The issue of gender and how that is one of the factors considered with regards to how banking depositories -- 42 9/27/07 - COMMERCE - RES. 070601
It is with regard to home loans. It is not with regard to small business loans, which is how Mr. Nacchio should have answered. Small business lending is not tracked by gender.
Okay. So the next report is due when? Thank you, Mr. Chairman. The next report is due when?
We're hopeful to have it by the end of December based on the fact that Econsult did this study so they have a format to expedite the processing. So if the data is available now, they can start working towards that end.
Okay, then. Thank you. Thank you, Mr. Chairman. 43 9/27/07 - COMMERCE - RES. 070601
I do want to also add predatory lending was also a concern in the report.
Thank you, Councilman. Good afternoon. This question is somewhat unrelated, but in a way it is related, and it talks about location of lending institutions. And the reason why I say it's related to some degree is because the reality is if an institution is in a particular community, there's a likelihood that that person in that community would use that institution and establish a relationship usually just for purposes of cashing their check and then as they move along establishing those relationships, it would end up being probably home equity loans, things of that nature and, therefore, having some 44 9/27/07 - COMMERCE - RES. 070601 relationship to this discussion about lending practices. Is that in any way a part of the equation as you determine your policies associated with the depositories? And the reason I bring that up, because I'm from a particular section. In the Strawberry Mansion community I've actually had this conversation with a couple of the City depositories about the fact that in the Strawberry Mansion community where there's a significant number of residents, high home ownership as North Philadelphia goes, and there's not a single lending institution in that community, and I'm wondering as we make these decisions, do we take that into account also? And if we don't, would it be a possibility?
I want to say at every turn in my office with our authorized depositories I make it known to them what the City's objectives and 45 9/27/07 - COMMERCE - RES. 070601 concerns are about this subject and that they should work towards that end to incorporate into any strategic or marketing plans that they have about the location of branches.
But I do want to bring the point that we have depository-type institutions operating in the City of Philadelphia, which are banks, and you have non-depository kinds of entities that do loans, et cetera, which we don't have any input on that may be also operating in those areas.
Mr. Nacchio, I believe Councilman Clarke's question was whether a bank's branching patterns determines at all whether they will receive City deposits and how much they receive in City deposits and whether --
Well, certainly it was not a weighted factor in the past, but it is -- 46 9/27/07 - COMMERCE - RES. 070601
There are no 3 new factors. You said that everyone inherited the accounts and the business that they received, for the most part, and that people who used to get the business still get the business and you're not going to take fair lending into consideration, you're not going to take community reinvestment into consideration, you're also not going to take branching patterns into consideration.
I said all those things were being taken into consideration because they're a weighted factor in the RFP for payroll.
No, that's not what you said. You said that they were included in the RFP. You didn't say that you were going to take it into consideration.
Well, certainly in the universe of decision-making there's many factors that contribute to 47 9/27/07 - COMMERCE - RES. 070601 the final decision. Our primary one is the security of City funds.
And the honest answer to Councilman Clarke's question is, I don't care if there are no 7 banks in the parts of the district that need it the most, that doesn't make a difference in my decision-making about where the money is going to go. That's the honest answer to Councilman Clarke's question. I don't care if there are no 13 banks in North Philly, and where you have the money now in places where the depositories will not lend to is not going to change my mind about where the money goes.
Well, one of the approaches that the City of New York and New York state has done is to give real estate tax abatements to locations that are in those areas to encourage banks to locate in those areas.
He asked whether it weighs into your consideration 48 9/27/07 - COMMERCE - RES. 070601 of where to put the money. That's what he asked.
On a daily basis? It doesn't, because it only comes up in the process like the RFP for payroll.
It just made me think. Chairman Goode said that we create the authority of the depository. How do you decide -- how many depositories do we have today now?
If they had 49 9/27/07 - COMMERCE - RES. 070601 it, they keep it. Is that fair?
It's been a process over time which has led to the decision for these accounts to be kept at certain institutions.
So what you're telling me, if they had this much when there were four and now it's 11, they still have that same amount of money?
Well, the primary banks that the City does business with is Wachovia, PNC and Mellon Bank. So those are the primary three that we deal with. On that scale, Wachovia is the legacy bank of other institutions, which at the time were the largest institutions in the City of Philadelphia. To match the needs of the City of Philadelphia's cash management, you have to have an organization that can match the needs of the City. I mean, the delivery of the payroll is the -- 50 9/27/07 - COMMERCE - RES. 070601
Well, Mr. Nacchio, when you became City Treasurer, what percentage of City money was in Wachovia?
