How Philadelphia can turn $12.4 billion it already has to the public interest by forming a Public Bank

1. No More Detroits: The Philadelphia Public Bank
Solution
Saturday, October 12 / 8:30 AM
The Arch Street United Methodist Church
50 North Broad St.
Philadelphia, PA
Using Existing Government Funding to create a Public Bank in Philadelphia
Presented By:
Scott Baker
SSBAKER305@YAHOO.COM

3. 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!)
CAFR sources:
http://www.phila.gov/investor/CAFR.html and
http://www.phila.gov/investor/Financial_Reports.html
* As of 2007: http://cafr1.com

4. 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….
 Revenue Bonds
The City oversees the issuance of revenue bonds for the Water and Sewer
Department, the Aviation Department, and Philadelphia Gas Works (PGW).
* Related authorities include 8 separate entities we will discuss later

5. Philadelphia Bonds, rated by Moody’s, Standard &
Poor’s, and Fitch (page 23):
Bond Type
Moody’s
Investor Service
Standard &
Poor’s
Corporation
Fitch IBCA
General Obligation Bonds
A2
BBB+
A-
Water Revenue Bonds
A1
A
A+
Aviation Revenue Bonds
A2
A+
A
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 $79.8m.
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?

6. 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?
Counter-cyclical?
Able to provide consistent returns?
Supportive of the local community/job-creation?
Fiduciarily responsible?
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?

7. Philadelphia CAFR Investment holdings – as of June, 2012
(not including 8 separately reporting agencies)
Breakdown by investment type on CAFR – page 47: (amounts in thousands)
Classifications
Corporate Equities
Fair Value
% of Total
1,745,706
27.29%
Corporate Bonds
900,314
14.07%
U.S. Government Agency Securities
863,478
13.50%
Miscellaneous - Limited Partnership
739,073
11.55%
U.S. Government Securities
720,264
11.26%
Other Bonds and Investments
421,599
6.59%
Mutual Funds
361,789
5.66%
Commercial Paper
309,068
4.83%
Short-Term Investment Pools
257,360
4.02%
Collateralized Mortgage Obligations
52,973
0.83%
Financial Agreement
21,047
0.33%
Certificate of Deposit
5,000
0.08%
Total
$6,397,670
100.00%

8. Partial Breakdown of Pension Fund Investments. What
kinds of risks are there?
2 Examples:
•
Equity Securities subject to Foreign Currency Risk (in thousands of USD) – page 49
Currency
Fair Value
Euro Currency
135,856 22.14%
Japanese Yen
87,656 14.28%
Pound Sterling
97,963 15.96%
Australian Dollar
22,324
3.64%
All Others
269,861 43.98%
Total:
$613,660 100.00%
•
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!

9. What about hedge funds?
Is investing in hedge funds safe and prudent?
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.
To Recap:
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.
4.
Assent to motions without discussion to remain “team players.” (Groupthink)
Above all, don’t invest in anything that might help the local community!
Swell. I feel safer already, don't you?

10. From the Philadelphia Inquirer:
Philly Deals: Hedge fund loses money for Pa.*
“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%
* http://www.philly.com/philly/business/20131006_PhillyDeals__Hedge_fund_loses_money_for_Pa__pension__then_closes.html

11. 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
Total:
$1,865,725
“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 cashstrapped FDIC which has to pick up the pieces:
http://www.fdic.gov/bank/individual/failed/banklist.html

12. 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):
Government Entity
Total assets, excluding
capital
Philadelphia Gas Works
$708,391
Philadelphia Redevelopment Authority
$196,491
Philadelphia Parking Authority
$171,747
School District of Philadelphia
$635,492
Community College of Philadelphia
$63,537
Community Behavioral Health, Inc.
$88,792
Delaware River Waterfront Corporation
$11,913
Philadelphia Authority for Industrial Development
Total
$125,644
$2,001,997

13. Additional Investment Sources in CAFR 2012
In thousands. Capital Assets not listed
Governmental Funds - Page 26
Assets
Governmental Activities & Business Type
Activities
Cash on Deposit and on Hand
8 Agency Component
Units
82,679
310,248
0
40,022
Equity in Treasurer's Account
927,436
0
Investments
109,377
112,841
69,246
0
Due from Primary Government
0
69,617
Amounts Held by Fiscal Agent
56,965
109,544
0
34,324
490,998
335,973
1,440
20,438
459,647
113,670
47,316
118,398
4,295
215,406
Deferred Outflow - Derivative Instruments
144,229
0
Restricted Assets: Cash and Cash Equivalents
241,769
211,148
Restricted Assets: Other Assets
862,766
310,368
$3,498,164
$2,001,997
Equity in Pooled Cash and Investments
Due from Component Units
Notes Receivable - Net
Accounts Receivable - Net
Interest and Dividends Receivable
Due from Other Governments - Net
Inventories
Other Assets
Totals
Total of Governmental Activities & Business Type Activities + Component Units = $5,500,161

14. Additional Investment Pools in CAFR 2012 (continued)
In thousands - Capital Assets not listed
Enterprise Funds: Water & Sewer, Aviation, Industrial & Commercial Development – page 31
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
Totals
$381,811
$1,104,535
Totals
$418,694
Totals
$445,868
$4,590,877
Enterprise Funds + Non-major Gov. Fund + Combining Statement of Fiduciary Net Assets: $6,9 41,785
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
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?

15. Management fees for pension
Investments
 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 returns.
 What other fees are there? Hedge fund 2 and 20? – 2% for “showing
up” and 20% of any profits? Fund expenses? Fees states pay for
withdrawing from certain hedge funds?

17. (Interest)
Dividends
Community banks

18. 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!

19. 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 cash-strapped FDIC
which has to pick up the pieces: http://www.fdic.gov/bank/individual/failed/banklist.html
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?

20. 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:
http://www.opednews.com/articles/Detroit-is-Not-Broke-byScott-Baker-130805-986.html
 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 CAFR funds.
•
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-publicbanking - citing National Conference of State Legislatures

21. The biggest banks are
now even bigger than
ever.
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.