COUNCIL OF THE CITY OF PHILADELPHIA COMMITTEE ON COMMERCE AND ECONOMIC DEVELOPMENT - - - Room 400, City Hall Philadelphia, Pennsylvania Thursday, September 27, 2007 1:10 p.m. - - - PRESENT: COUNCILMAN W. WILSON GOODE, JR., CHAIR COUNCILMAN FRANK DiCICCO COUNCILWOMAN CAROL ANN CAMPBELL COUNCILMAN DARRELL L. CLARKE COUNCILMAN JUAN RAMOS COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO RESOLUTION 070601 - Resolution authorizing the Committee on Commerce and Economic Development to hold hearings on the study of lending disparities recently released by the City Treasurer. - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 2
Good afternoon. This hearing is called to order. This is a public hearing of the Commerce and Economic Development Committee on Resolution No. 070601. My name is W. Wilson Goode, Jr., Chair of this Committee. We do not need a quorum for this hearing, although I expect other members to show up. To my left is Councilman Rizzo, also Councilwoman Blondell Reynolds Brown. To my right is Councilman Juan Ramos, Councilman Frank DiCicco. The title of the Resolution No. 16 070601, authorizing the Committee on Commerce and Economic Development to hold hearings on the study of lending disparities recently released by the City Treasurer. Our first panel will be John Nacchio, City Treasurer, as well as Econsult. You can please approach the witness table. Please state your name for the 3 9/27/07 - COMMERCE - RES. 070601 record and proceed with your testimony.
Yes. Good afternoon, Councilman. I am John Nacchio, the Treasurer for the City of Philadelphia. I'll read my written testimony first. Good day, Mr. Chairman and members of the Committee. I am John Nacchio, the City Treasurer for Philadelphia. I appreciate the opportunity to testify before you on matters related to financial institutions that are authorized to be City depositories. The City of Philadelphia has taken steps over the last 15 years to ensure that the institutions selected to be authorized depositories of City funds provide credit in a fair and unbiased manner to the citizens of Philadelphia. This is in addition to the various treasury and investment guidelines captured in the City's Philadelphia Code and the adoption of the City's Investment 4 9/27/07 - COMMERCE - RES. 070601 Policy for management of the City's cash. It has been recognized that the strategic economic viability and competitiveness that City depositories can invoke are vital to strengthening and building opportunities for not just some but all Philadelphians. The City's list of authorized depositories represents 10 both a cross section of the largest banks 11 in Philadelphia and a diverse mix of institutions. However, it is significant to note that depositories only represent one portion of the financial institutions that conduct lending business in Philadelphia. These other business entities also hold a huge potential for the positive impacts to stabilize and grow the City's tax base, add to the quality of life for the citizens and to support the Philadelphia region's viability and competitiveness in local and world markets. Particularly in response to City Council's Resolution No. 051161, the 5 9/27/07 - COMMERCE - RES. 070601 Office of the City Treasurer has commissioned its first annual study of lending disparities of City depositories. This completed report studies 2005 data and was delivered to the Mayor and to the City Council. The contents of the annual report commissions a comprehensive analysis of home lending, small business lending and branching patterns, as well as the measurement of the community reinvestment and fair lending performance of banks receiving City deposits. In support of this subject, the City Treasurer's Office website at Phila.gov has posted the 2005 report and both the prior reports that were independently commissioned by City Council for 2003 and 2004. Further, for the first time, the depository responses for annual community reinvestment goals for 2007 are posted to the website that discloses the authorized depositories' commitments to the City of Philadelphia. The purpose of examining City 6 9/27/07 - COMMERCE - RES. 070601 depositories serves both for compliance and policy discussion and development. Econsult Corporation and MFR Consultants authored the 2005 report. They are available here today to provide testimony pertaining to the specifics of the report. And that would conclude my written testimony.
Thank you for your testimony, Mr. Nacchio. I have several questions for you before Econsult presents the report. The first being, in your testimony you make the statement, "The City of Philadelphia has taken steps over the last 15 years to ensure the institutions selected to be authorized depositories of City funds provide credit in a fair and unbiased manner to the citizens of Philadelphia." Can you describe those steps taken over the last 15 years?
Yes. In my research of the City's process, in the 7 9/27/07 - COMMERCE - RES. 070601 early '90s the Finance Director's Office did begin to prepare a report to analyze the depositories' lending practices, and it seemed like it was probably 1992, 3, 4 and 5, as best that I can determine. Those were initial steps, but certainly the larger strides were taken in the last four years through City Council.