I would say on an average basis we have an average balance of only 50 million there. And I want to say as Treasurer --
My question was what percentage of City money was in Wachovia when you became City Treasurer.
Yeah, but this is a point that needs to be expressed very clearly, is that it is not the intent of any City Treasurer, including myself, to keep deposits at a bank.
I understand that. I didn't ask the dollar amount. I asked the percentage. I understand you shifted more money investments away from 51 9/27/07 - COMMERCE - RES. 070601 cash, which is a smart thing to do, but you still have money in banks that isn't just invested. So when you became City Treasurer, what percentage of City money was in Wachovia?
Other than saying that the highest percentage was, because payroll and vendor payments are processed through that.
Seventy-five percent sounds like a fair number, maybe 80 percent?
Well, there's a question there. It's the next largest percent. I would say -- I can tell you like $500 million of City electronic payments go through PNC. They don't go to Wachovia; they go through PNC. So that's $500 million. So I don't know how you judge that.
And the 52 9/27/07 - COMMERCE - RES. 070601 amount that Mellon has isn't really that significant?
That's the pension fund basically and we also had foster parents there, and a reorganization of making efficiencies for foster parents, which was a major concern and objective and initiative of my office, is to get that straightened out about foster parents being paid on time. That did get moved.
So those are the three depositories that you are used to doing business with. You still do more business with Wachovia than anyone else.
I'm going to say in addition to other City departments. So we have other City departments doing banking.
You still do business with Wachovia more than anyone else, then PNC and to some extent Mellon?
So Councilman Rizzo's question is, has that changed at all. The answer to that is probably no. 9
No. There's a benefit because the bundled banking of other departments, which do not come under the City Treasurer, are also included in the relationship of Wachovia.
We authorize a bank to become a depository. How do you decide how much then -- or do we have any banks that are depositories that you don't give anything to but they're authorized to be?
Well, the point is, we're trying to spread this around, I think, a little bit. Explain to me, a layman, other than the 54 9/27/07 - COMMERCE - RES. 070601 investment portfolio, how does a bank make money from the City of Philadelphia being a depository? If the money is moving in and out so quickly, how do they really make money?
I'm going to say certainly our objective -- and I've increased that since I've been there -- is to keep as little on deposit as possible, because we want to invest in an investment like a treasury, et cetera, and we get more interest earnings. So we've increased our interest earnings based on the fact we keep low deposits. A bank would prefer that you keep a deposit at the bank because then they can use that for lending, et cetera.
As a composite of 55 9/27/07 - COMMERCE - RES. 070601 all City departments banking with Wachovia, we may have on an average of $50 million a month that sits there.
So you have some with none. You've got others that have 75 percent of the action. Again, the fact that we just have that money parked in, I would assume, some interest-bearing account, right, or is it basically no interest at all on that money?
Well, they're called demand accounts, so they're basically checking accounts. So they're not there for savings. They're only there for processing payments and for monies to go in and out.
Some of them are interest-bearing and some of them are not. I'm going to say it's an initiative of my being City Treasurer is to get as many of those accounts back on the 56 9/27/07 - COMMERCE - RES. 070601 interest-bearing road as possible, because they haven't been on that road before.
Well, I would hope so. When I go shop for a bank account, I look for the highest -- Capital One just sent me a new money market that's paying five and a quarter percent. Well, guess what? I jumped right on that deal. I would hope you are doing the same thing, making sure that Wachovia with 50 million bucks is paying us some interest.
Well, I want to say the benefit on the other side is that the City does not then bear the cost of operating the account. So all the accounts have expenses. So instead of giving us interest earnings, we don't get charged for the expense of processing the account. So you have ACH expenditures, you have check payments, you have all those kinds of expenditures that a bank 57 9/27/07 - COMMERCE - RES. 070601 will charge you for the service that they provide. So instead of getting those charges, we may have a non-bearing interest account.
So does it balance out? Sometimes it balances out. Is it to the benefit of the bank sometimes? Yes. Is it to the benefit of the City sometimes? Yes. Do we need to look at it on a daily basis? Yes. We have to continue to do that.
I want to be clear with Chairman Goode's questions. Currently, there are only three banks that the City currently does business with, Wachovia, PNC and Mellon?
