San Francisco Finds a New Way to Break the Bank

The City of San Francisco is reeling from rampant crime and facing a commercial real estate crash. Arguably, City policies have created both problems – the former, a result of lax law enforcement, and the latter, a consequence of the first, coupled with unfriendly business policies. Meanwhile, the City is facing a $489 million budget deficit in 2024-2025 that grows to $1.3 billion by 2027-2028. 

The anatomy of failed municipal decision-making

How does a municipality dig such a deep hole for itself and then proceed to dig itself even deeper? Recently, the City’s Board of Supervisors unanimously approved a plan that exemplifies just how cities bring about such compounding failure. Failure that comes not from corruption, not from the lack of diligent execution, and not from insufficient resources, but from pursuing goals that are undesirable and/or unachievable. Such dysfunctional goals are enabled by unbounded municipal missions that encourage the proliferation of municipal goals without the board/council/supervisor/public scrutiny that could expose why such goals are undesirable and/or unachievable.

On September 5, 2023, City Supervisors unanimously approved a “Final Governance Plan, Business Plan and Viability Study for a San Francisco Public Bank.” Describing the document as a “viability study” suggests that the working group that prepared the report evaluated the prospect of a City-run public bank to help policy makers reach an informed decision. But those closely watching the City over the past several years know – and a review of the June 2021 Administrative Ordinance that established the working group clearly shows – that the City Supervisors have long decided to create a public bank.

Over a nine-year period that began in 2011, City Supervisors commissioned several studies related to the creation of a City-run bank. Within 18 months after the California legislature authorized public banks (AB 857), effective January 1, 2020, the Supervisors had already determined that “a San Francisco Public Bank would create a fiscally safe and sound institution to invest public funds in a manner that aligns with the values and interests of the City, including investments in City residents, businesses, and sectors that serve the public good and that are underserved or unserved by the existing financial industry,” and that a public bank could “create significant long-term benefits for the City, which include allowing local tax dollars to be invested in local priorities while still ensuring the safety and preservation of capital, liquidity to meet City cash flow needs, and return on investments.”

If, in June 2021 when the Administrative Ordinance was being considered, a resident had objected to the City’s pursuit of a banking endeavor, he or she would have been told something to the effect: “This action simply paves the way for the study of a bank’s viability and the development of a plan; it does not itself establish a public bank. There will be plenty of opportunity for public comment before any formal action to create and fund a bank is taken.” When decision-making is orchestrated over several years in such a way, there is no appropriate time to voice concern. Objections are unavoidably either too early or too late. Such is the cloudy decision-making process that leads to the cavalier diversion of funds from core municipal services to sports facilities, convention centers, and now public banks.

The working group’s report

The working group’s report states that “the fundamental need for a City-owned Bank stems from the historic failure of existing financial institutions to equitably serve the needs of low-income communities and communities of color and to deliver financial services that are not extractive or damaging to those same communities.” A City-owned bank would “address the three main areas where financing disparities are most pronounced: affordable housing, small businesses, and green investments.”

The working group reported that when they reviewed outcomes in homeownership rates and lending by gender, race, and ethnicity, they discovered disparities (e.g., lending outcomes that were inconsistent with the City’s demographic makeup). The working group did not pursue causal explanations for the disparate outcomes (e.g., actual instances of discrimination in lending practices or underlying explanatory factors), instead simply concluding that such disparities constitute “a pattern of discrimination.” 

The working group proceeded to estimate the “gap in the local financial market” – i.e., the loans and funding expected to go unmet by existing financial institutions – to rest between $1.3 and $2.4 billion per year through 2030. Its report went on to state that “local enterprise lending for small businesses unsupported by existing large banks and other financial institutions likely runs to several tens of millions of dollars annually.” 

The working group did not disclose all the assumptions and calculations that led to these estimates, but the broad dollar range in the case of affordable housing and the vague dollar range in the case of small business assistance should not be surprising. If one attempts to quantify all the loans and other financial assistance that did not get made by conventional banks and then uses that estimate as a basis for projecting future “funding gaps,” based on a goal of closing assumed outcome gaps, the possibilities are endless. 

