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 The implication of her comment is  that this deposit can be withdrawn at any time and used for another purpose, but this is not the case.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.


Opportunity Lost

City Council Overlooks Troubling Financial Indicators in Favor of Relativism and Wishful Thinking

On January 17, City Council was provided a status report update by the City Auditor entitled Berkeley’s Financial Condition (FY 2012 – FY 2021): Pension Liabilities and Infrastructure Need Attention Audit”.  The objective of the presentation was to report on the implementation status of the Auditor’s recommendations emanating from a May 2022 Audit Report with the same title.
The May 2022 audit report is one of the most concise and revealing analyses of the city’s long-term financial condition. With regard to pension liabilities, the May 2022 audit report documented that the combined growth in pensions and other Post-Employment Benefits (OPEBs) such as health benefits represent one of the most serious “challenges” to Berkeley’s financial well being. The report examines the period between 2012 and 2021 to document long-term financial trends, and the leading indicators are troubling. 

  • During this period, city revenues were up by 25%, but combined pension and OPEB liabilities increased by 36%. 

  • Particularly alarming was the report of OPEB liability growing by 91% between FY 2012 and FY 2021, from $60.4 million to $115.1 million, adjusted for inflation.

  • Combined unfunded pension ($657.9M) and OPEB liabilities ($115.1M) were $773 million in FY 2021.

Equally concerning are recent indicators (since the original audit report in May 2022) suggesting that the gap between revenues and liabilities is expanding further. For example, between 2012-2021, CalPERS investment returns were around 7.7%. Therefore, Berkeley’s liability gap grew despite a decade of robust returns on investments. For the 2021-22 fiscal year, CalPERS reported a -6.1% decline in investments, with negative or diminished returns continuing into the current fiscal year. In other words, we were losing ground even when investment returns were very strong, and now we appear to be losing ground at an accelerated rate.
Pension liabilities are a significant driver of financial health; because, unlike infrastructure needs, they cannot be “deferred.”  As the risk analysis performed by the Government Finance Officers Association pursuant to ballot Measure L (2022) describes, if (1) the gap between revenues and expenditures continues to widen and (2) the cumulative pension liability is substantial ($773.1M) and growing, then the city’s overall credit rating is at risk.
We highlight this dynamic between economic trends and Berkeley’s financial health because it was not clear from the discussion that the City Council appreciated the scope and magnitude of the problem. The mayor did refer to “long-term significant challenges” and he recognized that the city’s “unfunded liabilities will increase.” Councilmember Kesarwani, to her credit, did attempt to unpack the root causes by asking the City Auditor to explain the basis for the State Auditor classifying Berkeley’s pension funding ratio as “high risk”. 
However, these sobering and measured remarks were in contrast to Councilmember Harrison who stated, [time stamp 1:16] “we are in much better shape than many many other cities”... “I am very happy about where we are heading, I am not feeling as dire as where we are at right now.” With regard to fiscal relativism, Berkeley is ranked by the State Auditor in the lowest quartile (25%) of California cities (81st out of 360). On balance, 78% of California cities are considered to be in a better financial condition, so we do not believe fiscal relativism is anything to write home about.
After some confusing remarks about when employees will retire [time stamp 1:26:42], Harrison referred to the $657.9M in pension liability as “so called debt” … that is an “accounting number.” Yes, it is an accounting of the difference between future costs and funds available to cover such costs which can’t be wished away.
One of the critical issues, with regard to the timing of employee retirement, is age. The City pays a retiree medical subsidy that can be used for health insurance premiums of the retiree (single-party) or retiree and spouse/domestic partner (2-party). As noted previously, this OPEB benefit grew 91% in the last decade. It appears the  “great resignation” among city employees, with many taking early retirement, will result in an even greater OPEB liability.
The distinction between pension and other benefits was not even included in the status report or discussion. Another striking observation was that only two council members and the mayor spoke during the discussion which makes us wonder whether our city’s leaders have a complete perspective on the issue.

Later  this year, CalPERS will  release its revised Actuarial Valuation Report. WOM Berkeley anticipates that the consequences of the troubling financial indicators highlighted in our analysis will be revealed in the CalPERS report.  In the meantime, we caution against relativism and wishful thinking.

Warning Signs on the Horizon

 A Financial Wakeup Call for City Council

This week we witnessed a series of financial alarm bells being triggered that should cause the City Council to take notice. The first was the release of the California Public Employees Public Retirement (CalPERS) System’s 2022 Annual Review of Funding Levels and Risks. This report (which WOM Berkeley brought to the attention of City Council, the City Auditor and City Manager) is intended to assist participating employers, like the City of Berkeley, in assessing the soundness and sustainability of the Public Employees’ Retirement System for ongoing pension plans. 


As WOM Berkeley has documented previously the Financial Officers Association and the State Auditor consider Berkeley’s pension liabilities to be the greatest threat to the city’s credit [bond] rating. The State Auditor ranked Berkeley among the worst in the state for pension cost risk (giving the city a score of 0).


Pertinent findings in the CalPERS report include:

With the lower-than-expected investment returns for fiscal year (FY) 2021-22, the funded status of the system has decreased from 81.2% as of June 30, 2021 to an estimated 72% as of June 30, 2022. 

The recent decrease in funded status has increased the risk that plans will fall to low funding levels. In addition, employer contribution levels are expected to increase in response to the investment loss for fiscal year 2021-22.

We have determined that required contributions may increase 5%-12% of payroll over the next several years depending on how long the high inflation period lasts and how quickly it returns to Federal Reserve targets. 

City Council recently signed off on a labor agreement that requires the city to increase contributions towards pensions, so it is likely Berkeley will be on the higher end of the 5%-12% range. These required contributions are on top of over $660 million in existing liabilities. The potential consequences are service cuts or, more likely, voters will face a bond measure with the sole purpose of “shoring up” the city’s finances.


A second report from the state’s Legislative Analyst’s Office projects a $41 billion state deficit across 2022-2024. The state budget challenges emanate from our progressive tax system where there is significant reliance of the General Fund on capital gains and on taxes paid by a small portion of the population. Disastrous market returns in 2022 have flipped the state’s surplus to deficit with little relief in sight for 2023. As a consequence, city windfalls received as a result of a state surplus have disappeared.


City Council appears slow to recognize the gravity of the situation. Currently, they are advocating for extending retirement benefits to part time workers. When council members expressed a desire to better understand the fiscal implications of expanded benefits, other members responded by suggesting they make binding long-term financial decisions “without understanding the [budget] implications.” One rationale for extending benefits without complete informations is that “we have fluff in the budget.” Such a cavalier attitude toward the city’s financial situation may no longer be tenable in light of these most recent reports.


A rapid decline in state revenues from capital gains is putting increased pressure on the state, and by extension, local budgets