There are some City business not only -- because there's other banking done under City 58 9/27/07 - COMMERCE - RES. 070601 departments, but you can include the Commerce Bank as also another bank, and there are smaller bankings going on at Citizens, and I bank with United. So I have banking with United.
Yes. The rest of it would be just like minor, because it's up to a department. They can walk into any branch. As long as you've authorized them as an authorized depository, a department can walk up into any branch of those banks that are authorized and open up an account.
They can. So we're trying to get better control over that and organize it in a better way. 59 9/27/07 - COMMERCE - RES. 070601
Basically through information. I set up a user group, and me and my staff have had some periodic meetings. I call it M-Bucks. So I invited every custodian and person in a department who does banking or does banking related, to let them know that we have subjects that are interrelated. So we talk about fraud prevention and opening up a bank account and best practices, and that if you open a bank account, the signature card requires the City Treasurer to be on it, which is basically standard procedure for the Finance Department. So they lose sight of that, but bringing them together and talking to them has been really helpful and just communicating the subject matter and we get better cooperation. Because they'll ask, Where should we bank? Is it to our benefit to be with this bank or that bank?
And so to 60 9/27/07 - COMMERCE - RES. 070601 the issues that have brought us to the table today, would those factors be additional information you would share in the meetings you just described?
I'm going to say banking practices like lending practices and CRA?
I would say the type of staff would probably not be at that level that they would be interested in the subject that would determine what they do.
But it would determine my answer to them about my guidance about where they should bank.
Yes, because under the City Charter and et cetera, I'm not permitted to tell them what to do.
But I want to be the one with the information to guide them to best practices. So I've taken on that role as City Treasurer, to guide them through best practices.
And in your guidance, you have raised issues related to fair lending/community reinvestment?
I take to heart, Councilman, the concerns of City Council for disparities in lending, gender, immigrants and the subject matters that are brought before Council. Also, during the RFP process for payroll, we've brought up questions about the reentry program, which was not a part of the RFP, but we asked each of the submissions in their presentations to respond if they had any programs, et cetera, about it. So I do flow into the concerns.
Mr. Nacchio, what you said was that you can't tell other departments where to put their money. 62 9/27/07 - COMMERCE - RES. 070601
But you can offer them guidance. What Councilwoman Brown wanted to know, in offering them guidance on where to put their money, do you instruct them with regard to the fair lending/community reinvestment performance of those institutions? And my guess is the answer is no. 11
Because primarily it's the banking and treasury operation that guides as the first priority.
You tell them it's a safe place to put their money whether they lend fairly or not. That's what you tell them.
That would have to be correct, because my primary responsibility is the security of the City's cash. 63 9/27/07 - COMMERCE - RES. 070601
And you don't care about the fair lending/community reinvestment performance. You also don't care about the branching patterns.
Obviously I do care because I've expressed that more than once.
I take that back. I won't use the word "care." Does not enter into any of your decision-making about where to put taxpayers' money.
It has been integrated into the decision-making process.
But not into 64 9/27/07 - COMMERCE - RES. 070601 the decision-making. Because when you say that regardless of what we put in the process that at the end of the day the decision is made, you don't believe in a reward and punishment system for fair lending/community reinvestment performance, it means that you're going through the motions because we put things in The Philadelphia Code that are now law, but it really doesn't make a difference to you about where the taxpayer money is going to go.
Well, rather than saying that going through the motions, I've actually put it in the motion. So it's part of the process. Institutionalizing this is not an easy thing in the decision-making process when your primary responsibility is the security and safety of the City's cash, because we're taking a factor which is unrelated to security of the City's cash.
Are there 65 9/27/07 - COMMERCE - RES. 070601 other questions from members of the Committee of this particular witness at this time?
Yes. Define for me "institutionalizing." When you say "process," is there a manual that's like a standard operating procedure which has in it those factors that must be shared with department heads that inform and instruct them on the decisions they need to make with regards to selection of where they --
It hasn't gone that far, but I'm saying the RFP for the payroll process did include it as a weighted factor. On my web pages I have included now information that discloses the information with community reinvestment goals, this annual report and the whole subject matter as part of the dimension of consideration. At meetings that I have with depository banks it's one of the subjects that comes 66 9/27/07 - COMMERCE - RES. 070601 up and I ask them what are they doing, how are they improving, please inform us, keep us -- so it's always a subject before them as part of a concern or an issue.
So do they understand that now and going forward there is a penalty, there is a consequence that comes with not honoring the tenets of this legislation?
