Welcome to the Machine: How the FF Campaign Epitomizes Contemporary Berkeley Nepotism

By Geoff Lomax

Nepotism: The practice of giving patrons an unfair advantage or preferential treatment

Under the California Political Reform Act it is unlawful for elected officials to use public resources for a campaign activity. A fundamental precept is that the government may not ”take sides” in election contests or bestow an unfair advantage on one of several competing factions. Stanson v. Mott (1976). The reason for restricting activities with respect to ballot measures is that the use of taxpayer dollars distorts the debate and undermines the fairness of the election. Berkeley’s political establishment has disregarded these principles of fairness and neutrality in favor of enabling organizations receiving millions of dollars in city funds to simultaneously finance the FF campaign while censoring alternative viewpoints.

Since 2016, City Council has endorsed a series of ballot measures (O 2018, L 2022, FF 2024) intended to raise over $1 billion for infrastructure programs. However, Council has been deliberate in ensuring that these funds flow to their patron organizations. For example, Measure O restricted funds for housing development to a limited group of  “qualified not-for-profit entities.” Predictably, these “qualified” organizations donated tens of thousands of dollars to individual candidates and the Council-sponsored ballot measure. After Measure O passed, these same organizations were recipients of millions of public dollars. Subsequently, when the Council placed Measure L on the ballot, they included the same restriction, and “qualified” organizations donated thousands more.

Financial Shell Game Launches Measure FF

One of the more intriguing examples of Council’s “revolving door” financing involves Walk Bike Berkeley. This “qualified” organization provided the first major cash infusion to the FF campaign, $15,000. However, these funds came from Oakland-based Bike East Bay. Walk Bike Berkeley is identified as an “intermediary” for Bike East Bay. More intriguing is the fact that Bike East Bay reports receiving over $10,000 per year over the past five years from the City of Berkeley (2019, 2020, 2021, 2022, 2023). 

In short, an Oakland organization receiving over $50,000 at City Council’s discretion served as the financial foundation of the Measure FF campaign. If this shell game was not enough, the Measure L committee soon followed suit by transferring $12,000 to the campaign. Thus, from day one, the FF campaign amassed a massive campaign budget from organizations that are direct recipients of millions in Berkeley residents’ tax dollars doled out at City Council’s discretion. Meanwhile back at City Hall, Council requested and received an opinion from the City Attorney that they could participate in the FF campaign, freeing them to use their subsidized mailers and other resources to advocate for the measure.

Weaponizing the Political Reform Act to Censor Alternative Viewpoints

At the time of this writing, FF has a five-to-one financial advantage ($85,000 vs. $17,000) over a complementary measure. Measure, EE, is a modest (by Berkeley standards) grassroots campaign financed by voluntary individual contributions. For example, the EE campaign conducted a yard sale to engage community members and raise funds. It was disclosed to those who donated items and attended the yard sale that proceeds would support the EE campaign. Proceeds from the yard sale were subsequently reported to the Fair Political Practices Commission.

The FF campaign filed a complaint claiming the contributions were not itemized. In other words the campaign did not collect paperwork from persons donating items or purchasing them at the yard sale. In the FF campaign world, receiving $15,000 from a financial intermediary that receives ten of thousands in Berkeley taxpayer dollars (unbeknownst to most residents) annually is business as usual, but the voluntary and consensual contributions of residents at a yard sale must be prosecuted.

The Rise of the Machine and the Demise of Grassroots Democracy

Such political “meddling” is not necessarily new; what is different is the scale and methodological consistency. It's a well-oiled system where the dominant political class receives tens of thousands in donations from their political patrons (many of which are direct recipients of Berkeley tax dollars), makes these funds portable from election to election through the creation of campaign committees, and weaponizes laws intended to support fair elections to silence alternative viewpoints.