But the analysis overlooks a key fact of economics: At any given time, there is a fixed amount of investment capital. Any attempt to close an assumed “funding gap” requires diverting capital from where it otherwise would have gone. For example, City funds appropriated for its public bank are funds that cannot be used for protecting residents, businesses, and their property or for maintaining City property. (Later, I’ll discuss the issues related to using the City’s investment funds to further finance the public bank’s activities.) The report does not acknowledge such consequences. Meanwhile, the Supervisors brushed aside a joint letter from the Office of the Controller and Office of the Treasurer and Tax Collector that points out that “given the significant costs associated with a [sic] forming MFC/Public Bank, policymakers would likely need to divert funding from other initiatives.”

The one initiative that policymakers clearly do not want to jeopardize is the City’s Climate Action Plan (CAP). The CAP begets a $21.9 billion funding gap that the working group takes at face value and suggests can be addressed by the public bank. The CAP declares war on fossil fuels, culminating in a laser-focused goal of achieving “net-zero greenhouse gas emissions by 2040.” While it was not in the purview of the working group to challenge the goals of the CAP, the CAP’s goals are relevant to this discussion because we are examining a crisis in the making. By accepting the legitimacy of the CAP’s strategies, the working group incorporated the CAP’s goals, methods, and assumptions into its recommendations.

The City’s CAP falsely equates some climate impact from fossil fuels with catastrophic climate impact and uses this evaluation to conclude that “it is urgent that San Francisco take aggressive and equitable action to mitigate the catastrophic impacts of climate change.” The CAP fails to acknowledge that the most significant instances of CO2 reductions have come from nuclear energy and the substitution of natural gas for coal. Nowhere in the 300-page CAP does the City acknowledge the positive contributions made by fossil fuels; that fossil fuels are uniquely capable of providing safe, reliable, affordable, and scalable energy; and that their use is essential to protecting residents and businesses from the dangerous effects of climate. Nor does the CAP discuss the impact on its residents and businesses of requiring or encouraging the City government organization, City residents, and City businesses to adopt less reliable, more expensive forms of energy. (For a full account of why “net-zero” is an undesirable goal from the perspective of residents and businesses, see Fossil Future, by Alex Epstein.) 

The rush to replace fossil fuels will make San Francisco a more expensive place to live, work, and operate the city government organization. Low-income residents and small businesses – who are particularly sensitive to the cost of energy – will be the most visible victims of the CAP’s implementation. Meanwhile, the CAP’s strategies will benefit green cronies and opportunists who will be happy to partake in loans and grants that require little scrutiny or accountability. The working group’s recommendation to use a public bank to implement CAP strategies encourages such abuse of City funds.

The working group’s plan assumes funding the City-run bank with $60 million in contributed capital by the beginning of year four, the first year of banking operations. This amount is to be appropriated by the City and granted to the municipal finance corporation (MFC) to establish a public bank. The plan calls for an additional “contributed funding” of $250 million over an eight-year period. These funds would also be appropriated from the City but could be reduced by any amounts received from outside grants and donations.

According to the plan, in addition to receiving a $310 million commitment over the eight-year planning horizon, the bank would “serve as the depository for the City’s assets,” including those assets currently held in the Treasurer’s $15 billion Pooled Investment Fund. For now, the State’s public investment requirements might save the City from itself, since the proposed bank will have difficulty complying with the California Government Code for public funds investments. But if the State were to make special provisions for deposits of public funds in public banks, the City Treasurer will be challenged to maintain his professional responsibilities in the face of political pressure to invest in activities that are, by their nature, riskier than those in which the City currently invests. 

There is an additional, unaccounted-for effect of converting the City’s pooled investments from their current securities to deposits in a public bank. Such action would reduce the demand for such securities, thus negatively affecting the federal agencies, bond sellers, commercial paper sellers, and money market funds whose securities the City currently holds as investments. The point here is not that such an impact would be large but, rather, that the working group did not consider such an impact. Nor did the group discuss the risk to taxpayers if the City were to deliberately move from a proven investment strategy to one that compromises on safety, liquidity, and return.   