I was asking you to be a bit more specific. I'm aware of those reports that were done in the early '90s. What came of those reports? Why were the reports discontinued? Were there any policy changes related to the reports? How were the reports used?
I have to say I was unable to determine why the reports had stopped, except for the staff's participation or interest in producing the report.
How exactly can you make the statement, then, that the City of Philadelphia has taken steps over the last 15 years to ensure the 8 9/27/07 - COMMERCE - RES. 070601 institutions selected to be authorized depositories of City funds provide credit in a fair and unbiased manner to the citizens of Philadelphia? That's not really a fair statement if you just found some reports in the office from the early '90s.
Well, it looked to me as though, without having a person to talk to, the institutional knowledge there was not to be accessed, but it was an indication to me that there was an effort to disclose the information so that it would be used to encourage or to --
As I said, I'm aware of the reports, but let me put it a bit more bluntly.
And that's 9 9/27/07 - COMMERCE - RES. 070601 all they were doing, was sitting on the shelf.
To the best of my knowledge, they were sitting on the shelf.
Thank you. Let's get back to this report. Did you read the study?
I believe that Econsult and MFR Consultants did a very fine job in presenting the information. It's a very difficult subject to ascertain specifics, and I think in this presentation, it was a good presentation.
Certainly I agreed with the fact that it was part of 10 9/27/07 - COMMERCE - RES. 070601 the disciplines that I asked him to do as part of the report, was to provide some policy recommendations, and I think the ones that they came up with are leading in the right direction.
Did you specifically agree with the recommendations? For instance, did you agree with the recommendation that there should be a reward and punishment system for fair lending practices?
Based on my observation of other cities, a direct relationship to using a penalty, I'm not sure that that was always the productive way. I mean, if you talk about a sanction such as a penalty fee, that might be a possibility, but withdrawing funds from deposits may not always be the --
Mr. Nacchio, I'm speaking about specific recommendations in the report. Let me read from the report. 11 9/27/07 - COMMERCE - RES. 070601
"The City should use the annual rankings to identify underperforming depositories for possible sanctions if performance does not improve." Do you agree with that recommendation? Yes or no?
"The City should use the annual rankings to identify underperforming depositories for possible sanctions if performance does not improve." Do you agree with that recommendation or not?
I would say I cannot agree with that from the basis of the report, which is an independent report, that the rankings should be taken as the sole decision-making item, and the report is informational.
The report 12 9/27/07 - COMMERCE - RES. 070601 is informational. There were two prior studies, but I'm going to try one more time. This is a very specific recommendation. "The City should use the annual rankings" -- 2003, 2004, now we have 2005, we're waiting 2006 -- "to identify underperforming depositories for possible sanctions if performance does not improve." Do you agree with that or don't agree with it? I'm not asking what sanctions should be used. I'm not asking whether it should be the ultimate sanction. I'm asking whether you agree that there should be some sanctions if depositories are still underperforming after several years, 2003, 2004, 2005, 2006.
The best I can respond to that is that there would be no 22 basis for the decision-making to make that possible even if I did agree with the recommendation.
I don't 13 9/27/07 - COMMERCE - RES. 070601 understand your answer.
There's nothing in the City's Philadelphia Code and/or the procedures of the City that would permit taking a sanction just based on a ranking. There's nothing specific that says that a ranking determines sanctions.
What does determine where you put our money? That's a hard question, I guess.
Presently it's past practice, and the accounts that are open are the accounts that have been open.
So you've made no decisions about where you put our money?
During the time that I've been City Treasurer since 2004, I would say none of them are of -- they're just cosmetic or hygiene kind of.
Let me get to the second recommendation. 14 9/27/07 - COMMERCE - RES. 070601
Let me get to the second recommendation by Econsult. "Conversely, banks with better performance should be rewarded with a larger share of the City's financial transactions." Do you agree with that recommendation?
I would say that there's a possibility that it may influence the bank's behavior based on who gets the deposits, but I don't believe on my observation on the national level that other cities were successful in making the direct relationship and they've used other programs which are more direct rather than just deposits, and one of them is the link deposits. You can find that in the City of Boston, New York and Chicago where a specific amount of city funds are deposited and where bank or banks are matching the 15 9/27/07 - COMMERCE - RES. 070601 activity based on that deposit.
Let me get to a third recommendation by Econsult. Do you agree with Econsult's recommendation about the creation of banking development districts to encourage branching in underserved areas?