This playbook has become so ingrained in Berkeley’s political culture that it has been normalized. Many elected officials, who as aspiring progressive activists decried “big money” in politics and corporations deploying strategic lawsuits against public participation (SLAPP), are now lending their names to a campaign of moral equivalency. It’s a perverse and corrosive system that blurs the lines between public dollars and private interests at an unprecedented scale, further empowers the powerful, and intimidates those who would otherwise engage in the political process.* Welcome to the machine.

* In performing background research for this essay, numerous individuals, who were involved in prior ballot measure campaigns, provided examples of being subject to punitive actions resulting predominantly from bookkeeping errors involving small individual contributions. The resulting administrative burdens as well as fines and diminishment of character cause many to say they would “never again” engage the process.

City Council Adopts Resolution of Intention to form the Public Bank East Bay

Berkeley Homeowners Face Double Jeopardy for $40 Million Starting Cost & Resolution Authorizes Closed Door Planning Process

On April 11, 2023, at the urging of Mayor Arreguin and Councilmember Robinson, City Council approved a resolution of intent to form a public bank and authorized the City Manager to coordinate with the organization Public Bank East Bay to draft a business plan.

The bank’s proponents state that a major aim of the public bank is to provide loan support to underserved sectors of the local economy including “capital for small businesses.” Supporting community business development is laudable, but providing these loans is an inherently high-risk endeavor for almostt one-third of small businesses fail in the first two years and about 70% fail over ten years [see BLS data].

The bank’s proponents are asking residents in Berkeley, Oakland and Richmond to provide $40 million to capitalize the bank. The primary function of capital is to act as a cushion to absorb unanticipated losses and declines in asset values that could otherwise cause a bank to fail. The fact that Berkeley is being asked to put up collateral to back loans appears to be lost on some councilmembers. Kate Harrison stated, “We are not spending $40 million; we are depositing $40 million into a different financial institution.” The implication of her comment is  that this deposit can be withdrawn at any time and used for another purpose, but this is not the case. The $40 million is needed to back loans and other financial transactions.

Bank proponents report that Richmond has already committed “their share” – $750,000. Thus, the remaining $39.25 million would come from the cities of Berkeley and Oakland, and Alameda County. Based on this formula, Berkeley homeowners would be paying twice, in the form of city and county taxes, to support Richmond which is in Contra Costa County.

"Berkeley homeowners would be paying twice, in the form of city and county taxes, to support Richmond which is in Contra Costa County."

This apparent double jeopardy for Berkeley residents was not lost on Councilmember Bartlett who expressed concerns over Richmond’s precarious financial situation: the State Auditor recently reported growing deficits place the city's stability at risk. Bartlett is so concerned that he suggested that Berkeley “would be better served with its own bank.”

Richmond is not alone in facing financial challenges. For example, on the same day Council voted its intention to create a bank, the Budget Manager reported the city’s pension obligations are anticipated to increase by more than $32 million over the next ten years and the infrastructure deficit is anticipated to swell to approximately $2.52 billion from FY 2024 to FY 2028.

Certain city obligations, like pension payments, are non-negotiable and must be paid. Such obligations could conflict with the bank’s business plan. For example, Berkeley could be legally obligated to withdraw its capitalization to cover obligatory pension payments, potentially triggering a scenario similar to the recent “run” on banks that contributed to the downfall of Silicon Valley and First Republic.

WOM Berkeley believes there are numerous scenarios that could lead to instability or default. Under the current arrangement, the individuals seeking public funds to operate the bank are drafting a business plan in collaboration with the City Manager. Absent process transparency and public visibility, we have no way of knowing what evidence was considered to support the plan or the level of due diligence performed. WOM Berkeley has requested that the City Manager maintain a real-time publically accessible electronic docket tracking the development of the business plan. Docket contents would be available via the City’s website and include but not be limited to:

• Meeting agendas and participants

• Meeting minutes

• Any City of Berkeley “financial details” provided to Friends of the Public Bank East Bay

• Background information or analysis considered by the working group

• Any Business Plan drafts circulated to elected officials

• Any additional materials that would support public evaluation of the business plan

WOM Berkeley has a proven track record of providing timely city financial analyses. Such analyses are only possible through the  disclosure of information in the spirit of the Brown Act. A financial plan of this magnitude should not be drafted behind closed doors.

