WOM Berkeley's Analysis of the Public Bank Ordinance 

Understanding The Berkeley Bank Tax (Berkeley’s Public Bank Ordinance): What Voters Should Know

Berkeley voters are being asked to approve a new bank tax on homes and businesses. The full text of the measure is here. The purpose of this tax is to "capitalize and support” a new bank authorized to make loans throughout the East Bay and Alameda County.

The tax raises important policy questions that deserve careful consideration. This report summarizes bank tax features and issues voters may wish to consider.

A New Tax on Every Berkeley Home and Business

The measure establishes a new annual parcel tax on every square foot of residential and commercial property in Berkeley. Commercial tax rates are 33% higher than residential. The tax is intended to cover the bank’s start up costs. A study commissioned by the City of Berkeley suggests $40 million in taxpayer funding is needed to launch the new bank.

No Guaranteed Berkeley Benefit

Berkeley taxpayers are being asked to provide 100% of the bank’s operating capital, but there is no guaranteed minimum return or allocation for Berkeley. The managers intend to fund projects anywhere in the East Bay including Oakland, Richmond and Emeryville. At a time when Berkeley is facing a $30 million deficit, an important policy question is whether residents and businesses should be asked to finance projects on behalf of other cities that are not contributing.

Unprecedented Mandatory Annual Tax Increases

The starting tax rate is $0.06 per square foot on homes and $0.09 per square foot on businesses. For a 1,600 square foot home, the starting price would be $100 per year that will increase rapidly because the measure imposes automatic annual tax increases regardless of need or impact on residents or businesses.

“Annually in May, the City Council shall increase the previous year’s rate by up to the greater of the cost of living in the immediate San Francisco Bay Area or per capita personal income growth in the state” (Section 7.03.020 B.)

Every past and current Berkeley parcel tax measure gives City Council the discretion to make inflationary adjustments. Mandating this increase based on the greatest inflationary measure is unprecedented. During inflationary periods, the increase could exceed 10%. Increases would be automatic throughout the life of the measure even if there was no need for additional funding.

The Bank Does Not Yet Exist (And May Never Exist)

Voters are being asked to fund a public bank that has not been authorized to operate. Banking is one of the most heavily regulated industries in the United States, requiring institutions to meet stringent capital, liquidity, risk management, and regulatory compliance standards designed to protect depositors and maintain financial stability. It is unclear if authorization will be obtained.

If the Bank does not secure authorization to conduct business by or before June 30, 2033, the special fund may be used to offer loans which support affordable housing, green energy/infrastructure, and/or small businesses until such authorization has been secured, consistent with this Chapter. (7.03.010 F.)

The ordinance allows until June 30, 2033 for the bank to obtain regulatory approval.  The tax begins immediately, but the bank may never exist.

Redundant with Existing Financing Programs

The bank intends to finance three principal activities:

• Housing,

• Infrastructure,

• Small businesses

California already operates several public financing programs serving these purposes, including:

• The California Capital Programs and Climate Financing Authority (CPCFA)

• The California Infrastructure and Economic Development Bank (IBank)

• Community Development Financial Institutions (Cal IIP)

• Municipal bond financing program

Local credit unions and regional banks provide additional financing for housing and businesses. Berkeley residents are already paying for multiple bond measures to support affordable housing and infrastructure. The Federal Small Business Administration also maintains a loan program from small to large and can be used for most business purposes, including long-term fixed assets and operating capital. 

A central policy question is why pay for a speculative entity for services existing public and private financing programs already deliver.

Significant Financial Assumptions

The 2024 review by HR&A Advisors commissioned by the City of Berkeley concluded that the proposed business model resembles a plausible de novo bank but emphasized that its success depends upon several major assumptions.

Among them:

• approximately $40 million in initial capitalization,

• substantial additional deposits,

• participation by multiple local governments,

• significant funding from foundations, unions, and other private sources.

HR&A noted that many of these commitments have not been secured and recommended that participating governments establish clear funding milestones before committing public money. Under this measure, Berkeley homes and businesses are the only source of revenue; no other local government is required to pay. However, the funds can be spent in Oakland, Richmond and other cities throughout the East Bay.

High Risk Lending Practices

The ordinance authorizes lending to eligible businesses the bank’s management believes "can grow and thrive with loan support" – a subjective standard not typically used to evaluate lending decisions.

Its definition of eligible businesses includes:

• Startups,

• Businesses too small to obtain adequate support from traditional banks,

• Businesses requiring early-stage financing,

• Businesses that the bank's management believes "can grow and thrive with loan support."

These loans are risky. Nationally, roughly half of all startups fail within five years. The Bay Area’s costly environment makes the failure rate even higher. There is a high probability that a many of these high risk loans will default creating additional pressure on the bank’s finances and potentially requiring greater taxpayer subsidies.

Voter Considerations

If approved, Berkeley homes and businesses would be required to:

• Pay a new parcel tax.

• Accept automatic annual tax increases tied to inflation or income growth.

• Capitalize a public bank that has not yet been authorized to operate, and may never will.

• Support lending in cities across the East Bay area without any guaranteed minimum for Berkeley.

• Assume the risk associated with launching a new regional lending institution.

• Be on the hook for additional tax subsidies should the bank’s fiances deteriorate