I believe that would be a good one and the City should move in that direction.
How does that not relate to the first two recommendations?
I'm going to say the first two are more in reference about the City Treasurer's Office and how it operates and the decisions upon which it can validate or certify as being appropriate for actions; whereas, this one is related to policy, and the policy 16 9/27/07 - COMMERCE - RES. 070601 requires the action of policymakers, which is the City Council and the Mayor.
So how would the City Treasurer go about developing banking development districts?
I'm going to say the City Treasurer's Office could not under the current description of the office. I would say that more would fall under the City Commerce Director.
Have you discussed any of these recommendations with the Finance Director?
The City Finance Director has a copy of the report and he has not discussed them with me.
Have all of 17 9/27/07 - COMMERCE - RES. 070601 the City depositories submitted strategic plans to address disparities found in the study?
They have responded, yes, in writing, and those copies have been shared.
Have all the City depositories submitted strategic plans to address disparities found in the study?
I'd have to check, but off the top of my head, those are the only two I recall.
And Bank of 18 9/27/07 - COMMERCE - RES. 070601 America. I'm sorry.
For those depositories that have not submitted strategic plans, are they not out of compliance with The Philadelphia Code?
I haven't gotten to the point where I've been able to determine whether that's true or not, but I have asked them to comply as part of good business practice. And I have not heard from --
Essentially, The Philadelphia Code says if they're not in compliance, they cannot receive any deposits. Any deposits which they have have to be returned until they are in compliance. Is that not what the City Code says?
So if they're not in compliance, they're not in compliance.
Well, the part that's unclear to me is if the 19 9/27/07 - COMMERCE - RES. 070601 disparities mentioned require them to respond. And they haven't told me that they haven't responded because of that, but they haven't responded to either of my repeated requests.
You can make your own determinations with the aid of your consultant whether any of these institutions have disparities that are disclosed in the report, and if they have disparities disclosed in the report, then essentially they're supposed to submit strategic plans. That's what the Code says. And, in fact, you sent out a description of who should comply and how they should comply.
Right. I've asked for everyone to comply whether they felt as though they should comply or not, because I felt it was their responsibility as a City depository to respond to the City of Philadelphia since they're on the list of authorized depositories and have gone as far as to 20 9/27/07 - COMMERCE - RES. 070601 say that they wanted to have City deposits, that they should comply with all of the items.
You sent out this sheet, which says Office of the City Treasurer, Frequently Asked Questions, what is required, long-term strategic plan, guideline if disparities are disclosed, guideline if disparities are not disclosed. So you sent this out to those institutions that are authorized and you were expecting something back from each and every one of them.
So if you did not receive it, they are not in compliance; is that correct?
That's one conclusion. I haven't gotten that far with that part of it. 21 9/27/07 - COMMERCE - RES. 070601
Well, Councilman, as I explained to you, my staff is generally dedicated to treasury management. We don't have the depth of analysis provided in my office.
Well, the consultant did the study, but I don't have the consultant for that purpose. That would be helpful.
You put out a request for qualification or request for proposal with regard to payroll depositories?
Yes. An RFP for payroll has gone out in accordance with the ordinance requiring that the City Treasurer do an RFP for payroll deposits.
It's in the final 22 9/27/07 - COMMERCE - RES. 070601 stage.
A panel representing the Finance Department, the Computer Center and the Finance Director's Office was assembled. I was not a part of the committee directly.
What was your involvement in the process or what is your involvement in the process?
Well, I would say facilitating the side part of it, but at the end, product recommendation will be made to myself and the Finance Director.
Will you take into consideration the strategic 23 9/27/07 - COMMERCE - RES. 070601 plans on selecting which institutions should be authorized as payroll depositories?
I said will you take into consideration the submission of the strategic plans and what those strategic plans say related to disparities disclosed in these reports when you make a decision about who should be authorized as payroll depositories?
Yes. I'm going to say that the RFP was posted on June 8th. It closed August 6th. And in that process and of the RFP being posted, there's clear indication that CRA or CRG goals were an important part of their presentation and their submission, and it was integrated into the discussion and presentations that were required of those banks that submitted their request for the RFP proposals.
But my 24 9/27/07 - COMMERCE - RES. 070601 question was --
So the answer is yes, that you personally will take into consideration the strategic plans --
Well, sir, I want to avoid being personal about it saying that the RFP process -- has it weighted as part of the integrated --
I'm not asking about the process. I'm asking about the rest of the committee. I'm not asking about the Finance Director, because he's not here. I'm asking about your participation in the process.
