For co-founder James Rasza, Democracy Brewing was always going to be a worker-owned cooperative. He’d held low-wage service jobs earlier in his life and spent years in labor and community organizing, but had grown disillusioned with the lack of practical, actionable, alternative paths forward.

“The nonprofit world is garbage,” Rasza says. “What does winning look like? For me, winning looked like owning your own business, having people have a say in it, not being exploited, basic stuff that comes with a worker co-op.”

Democracy Brewing, a worker-owned microbrewery and pub with a 3,600 square foot main barroom, opened in its downtown Boston location in 2018. It now counts ten worker-owners with a handful of newer employees on the path to worker-owner status. It’s currently planning for a second location in Maine. Rasza and the crew try to spread the worker co-op model one beer or burger or comedy show at a time.

“I think creating things like Democracy Brewing where people can go, drink a great beer, eat good food, listen to good music, see some comedy, and people are like, ‘worker co-ops, that sounds good but does it really work?’ Well, do you like the beer? Do you like the hamburger?,” Rasza says. “At the end of the day, working-class people are very pragmatic, and pie in the sky shit is stupid, in my opinion. People want to see if it works, and if it does, they want it. But we need to create the desire for people to want this, and once you do that, people will start seeking that out.”

But as Razsa also knows from the years it took to raise startup capital for Democracy Brewing, the financial system isn’t quite prepared to handle more worker co-ops. Most lenders follow small business lending practices that are incompatible with the worker co-op ownership structure and aren’t familiar enough with the model to be willing to bend their own rules.

The few lenders who do work with worker co-ops, like those who provided startup loans for Democracy Brewing, are relatively small and limited in how many of these loans they can make a year. That’s why those lenders are now part of a broader coalition to support the creation of a state-owned bank in Massachusetts. Some of the details still need to be hammered out, but they believe it would be possible to support more worker co-ops and other cooperatives if they had a state-owned bank as a reliable partner in their lending ecosystem. Legislation to create such a bank is currently making its way through the Massachusetts Statehouse, and it needs a favorable committee decision this month to have a chance at a full assembly vote by the end of this year.

“There are some years we’ve been tighter on our balance sheet and forced to choose between deals,” says José Luis Rojas, chief operating officer at the Local Enterprise Assistance Fund, which provided a startup loan to Democracy Brewing. “It’s cyclical; there are times like now where we have a lot of room in our balance sheet, but those other times will come and it would be helpful for us operationally to have a public bank around. It could buy some of our loans and that would give us money to do more lending.”

State-owned or city-owned bank campaigns are growing in momentum across the country. The Philadelphia City Council passed legislation 15-1 in March to create the country’s first city-owned banking entity, though it is still a few steps away from obtaining a banking charter and becoming a full-fledged depository institution. The passage of that legislation marked a major milestone after six years of hearings, town halls, market analysis and community organizing. Some of the community organizing work in Philadelphia went back even further, at least a decade by some accounts.

Meanwhile, in New Jersey, Governor Phil Murphy convened a state board in 2019 to come up with a plan for establishing a state-owned bank, and that body held a hearing earlier this month to get public feedback on its current draft plan. The Governor is well-acquainted with banks owned by state or local units of government from his time as U.S. Ambassador to Germany, where such not-for-profit regional savings banks are known as “Sparkassen” and are very common across Germany.

On the other side of the U.S., groups of organizers in the Bay Area and in southern California are working closely with local legislators in multiple cities to navigate city-owned banking proposals through the legal process to establish city-owned banks, as laid out in state legislation that organizers drafted and got passed in 2019. Organizers in New York have been pushing for similar “enabling” legislation in that state that would create a clear pathway to obtain state banking charters for city-owned banks.

But from Philadelphia to NJ to California and everywhere in between, there’s plenty of skepticism about state-owned or city-owned banks. The skepticism is fueled in large part by ignorance about what they are and how they would work if they were more common across the country. For many decades, the 100-plus year-old Bank of North Dakota was the only state-owned bank in the country, only joined in 2016 by the Territorial Bank of American Samoa.

Investing in disinvested communities or alternative models like cooperatives is a common thread of support for state- or city-owned banks. The current Massachusetts state-owned bank proposal is backed by a broad coalition including banking law academics, the Black Economic Council of Massachusetts, the Boston Ujima Project, environmental justice groups, a group of Mayors in the Boston Metropolitan Area, and community development lenders like the Local Enterprise Assistance Fund and the Cooperative Fund of the Northeast. Working under the banner of Massachusetts Public Banking, the coalition produced the legislation in response to longstanding unmet credit needs among its members or the communities they represent.

