefits of a
Municipal Bank
Prepared for
A Progressive Vision for Municipal Finance
A roundtable discussion about reimagining the relationship between local
governments and Wall Street
Karl Beitel
Public Bank Project
(Supported in part by a grant from the Ford Foundation Metropolitan
Opportunities Unit)
Vision and rationale: why create the municipal bank?
Cities have financial resources currently held as deposits in commercial banking
institutions and invested in the money and capital markets that could be recaptured by a
municipal bank and redirected towards progressive public purposes. A municipal bank
would offer significant tools to local governments seeking to implement more equitable
forms of urban development. A municipal bank would be a powerful tool for addressing
racial and class income disparities, and for spurring targeted neighborhood development
initiatives. Municipals banks could also be used to finance city general obligation bonds,
allowing funds currently paid to holders of general obligation bonds to be recaptured and
channeled back into local investments.
Of particular significance is the fact that municipal banks would be able to support largerscale public investments without necessitating any increase in local taxes. A municipal
bank is a powerful means for addressing the constraints facing local policy makers, who
must often sacrifice good ideas to the grim realities of often-limited local revenue
sources.
In the broadest sense, municipal banking is critical aspect of emerging efforts to create
locally based, democratic, alternative to the current system of Wall Street dominated
finance. Municipal banks are premised on a vision of a more democratic, accountable,
and transparent system of finance, and one that sees government as a source of both
financial innovation and social betterment. It offers a means to reclaim local control over
public financial resources, and a means for transforming and re-invigorating the
relationship between citizens and local governments. We see municipal banks as part of a
long lineage in the U.S. of progressive, popular democratic initiatives.
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How can a municipal bank be created?
Creating a bank would require either a charter amendment or a City Council ordinance.
In some cities, it may be possible to establish the bank through executive action, coupled
with supporting fiscal appropriations. To insure hardwiring of policy goals and public
purposes, and to enhance the democratic legitimacy of the bank, where feasible the
Charter Amendment is the preferred alternative.
How would the bank be owned and governed?
The municipal government could either wholly or partly own the municipal bank. Initial
capitalization of the bank would occur through either a one-time appropriation out of the
General Fund, or through the transfer of surpluses from the investment pool, or both. In
addition, the bank could raise capital from other investors. The municipality would own
and exercise all voting shares, and would be the sole entity able to vote in elections of the
Board of Directors. This will insure full retention of sole powers of direction and control.
The bank would be incorporated as an independent state-chartered corporate banking
entity, with an independent Board of Directors. The Board would hire and oversee a top
management team responsible for all aspects of ongoing business operations. Once
created, a municipal bank would not require any further General Fund allocations, and
would operate wholly independently of the annual appropriation process.
How would the lending operations of the bank be funded?
The bank would be funded through deposits from local government entities, nonprofits,
pension funds, and through the issue various types of short-term debt issued by the bank
and financed through purchases by City Treasurers using surpluses in the city investment
pool.1 Such financing would not involve any encumbrance of the city general fund, or
any liability to depositor and other investors in the bank. These funds would then be used
to make a variety of locally targeted loans and investments. Options include funding new
general obligation bonds, financing refunding bonds, participation loans in partnership
with local credit unions, longer-term lending for affordable housing and infrastructure
development, and support for economic development initiatives directed towards lowincome neighborhoods.
Why do we need a public bank? What are the benefits?
A municipal bank would have financial powers currently unavailable to cities. The ability
to take deposits, to fund city general obligation bonds, and make a variety of loans are
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Most cities have significant investment pools, or surpluses accumulated over many years, that are placed
into various types of securities and financial investments. For example, Minneapolis has over $650 million
in such investment, while San Francisco has slightly over $7 billion in pooled funds under management by
the City Treasurer. Most of these funds are currently held in U.S. government securities and the debt of
various federal agencies. The bank could capture some of these funds through the issue of CDs, banker’s
acceptances, medium term notes, and repos purchased using funds in city investment pools.
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capacities that are simply not available at present to city governments, or through present
local lending, affordable housing, economic development programs operated by local
authorities.
What are the economic and social benefits to city governments of a municipal bank?
A municipal bank would allow cities to exercise greater control over the trajectory of
urban and regional development. Many municipalities today have few options for
implementing development policy beyond tying access to development rights to various
concessions wrung from private developers.2 A municipal bank would allow cities to
contemplate how to achieve progressive policy goals independently of private investment
through the bank’s ability to support large-scale funding initiatives, such as infrastructure
loans and affordable housing development. A municipal bank would similarly allow
cities to make targeted sector- and neighborhood-specific investments. The effect will be
to ease the current limits on local policy initiative created by exclusive reliance on private
sources of long-term development finance. A municipal bank would also offset, in part,
the fiscal constraints that have been imposed on municipalities by long-term reductions in
funding for HUD and other federal urban programs.
Some benefits include:

Supporting targeted local economic development, addressing structural
unemployment, and expanding access to financial services.

Financing general obligation bonds, thereby allowing the bank to recapture
monies currently paid to ‘outside’ investors and redirect these funds back into
local infrastructure and affordable housing investment.

The bank could be a source of savings due to the “in-housing” of various
underwriting functions currently contracted out to Wall Street.
Most significantly, a municipal bank could provide all these benefits without any increase
in local taxes.
How can a Bank help low-income populations and neighborhoods? Can a municipal
bank be a tool for achieving social justice?
There are several ways a municipal bank can address problems of inequality and social
exclusion of those living in low-income, working class neighborhoods. One, it can help
expand access to banking services for those underserved by existing banking institutions.
The bank could be a source of mortgage re-financing for households facing foreclosure
due to predatory lending. A municipal bank can support local economic development
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Examples include negotiation of community benefit agreements, linkage fees to offset increased costs of
providing additional public service to support private development, and conditionalities such as
inclusionary housing requirements.
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targeted towards improving economic opportunities in low-income neighborhoods, and
meeting needs for affordable housing.
In addition, the bank can be constituted to enhance the voice of ordinary residents in
oversight and direction of public sector resources – for instance, through community
member’s appointment to the Board of Directors; and community citizen and
neighborhood councils that would provide channels for ongoing consultation to insure
programs are actually providing sought after benefits to local residents.
What about the potential for conflicts of interest and manipulation for political
purposes?
Legal incorporation as a state-charted banking entity, coupled with the fact that the Bank
has an independent Board of Directors and full operational autonomy, would limit the
ability of elected officials to use the bank to fund “pet projects” as a form of political
patronage. This mitigates any potential conflict of interest.
How will fulfillment of these goals be guaranteed? What prevents the bank from
being taken over by “outside” special interests?
The Bank would have explicit statements of social policy goals and public purposes set
forth in its founding documents (the Articles of Incorporation, Bylaws, and Charter
Amendment). The founding documents would allow for specification of rules pertaining
to areas such as ownership and governance, mechanisms to insure accountability to the
public, and allowable types of loans and investments. So established, the bank would
operate according to a public mandate that could not be easily subverted.
Additional Information
More detailed documents outlining various legal issues, means of achieving conformity
with various federal, state, and local regulatory codes, compliance with federal and stat
banking law and codes, incorporation, and overview of prospective business operations
and funding structures of municipal banks will be available from the Public Bank Project.
Please contact Karl Beitel, Director, Public Bank Project
Karl Beitel
kbeitel@earthlink.net
(510) 220 0090
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