Will you take into consideration lending 25 9/27/07 - COMMERCE - RES. 070601 disparities that were disclosed in this report and past reports and strategic plans that were supposed to be submitted to address those disparities in decision-making about who should be authorized as payroll depositories?
Well, I'm going to take that in two steps. The RFP process is independent of the compliance as being an authorized depository.
Actually, it's not. I wrote the payroll deposits legislation.
I'm going to take it in two steps. So the first step is that the RFP process is proceeding in that the community reinvestment goals has been fully integrated into the request of those who made their submissions and they know that it is being weighted and it is a weighted factor. Part of the ordinance does say that they must be authorized depositories 9/27/07 - COMMERCE - RES. 070601 in compliance and meet all the requirements. So that's going to be a secondary issue in the review of the finalists for the RFP.
So if they're not in compliance in terms of having submitted strategic plans, they can't quality as a payroll depository?
Okay. I'm glad you took away the word "possibility." Either you're in compliance or you're not in compliance.
We haven't gotten that far. We're in the final stages of doing that.
Right now I'm very happy to say that about 74 percent are direct deposits.
I'm looking 27 9/27/07 - COMMERCE - RES. 070601 for a number.
Because I started out when it was like 60, maybe 62. So we're up to 74 percent now.
We have a total of -- there's about 32,000 paychecks that go out. Not all of them are full time, part time.
I believe with the pensioners they're up to 84 percent. We only send out about 6,000 paper checks currently.
It's actually on par. I think there's 36,000 pensioners 28 9/27/07 - COMMERCE - RES. 070601 now. So we're probably talking 24,000, 25,000, -- I'm sorry -- 4
About 23,000 5 employees that have direct deposited 6 paychecks, but 25,000 pensioners have 7 direct deposited paychecks. So how many 8 employees and pensioners are affected by 9 your selection of payroll depositories? 10
Well, this is an 11 interesting subtlety in that pensioners 12 are not considered part of the payroll 13 deposits, because the Pension Board is 14 separate from the payroll system. 15
So the pensioners 18 are paid through a process handled by the 19 Pension Board. The City Treasurer has a 20 disbursement account upon which the 21 pensioners are paid from. 22
So how many 23 employees are affected by your selection 24 of the payroll depository? 25
Right now we're 29 9/27/07 - COMMERCE - RES. 070601 only looking at the payroll for the City of Philadelphia for active employees, which will be approximately 32,000 paid employees.
Should a payroll depository have to meet certain fair lending standards?
Should a payroll depository have to meet certain fair lending standards?
I'm going to say the answer to that question is, it's a balance. The first issue is treasury management and whether they can do the job.
That's not the question I'm asking you. Should a payroll depository have to meet certain fair lending standards?
It's a yes 30 9/27/07 - COMMERCE - RES. 070601 or no question for me.
Well, my responsibility is for the treasury management of the City of Philadelphia, that every City employee gets paid on time and that we keep our balances correct.
Actually, that's not correct, according to The Philadelphia Code, because I changed it. I changed The Philadelphia Code to include fair lending --
So your job is actually also defined by The Philadelphia Code.
But you know what I'm asking you. I'm asking you, should a payroll depository have to meet certain fair lending criteria? 31 9/27/07 - COMMERCE - RES. 070601
And I'm responding that it is not the primary consideration.
I already understand that. Should they have to meet any fair lending criteria?
Whatever it is that's in the Philadelphia City Code. We're to follow that.
The date is going to be available in September. So we're hopeful to have that report --
Not to my 32 9/27/07 - COMMERCE - RES. 070601 understanding. It's not available until September.
I mean September 30th. I'm sorry. The month is not over. I'm informed it just came out.
The date is available. So when will the next report be completed?
We're working for a target date of December, end of December, which has expedited over the last years.
Let me ask you the next and most important question. What do you view as the purpose for the next study or any of these studies?
Well, part of the response is that this is a new piece of business for the Treasurer's Office, and integrating it into the operation of the department is each and every day becoming more clear about how it plays a role in 33 9/27/07 - COMMERCE - RES. 070601 our decision-making. So I would say that the next report would help play a bigger role than the previous reports because it's now institutionalized as a piece of our business.
One, to encourage any of the depositories that have City deposits to do a better job and a better focus on their lending practices, because to my observation, it may not always be clear to the institution whether they're doing a good job or the job that we want them to do, and I think that this has brought it into focus.