And as I was saying -- this is an honest answer -- there are big corporations and to digest this into their organization is difficult for them too, because you're talking to a representative, a representatives who goes back to another representative, who goes back to the bank president. And for it to be digested, it takes some time. But it's getting there. The message is definitely getting there.
Because of the 67 9/27/07 - COMMERCE - RES. 070601 feedback. The feedback changes over time. So we get better responses. I'm going to say the presentations that the banks did for the RFP for the payroll process, I heard much better responses than I have heard in the past, much more clarity of focus.
Mr. Nacchio, let me ask you two questions. Is there any institution authorized to receive City deposits that does not meet your safety standards?
I'm sort of curious as to what you're advising these departments on. If you say you're advising them based upon safety and your primary concern as City Treasurer is to make sure the City's money is safely invested --
-- haven't 68 9/27/07 - COMMERCE - RES. 070601 all the City depositories already reached that threshold of safety by being authorized and by going through the process of authorization?
Everybody who knows me, I'm into technology. So online banking was a primary initiative of mine, and all the banks do not offer the same online banking security and capabilities. So part of the decision is based on that ability to deliver online banking in a safe and secure way. Since we have less people to do less things -- or more things, I'm sorry, to do more things, we need to do them in a secure online way. So I may lean towards a bank that is not the favored bank having to do with lending practices, but because their technology is superior when it comes to handling cash, that may outweigh the factor.
But the bottom line position is not that you're determining whether one depository is 69 9/27/07 - COMMERCE - RES. 070601 safe to put money in and another is not. That's not even a consideration. If they're authorized as a City depository, then you already determined that it's a safe institution.
According to the criteria, they are considered safe institutions.
The second question is, if all these institutions are safe institutions, some better than others, in the course of deciding where you put money, it then is not necessarily a question of safety and to some extent it may be a question of, as you said, technology?
Where in the City Charter or City Code do you find the issue of technology as it relates to where you should put deposits?
Well, it's a companion to security and fraud prevention, which has to do with the 70 9/27/07 - COMMERCE - RES. 070601 security of the funds. An item that I implemented --
Yeah, but they vary in terms of delivery of services. They're not all the same.
My question is, where in the City Charter or City Code does it mention technology as a means of decision-making for where you put City money?
Again, technology is the same as security of the funds. One of the important -- I'm going to say one of the important parts --
It's not an interpretation. It's just the way the business operates.
Where in the City Charter or City Code does it mention technology? 71 9/27/07 - COMMERCE - RES. 070601
Well, if you go by the City Charter, we're not able to do direct deposit. We only print paper checks.
The only reason I raise the issue is because you said that we cannot have a reward and punishment system because nowhere in the City Code or City Charter does it allow you to have one. But you can take into consideration technology?
Well, that's not a reward or punishment. That's the capability. When it comes to payroll, one of the items that I look for and we've implemented in the Treasurer's Office in the last three years is an item called positive pay. That means that every paycheck that the City puts out goes to an issue file to the bank and is confirmed as being a valid check, both by name and by amount. So a fraudulent check is determined on a day's notice.
Let me just 72 9/27/07 - COMMERCE - RES. 070601 skim through that.
But not all of our depository banks can do that. Not all of them can do that.
Let me just skim through the discussion. Are you restricted by the City Charter or Philadelphia Code in having a reward and punishment system?
I said are you restricted by The Philadelphia Code and Philadelphia Charter in instituting a reward and punishment system?
Are you restricted by The Philadelphia Code and Philadelphia Home Rule Charter in instituting a reward and punishment system?
I don't know what empowers me to penalize. 73 9/27/07 - COMMERCE - RES. 070601
What empowers you to take into consideration technology?
That's because it's a business function. It's a business function related to the security of the City's funds.
Do we have any insurance to protect our investment? I know most deposits, I guess, personal deposits, are protected by the FDIC.
There's a difference. All the deposits that we have at a bank or institution is subject to Act 72, and they must collateralize that 102 percent. So if we have, let's say, $10 million on deposit at a bank, they must hold securities equal to $10 74 9/27/07 - COMMERCE - RES. 070601 million, 102 percent of value somewhere in case something happened. So it's not the $500,000 or $100,000 that there might be typically on a bank account. So we're fully insured under Act 72, and that's part of the requirements of a depository, that they do that. And not all banks can cover those kinds of collateralizations. Some banks can't do $10 million that are on our list. That's like their max. Other banks can do $50 million. So that's why we have larger deposits at the larger bank.
