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Fresh off a huge victory against UCB in court, Mayor Jesse Arreguin signed onto a one-sided deal with UC that shortchanges the City on money, ties the hands of smarter mayors in the future, and all but guarantees that the City will be embroiled in yet more litigation in years to come. The magnitude of Arreguin’s colossal debacle is leaking out thanks to recent public disclosures of the settlement agreement itself. To understand how bad a deal it is, you need to understand two things: (1) the money at stake and (2) the legal restrictions Arreguin agreed to, which make the money settlement all but unenforceable. Once you do, you will really wonder what is going on.

Taxes, Taxes: We Ain’t Going to Pay No Bleeding Taxes

Back when UCB was purely an educational institution, not a money-making juggernaut, the City had little to no leverage under the state constitution to require UC to contribute money towards reimbursing the City for the cost of making infrastructure improvements (sidewalks, streetlights, sewers, etc.) and providing basic services such as fire, EMS, ambulance, and police. As a result, the mayors of years past went hat in hand to ask the Chancellor to pay the City a so-called “impact fee,” which was entirely voluntary. As might be predicted, these conversations did not go well for the City. Mayor Tom Bates eventually reached a deal that resulted in an impact fee payout that is now worth $1.8 million/year. By 2021, the difference between what UCB pays the City and UC’s consumption of city services and dollars for infrastructure exceeds $20 million/year.[1] 

Fast forward to today, when UCB makes money hand over fist in a myriad of ways that are not tied to its educational mission. These money-making ventures include operating public parking garages, renting out its venues for concerts and other public events, leasing space to private businesses, catering parties, licensing technology and patents, operating childcare centers and marketing businesses, selling merchandise, and on and on. Many of these income-producing ventures, such as paid parking lots, are subject to local taxes despite UC’s status as a state university. See, e.g., BMC Ch. 7.48 (public parking tax). This point was made clear in 2019 when the California Supreme Court ruled that UC owed San Francisco parking taxes for its public parking lots. City and County of San Francisco v. Regents of University of California (2019) 7 Cal. 5th 536. This 2019 decision essentially slammed the proverbial door on UC’s arguments that it could avoid paying local taxes on its money-making ventures.[2] 

These unpaid taxes and fees represent real money for the City, but for some reason the City has not been pressing the tenants and UC to pay up. For example, UCB recently began renting three floors of its new Berkeley Way West building to commercial tenants[3] such as Microsoft, which rents 27,000 square feet. These tenants are obligated to pay taxes and fees to the City. Berkeleyside recently estimated that the uncollected payments on properties UCB leases to commercial tenants could be as much as $1million/year.[4] Likewise, UCB has been collecting City parking taxes for years at its public parking lots, but it has never paid over those monies (which are the City’s own funds) to the City.[5] 

In their recent settlement deal, both the City and UCB acknowledge that UCB and its commercial lessees are obligated to pay local taxes (see Settlement Agreement (SA) Para. 4.8 and 4.9). Rather than insist that UCB turn over taxes collected on the City’s behalf from third parties such as commuters who park in UC lots or pay the City its outstanding tax bill and its tax obligations going forward, the City gave UCB a truly sweet deal. In exchange for UCB’s unenforceable (see below) promises, the City agreed (a) to allow UCB to keep all the City parking tax funds it has collected over the years from parkers at its public parking lots (which conservatively is in the millions of dollars); (b) allow UCB to continue to keep the City tax collections on its public parking lots until such time as the City begins to collect the tax from its own City lots and BART lots; and (c) bar the City from collecting any “assessments” (read taxes and business license fees, which are proof of tax payments) that it is not already paying[6]! Wait, What???!!! 

That’s right, UCB, which from all accounts is quite literally Berkeley’s biggest municipal tax cheat, just cut a deal to hold onto millions of City tax dollars that it collected from commuters AND avoid paying municipal taxes in the future! How does that make sense? Does the Mayor plan to offer this deal to everyone in Berkeley? If so, we predict a stampede to City Hall. 

Setting aside the sheer stupidity of that move, does the City Council not realize that it has just opened the City up to an equal protection challenge by other taxpayers? Because Jesse Arreguin’s administration has effectively allowed UC to avoid all local taxes (and pay over money it collected from other to pay taxes), it is only a matter of time before a clever local business owner (or plaintiff’s attorney) seizes the ripe opportunity to sue the City for a constitutional equal protection violation. (Perhaps an employee in the Finance Department will make a whistleblower complaint for a future payday.) The US Constitution—that pesky document—requires that taxes be applied equitably to all who are similarly situated. A city cannot enforce tax laws on similarly situated businesses in a discriminatory manner. Put simply, courts tend to frown upon local leaders randomly deciding not to enforce taxes on their friends (i.e., Chancellor Carol Christ). If they do, it is called an equal protection violation (or worse under the criminal code). 