On Banking and Bankruptcy

WOM Berkeley Article Catalyzes Record Public Engagement and Conflicting Statements from the Public Bank East Bay and City Council

Record Public Engagement

It has been a fascinating seven days since our analysis of the proposed $40 million taxpayer funded Public Bank East Bay. As of this writing, there have been nearly a thousand page views making it the most popular WOM Berkeley post ever. Rodger Hallsten deserves credit for this engagement as he drove an incredibly informative Nextdoor post with over 250 comments. WOM Berkeley thanks all who contributed as we believe this robust discussion will serve to better inform this important public policy proposal.

On Banking and Bankruptcy

On Friday, the FDIC announced the failure of Silicon Valley Bank. The California Commissioner of Financial Protections reported a sudden “run on the bank” caused the failure despite being in “sound financial condition” only the day before. This failure underscores the inherent risks faced by the banking sector in general, and in particular, comparatively smaller institutions. SVB was the 14th largest bank in the US as measured by total assets.

Conflicting Statements by Public Bank East Bay on City of Berkeley’s $25,000 Allocation for a Viability Study

WOM Berkeley originally reported that $25,000 in funds had been received by the Friends of the Public East Bay. This was based on a statement in a Berkeley City Council Resolution:

The City of Berkeley began formally assessing the feasibility of establishing a public bank with a $25,000 allocation made in 2017 to support the development of a feasibility study for the Public Bank of the East Bay

However, the chair of the Friends of the Public Bank East Bay disputed this and responded in the Comments of the   article  with “corrections of fact” stating:

Berkeley (and the other cities) did not put any money into the viability study, which was totally funded by the Friends of the Public Bank East Bay.

Consequently, WOM Berkeley retracted the original statement based on the “correction” provided by the Public Bank of the East Bay. However, we also contacted Councilmember Robinson’s Office for clarification regarding the language above. Robinson’s Office responded by stating:

Thank you for reaching out. This [$25,000] funding was allocated to Friends of the Public Bank East Bay.

WOM Berkeley has made repeated attempts to contact the chair of the Public Bank East Bay to reconcile these conflicting statements, but they have not responded. It is somewhat unsettling that an organization that wants to be entrusted to manage $40 million in startup costs cannot account for $25 thousand dollars.

Risky Business: Berkeley Mayor and Councilmember Robinson Propose a Public Bank with Startup Costs of $40 Million in Taxpayer Funds

Other Progressive Governments Have Rejected Public Banks Citing Excessive Costs and Financial Risks

As Berkeley’s infrastructure continues to crumble and financial liabilities escalate, one would hope the Mayor and Council would focus on closing this gap. Perhaps they would consider scaling back the record growth in spending, so resources could be redeployed to address our maintenance deficit. But apparently the fundamental functions of municipal government are too mundane for this Mayor and Council as their latest push is to adopt a resolution to draft a plan to risk millions of public dollars to create a “public bank.” The startup cost of this endeavor is projected to be $40 million.

Mayor Arreguin and Councilmember Robinson are leading this effort, and they have recommended adoption of a resolution of intention to form the Public Bank East Bay with approval of up to $50K to develop a business plan. Arreguin and Robinson also present a “viability study” authored by advocates for the Public Bank. The viability study suggests funds should address the climate and housing crisis while it assigns blame for “structural [financing] problems” on Wall Street banks.

Small banks have been driven out of the market by Wall Street banks, or have been bought out or merged into larger banks. This has left banking deserts around the state, including in the East Bay. In 1994, the state had 500 community banks, but by 2017 it had only 124. While this corporate concentration may have brought convenience for some customers, it has caused pain to many others.

Public Bank East Bay Viability Study

Issue appropriation aside, the reduction in the number of community banks appears to have little to do with Wall Street. Rather, the FDIC attributes these reductions to voluntary mergers between community banks to improve the financial position of the acquired bank because it is typically underperforming.