You say the purpose of the report is to encourage them to do better?
Information like this, to my understanding, nationally is to have indicators so that people would have better practices in their banking and lending practices. 34 9/27/07 - COMMERCE - RES. 070601
Let me just ask you one last question again for the record. Should there be a reward and punishment system for fair lending performance?
Well, I'm going to say that's up to the policymakers and not to me as City Treasurer. I certainly take it into consideration and I think every institution --
What would your recommendation be to the next Administration? Should there be a reward and punishment system for fair lending performance?
Well, one of the things I think is an advisory board where the banks are joined together in some kind of committee where they supervise and report on this activity. The department -- I would say like in Boston, Boston has a very good reporting system about the program. So we have a report which is now being prepared by Econsult, 35 9/27/07 - COMMERCE - RES. 070601 but I think a report by the banks themselves about what their goals are and where they want to go and how well they're doing would be an approach that would include a reward and penalty system.
Explain to me what you just said. How would getting the banks to come together to examine their data create a reward and penalty system for them?
I'm going to take a look at -- the State of Pennsylvania has the Department of Banking. The City of Philadelphia doesn't. So on a state level, we have banking being supervised by a department that is solely dedicated to banking; whereas, in the Treasurer's operation, we're more concerned with the City's cash needs. So to have banking in Philadelphia more in focus, because, to my knowledge, there is no banking association in Philadelphia that's 36 9/27/07 - COMMERCE - RES. 070601 strictly Philadelphia. There's the Philadelphia --
Let me stop you. None of the fair lending/community reinvestment legislation deals with the entire banking market. It deals strictly with City depositories, those institutions authorized to receive City deposits. This Council does not have the authority to say where the money goes. We have the authority to determine who can receive the money, and then after we determine who can receive the money, it's then your job to determine where the money goes among those authorized City depositories. My question to you is, would you recommend to the next Administration that there be a reward and punishment system based upon fair lending performance? After reviewing the 2003 report, the 2004 report, the 2005 report and the 2006 report that will be done at the end of December, would you recommend 37 9/27/07 - COMMERCE - RES. 070601 that there be a reward and punishment system or not? That's a yes or no 4 question.
I am a positive guy and I say rewards are always better than punishment.
So you would not recommend a reward and punishment system?
I would say that it is best to organize the focus of the banking community. According to the Econsult report, only 12 percent of the lending is done by the depositories. So it would be in the best interest of the City of Philadelphia to leverage that 12 percent to the 100 percent of the entire marketplace in some fashion, and how we get there is probably in lots of different steps.
Mr. Nacchio, the City treasury is not some endless pot. It's a certain amount of money. So there actually is no way to reward 38 9/27/07 - COMMERCE - RES. 070601 without punishment, because if you're making deposits, if you're choosing institutions to invest in and if you're going to a reward, then you're taking it from somewhere. So would you or would you not recommend a reward and punishment system based upon fair lending practice?
I'm just going to use the models of other cities that they found the best approach is --
I'm not asking about other cities. I'm asking about this city. I'm asking in your role --
-- in your role as City Treasurer, would you recommend to the next Administration -- I already know this Administration is not going to do it. That's not the purpose of this hearing. The purpose of this hearing is not to discuss this 39 9/27/07 - COMMERCE - RES. 070601 Administration. The purpose of this hearing is to discuss this report as a transition document for the next Administration and to begin that discussion now and deal with the primary recommendation within this report, which is that there should be a reward and punishment system for fair lending/community reinvestment performance. Do you agree with that recommendation for the record? Yes or no? And would you make that recommendation to the next Administration?
Well, then the answer -- 40 9/27/07 - COMMERCE - RES. 070601
Do you believe in a reward and punishment system or not? Yes or no?
Thank you. Any questions from members of the Committee? Councilwoman Brown.
I was reviewing the report here now and looking to see if any consideration has been given to women as one of the many factors, and I see that is not the case.
Gender was one of the requirements that I asked the report to address, and it has been addressed in the report.
Specifically. 41 9/27/07 - COMMERCE - RES. 070601 Yes. Because I just want to say that on the Philadelphia website under the City Treasurer, I also put the guidelines that I requested for the report.
On my website, on Phila.gov, City Treasurer, I also posted there what I said that a report like this should contain. So since this is an independent report, what I did was just give a guideline to the subject matter, and gender was definitely one of the considerations, because I knew that was one of the concerns or issues of City Council in particular.