Well, it's interesting because we're into yes and no 17 answers. I thought I was going to get a no on that one. So I'm impressed that that is --
So that really contributes to the decision-making of going with the larger bank, is because if you have $50 million on deposit, they need to collateralize it. The smaller bank can't do the collateral. 75 9/27/07 - COMMERCE - RES. 070601
Mr. Treasurer, there's an announcement just this week that a new bank is coming to town. I think they're going to open branches, Citibank. 7
Twenty-one 9 branches. And one of the things that 10 they're talking about is what 11 Mr. Chairman is discussing, positioning 12 some branches in areas that are 13 underserved. Well, I would hope that if 14 they're going to roll the dice and come 15 to Philadelphia and put some branches in 16 some of our neighborhoods that aren't 17 served presently well, that they should 18 be considered. But if you don't make 19 that adjustment and one bank is getting 20 75 percent of the business and that never 21 changes, these other banks, in my opinion -- I don't pretend to know a lot about this, but I'm here learning. That's why I come to these hearings, to learn -- won't really have a really good 76 9/27/07 - COMMERCE - RES. 070601 opportunity to do business with the City of Philadelphia, and they're doing the right thing coming to Philadelphia, opening branches. And I think they 6 realize that -- they're coming here 7 because they realize that there's 8 probably an opportunity to position 9 themselves in neighborhoods that don't 10 have a bank presently. 11 So I think we've got to 12 rethink -- and I don't pretend to know 13 how to do that and I'm going to turn to 14 my colleague, who is the best at this -- 15 to figure out how we push for some of 16 that money to be reallocated. To hear 17 that a bank is on the list and gets 18 nothing, I'm sure they went through a lot 19 of -- I don't know how much effort or 20 expense to get that credential and they 21 get nothing.
But, again, there's no rule or decision-making process that would lead to me saying that I can deposit in that bank because of 77 9/27/07 - COMMERCE - RES. 070601 those reasons. So it would be better to perceive like other cities and states, is to give them a tax incentive to locate in those areas, to actually have link deposits, like Chicago and Boston where you have $10 million set aside specifically for banks to do this. So it's tied to a program that has a direct relationship. So they're not just like, Give me whatever you got, like what can you give me in terms of a deposit, whatever business you can send my way. That way it's defined. It's specifically defined as being 10 million, or whatever the dollar amount is. And it's by policy and not by the City Treasurer just saying, You know what, I'm going to reward you for going in those areas and open up an account there.
Mr. Nacchio, what does the Home Rule Charter say about where you should put the money and where you can put the money?
Authorized 78 9/27/07 - COMMERCE - RES. 070601 depositories by City Council.
So you can give the money to any authorized depository and you can give them any share of the money.
I'm going to say that was more past practice. The new practice is that it appears as though it must be bid. An RFP process may take on a new dimension here -- I mean disclosure and the amendment to the --
But you had complete flexibility other than you had to use the list of authorized depositories.
I have to say that flexibility has been curtailed based on the amendment to the City Charter of 2006 having to do with bid and no-bid process.
Because this becomes now a contract. You'd have a contract. It changes. 79 9/27/07 - COMMERCE - RES. 070601
You can decide how much money you want to give to each authorized depository. Yes or no?
I'm going to say that was general past practice, but it's not the same now because --
This is going under legal review of whether I have to go out and have a contract with these depositories for these bank accounts now. Prior to this I can just go to a bank and open a bank account. I could. And to put a deposit specifically that's in con-cash in, let's say, Citibank --
Mr. Nacchio, we're about to move forward with Mr. Mullin's testimony.
Well, currently there is nothing on the table except the RFP for payroll.
No, no, no. 6 The money is actually in financial institutions right now, City depositories, City money. Who decided?
Well, one of the reasons for consolidation is for the efficiency of business operations.
Thank you. Mr. Mullin, please state your name for the record and proceed with your testimony.
Stephen Mullin, M-U-L-L-I-N, Econsult Corporation. I'm 81 9/27/07 - COMMERCE - RES. 070601 here to provide testimony on our report. And may I introduce a couple of my colleagues on the report?
Alletta Emeno, who is with me here at Econsult, and Ellen Diebold, who is with MFR Consultants, who worked on this with us. Maria Roberts couldn't make it today, but will be working on the next round with us, and certainly this was a joint process. If I may, I thought I'd give a quick outline of our findings and sort of a little bit about the methodology, and then you've discussed some of the recommendations already. I'll hold there, and if you have some specific questions on that, would that be all right?