There is evidence of demand for additional capital beyond what the current banking system is able to provide in Massachusetts as a result of historic and ongoing structural racism that limits bank activity in Black and brown communities. Supporters of a Massachusetts state-owned bank often cite a May 2021 report from the Boston Foundation detailing $574 million or more in unmet capital needs specifically for Black or Latino-owned businesses across the entire state. That disparity is why the current legislation for a state-owned bank became the top priority for the Black Economic Council of Massachusetts in its 2021-2022 Black Policy Agenda.

“A state-owned bank was the idea that had the most relevance to the moment,” says Samuel Gebru, former policy director at the Black Economic Council of Massachusetts, now a consultant to Massachusetts Public Banking. “It’s not necessarily the easiest to explain, but it’s the most relevant to the post-COVID moment, looking at economic recovery.”

The proposed state-owned bank in Massachusetts would combine $1.4 billion in deposits with $200 million in startup capital from the state, distributed in $50 million increments over a four-year startup period. Combining the $1.4 billion in deposits with $200 million in startup capital, the state-owned bank would have the ability to build a $1.6 billion portfolio of loans and other investments.

The deposits would come from the Massachusetts Municipal Depository Trust — a pool of funds held on behalf of local governments, local housing authorities, school districts, public utilities, transit authorities and other public bodies across the state. The trust currently holds nearly $30 billion in assets on behalf of 674 different bodies of government representing 295 out of 351 cities, towns or counties in the state. About 30% of those assets are currently invested in certificates of deposit at a variety of banks, with the rest spread across short-term investments managed by a private financial asset management firm. The proposed legislation directs the state treasurer to move trust dollars not currently held in any bank into the proposed state-owned bank.

There is still some work for state-owned bank supporters in Massachusetts to do on this front. Massachusetts State Treasurer Deborah Goldberg has been vocal for years in support of a state-owned bank. But in an interview with Next City, she expressed serious doubts that she could move dollars from the Massachusetts Municipal Depository Trust into a state-owned bank without risking local governments pulling their funds out of the trust.

“The details of the actual bill as it exists today will be altered as there’s more understanding of how things work,” Goldberg says. “I want to make sure everything done balances the interests and achieves goals on all sides. Those funds belong to those local government agencies.”

If all works out as the Massachusetts state-owned bank’s supporters envision, the $200 million in startup capital would be the only cost to the state for the bank, as the bank itself would aim to become financially profitable by the end of its fourth year.

Though it took the Bank of North Dakota many years to become profitable — in a sparsely-populated state with little industry aside from farming for many decades and the Great Depression to boot — it has posted positive net income every year since at least 1966, the furthest back the state-owned bank’s public records show.

The financial projections for the proposed Massachusetts state-owned bank were formed in conversation with banking professionals and community development lenders around the state. The Massachusetts state-owned bank would take a page from North Dakota’s state-owned bank by partnering with private lenders behind the scenes to make most of its loans. It would participate in or purchase privately-originated loans, or provide loan guarantees, letters of credit or use other structures that allow private lenders to take on riskier loans or do more of the lending they already do in areas they perceive as risky, or help them make more loans supporting business models like cooperatives.

In a typical year, the Bank of North Dakota says it makes around 800 business and agriculture loans in partnership with private lenders across the state. In 2020, it made more than three times that amount: 2,500 loans as well as emergency grant distributions. A state-owned bank in Massachusetts wouldn’t be at that level of lending right off the bat, but it’s these kinds of lending partnerships that existing community development lenders see as a potential boost to their work that isn’t available from any existing local, state or federal programs.

Lending partnerships made it possible for Democracy Brewing to get its startup loan – Cooperative Fund of the Northeast, another community development lender that specializes in cooperatives, participated in the loan originated by Local Enterprise Assistance Fund. Lending partnerships like these between private lenders aren’t unusual, but the lenders say they could do more if there was a state-owned bank on permanent stand-by to participate in loans like this one.

“The more we can have reliable sources of capital for those large ambitious projects, the more they’ll come on board,” says Micha Josephy, executive director at Cooperative Fund of the Northeast. “The more cooperatives don’t have to worry about capital, the more they know if they just have a good business plan, the capital will be there.”