In the wake of the 2008 financial crisis, banks have been required to strengthen their asset positions. Therefore, this consolidation among community banks is generally good for customers and society because it increases assets and reduces risks of failure (requiring public bailouts) while preserving services. It is important to note that fewer banks does not necessarily mean less services. In fact, similar service levels are now supported by larger, more stable community banking organizations.

Community banks also make up the vast majority of merger participants on both sides of the deal. Most community banks that are acquired merge with other community banks, which results in a community banking sector composed of somewhat larger institutions that continue to provide essential financial services within a limited geographic market.

FDIC Quarterly 2017 • Volume 11 • Number 4

The FDIC also concluded that community banks were profitable and could successfully compete against their typically larger noncommunity bank competitors. Further, the viability study implies that a public bank is a way to remove our city’s government deposits from large Wall Street banks. But 53 percent of state and local deposits are already held by community banks, meaning a public bank could displace locally based community banks. In other words, Arreguin and Robinson’s “solution” appears to exacerbate the problem the viability study claims needs solving.

Beside this dubious rationale, the City would also be assuming enormous financial costs and risks. For example, the only existing public bank in the US is not FDIC insured. Berkeley would have to provide financial guarantees in the event of defaults on a bank’s loans. The feasibility study also cites Germany as an example, but fails to mention that the bulk of losses related to the 2008 subprime mortgage crisis were from loans provided by public banks. Massachusetts rejected a public bank proposal citing the high costs, risks, and unclear benefits including a significant initial investment of capital.  Chicago, echoed similar concerns. The viability study presented by Arreguin and Robinson does not mention these risks, historical losses, or the Massacchusetts study. Therefore, a city-funded study apparently omitted evidence of downside risk associated with the policy proposal it was charged with analyzing.

The Commission recommends that the Legislature not pursue establishing a bank owned by the Commonwealth or by a public authority constituted by the Commonwealth. The primary reasons for the Commission’s recommendation are that a state-owned bank would require significant initial capital investment … the public funds of the Commonwealth would be exposed to unacceptably high risk if deposited in a state-owned bank.

Report of the Commission to Study the Feasibility of Establishing a Bank Owned by the Commonwealth

To date, multiple jurisdictions have rejected creating public banks because of unacceptably high risk and cost. The Arreguin and Robinson proposal calls for forming the Public Bank East Bay alongside Oakland & Richmond to be governed by city council members. This language suggests a joint powers authority model with capital investment from three or more jurisdictions. Such complexity appears unprecedented. What jurisdiction’s taxpayers would underwrite a default on a Berkeley-based business with operations in Richmond and Oakland?

The Arreguin and Robinson plan also calls for the bank’s board of directors to be composed of city council members setting the stage for potentially significant conflict of interest scenarios. City council members could be authorizing “in their district or city” projects and programs financed with bank funds.

The Public Bank East Bay's proposed governance plan requires that each member city designate one councilmember to sit on the Public Bank East Bay's Board of Directors

Berkeley City Council Resolution of Intent

In summary, a preponderance of evidence suggests that the Arreguin and Robinson banking proposal is an expensive and risky endeavor that would serve to undermine our existing community banking infrastructure. 

There is no need to spend another $50K to assess the financial benefits and risks of forming the Public Bank East Bay. We have done the research for you here, just follow the links and save our tax dollars. Please don't  squander limited public resources to champion expansive programs that lack evidence of need or effectiveness. Our City has pressing needs that demand immediate attention. Will you come to your senses? We are not banking on it!

Revision: the original post indicated the City of Berkeley had spend $25K on the Feasibility Study. The City Council resolution states: "WHEREAS, the City of Berkeley began formally assessing the feasibility of establishing a public bank with a $25,000 allocation made in 2017 to support the development of a feasibility study for the Public Bank of the East Bay.”

According to a commenter (see below) “Berkeley did not put any money into the viability study.” The post has been revised based on this comment.