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 The implication of her comment is that this deposit can be withdrawn at any time and used for another purpose, but this is not the case.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