The working group’s plan relies heavily on Community Financial Institutions (CFIs) and Community Development Financial Institutions (CDFIs) to carry out many of the details of the public bank’s financing programs. (In San Francisco, there are several such community banks, credit unions, and lending funds whose missions are to support designated sectors of the community.) Such a strategy makes sense from the perspective of operational efficiency. However, this approach puts the City in the position of picking winners from the pool of CFIs and CDFIs. Moreover, as the Office of the Controller and Office of the Treasurer and Tax Collector jointly point out, such an arrangement does not promote accountability: “The impact of City funds may be harder to quantify as compared to existing City programs that involve more direct lending practices.”

What should the city do for housing, small businesses, and its residents’ environment?

The City can help residents who struggle with housing affordability by evaluating its role in sustaining land use and zoning policies that promote racism and its role and that of the State in hampering developers with requirements such as single-family zoning and other building restrictions that make housing less affordable. Such policies have extended the racist housing laws of the past and are at the root of current housing shortages. Rather than divert local tax dollars and other public funds to compensate assumed victims of such policies, it would be more effective – and just – to reform the restrictive land use, zoning, and building policies that continue to create real victims. 

The City could help its small businesses by rolling back its burdensome commercial regulations. City officials’ indifference and insensitivity to small businesses were clearly displayed during the pandemic and are further evidenced by the City’s slow post-pandemic recovery. The City’s priorities for small businesses should be to remove its own barriers to the free conduct of all business within the City and to refrain from actions that restrict energy freedom.  

In its evaluation of residential lending, home ownership, and business lending, the City should reconsider why it regards individual residents and business-owners only as members of an ethnic group, gender, or income class. That such a superficial, divisive approach to public policy continues unchallenged does not inspire confidence that municipal officials will correctly identify problems, develop effective solutions, or ever be able to clearly define their organization’s mission. A city cannot do justice to its residents – who are merely a group of individuals living in the agency’s jurisdiction – if it does not treat them as individuals. 

Finally, the City needs to reevaluate the goals and underlying assumptions put forward in its CAP. It’s bad enough that affordable and reliable energy sources are being abandoned in favor of expensive, unreliable sources. But the implementation of the City’s CAP comes at the expense of residents and business owners who are now pleading with the City to address the rampant crime and deterioration of City-maintained spaces.

Public banks are not a bad idea because they cost too much

San Francisco, a city with a multibillion-dollar budget deficit and a host of serious challenges, is enthusiastically committing over $300 million and jeopardizing its $15 billion investment pool for the sake of a financial venture that incorporates a flawed approach to affordable housing, a counter-productive approach to supporting small businesses, and a fixation on expensive, unreliable energy sources that will further compromise the City’s ability to perform municipal services.

Sadly, San Francisco City leaders now disparage the industry that helped build the City – i.e., the industry that built the Bank of America building and the Crocker Bank Tower (now Wells Fargo) and Galleria. Even New York-based Chase Bank spent $300 million for naming rights to the Chase Center. Instead, these officials should be grateful for the banking industry’s enormous contributions over decades – the commercial, home, and personal loans; the local employment, the local sponsorships, the business and property taxes paid, etc. Whatever deficiencies exist in the highly regulated banking industry will not be overcome by ambitious politicians who want to declare themselves bankers by fiat and execute a plan that promises “profitable operations” while vowing not to “maximize profitability.” 

Unfortunately, San Francisco is not alone in its quest to fund and operate a public bank. The Cities of Los Angeles, Seattle, Philadelphia, and Oakland are in the process of creating their own public banks. 

Public banks are not a bad idea because they cost too much. Such banks would be undesirable at any cost. Public banks are a bad idea because they are a product of municipalities with an unbound mission using their legislative authority to pursue undesirable and/or unachievable goals at the expense of residents and local businesses. A better idea would be for municipal officials to reform their city missions and bind them to a delimited scope of activity, based upon what local legislative and enforcement authorities can and should do on behalf of their residents and businesses. 


Mark Moses is a senior fellow with California Policy Center. He has thirty years of experience in local government administration and finance. His recent book, The Municipal Financial Crisis – A Framework for Understanding and Fixing Government Budgeting, was published by Palgrave Macmillan in 2022 and is available from major online booksellers.     Twitter: @MuniFinanceGuy

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