Our Money, Our Decision 

While it is true that the Settlement Agreement provided that UCB would pay an increased (voluntary) impact fee to the City—from $1.8 million/year to just over $4 million/year—that increased fee came with significant strings and is all but unenforceable.[7] Unlike tax payments, which go into the City’s general funds and can be used to pay whatever the budget provides, the Settlement Agreement restricts where the City can spend UCB’s impact fee money. It requires that $2.8 million of the roughly $4 million be spent every year on fire and other city services (SA 3.4.1), and most of the remainder goes towards infrastructure improvements in areas around the campus where UC owns significant property. Notably it provides that in 2022, part of the annual impact fee payment must be spent on “wildfire risk management and fuel reduction on UC owned property,” (SA 3.6.2). UCB’s planned enrollment surge likely will necessitate a new City fire station, but the agreement provides that none of UCB’s impact fee monies can be allocated “to the development of a new fire station.” SA 3.7. 

The Agreement also provides that UCB will have active and direct oversight on how “its funds” are expended. For example, the City must present proposed infrastructure projects to the Chancellor and Vice-Chancellor in non-public meetings before expending the “infrastructure” funds. (SA 3.7.) If UCB does not like how the City spends its funds, it can stop paying. (SA 3.7 and 3.8.) (This unilateral control by UC poses a problem under Berkeley’s Charter, particularly as the City is effectively foregoing the collection of business taxes and license fees in favor of collecting an impact fee.) The agreement also illegally abrogates the City Council and Mayor’s duty to control expenditures of monies collected and then taken from the General Fund. 

Promises, Promises  

This point brings us to the BIGGEST problem with the Mayor’s UC settlement: Enforceability. The City gave up all of its power in the Settlement Agreement for UC’s unenforceable promise to pay. As they say, the devil is in the details. The City’s agreement to dismiss its existing lawsuits and not file a suit against UC in the future are fully enforceable against the City; but UC’s promises to pay and to cooperate over issues of mutual interest are not. 

Promises to pay are not equivalent to a cash payment. A settlement agreement ending litigation (as this agreement did) should, if negotiated properly, contain strong “incentives” to ensure that the promised payment is made in the future. Generally, lawyers write these “incentives” to resemble the proverbial Pandora’s box, so that if the promised payment is not made, all Hell will break loose. For instance, where, as here, a court case has been settled, the agreement will generally allow the party that does not get its money to restart the case and dissolve all agreements it may have made not to bring any other suit. It also typically will require the non-paying party pay a LARGE PENALTY if they bust the agreement through non-payment of the settlement amount and then lose the underlying lawsuit. 

So did Jesse get these guarantees? In a word, No. This UC settlement is remarkable because it does not contain a Pandora’s Box of horribles that will unleash if UC fails to pay. Instead, it is a wholly one-sided settlement agreement in UC’s favor that effectively puts the City on the sidelines—bound and gagged—hoping that UCB pays it something, but powerless to object if it does not. Yes, that is right, the City gave up all its leverage to enforce the annual payment the mayor supposedly extracted from UCB. UC gets to decide every year whether it will pay the $4.1 million, and the City has no meaningful leverage whatsoever if it does not. (Crossing your fingers, Mr. Mayor, does not count as an enforcement strategy.) 

The key fact is timing. The City will have performed its end of the bargain (giving up its lawsuits) before UC has to deliver on its bargain (promise to pay). The City’s proverbial big stick was its power to challenge UCB’s ambitious expansion plans and cause its projects to fall under the court’s supervision instead of UCB’s exclusive control. By agreeing to dismiss its lawsuits against UCB and not file a lawsuit against UCB’s latest plans without an effective provision to permit suit later if UC does not deliver, the City has delivered its part of the bargain without ensuring that UCB performs its part of the bargain or has a strong incentive to do so. 

Under Paragraph 7.3, if the City decides to terminate, the City will lose the $4.1 million/year forever AND is legally barred from restarting the dismissed lawsuits or filing new lawsuits objecting to the new LRDP or any project within its scope AND cannot seek “any compensation or damages related to enrollment increases at the University.” The first part of this penalty—foregoing the impact fee payment—is the poison pill that other commentators have referred to.[8] It means that the risk is all on the City if it wages war with UC over UCB’s failure to live up to any part of its deal. 

The second part of that restriction—the permanent all-encompassing ban on most future lawsuits—is the thing that has us shaking our heads. Why in the world would the mayor agree to that restriction as it removes all incentive for UCB to live up to the bargain that it struck? Put simply by way of example, if in 2023, UCB stops paying the City the $4.1 million annual impact fee and never pays it again, the ship will have sailed on the City’s ability to challenge UC’s expansion plans because the litigation was already dismissed and the Mayor promised not to file any more litigation as to certain future projects. Further, UC wrote in so many conditions to its impact fee payment, that the City will never practically be able to sue UC to enforce payment. Thus, if UC increases undergraduate enrollment to 90,000 students and builds a 30-story tower on Clark Kerr campus and paves the rest over for student parking, the City can do nothing (!!). How in the world could the City Council agree to that? 

Again, we are left scratching our heads. We understand why UC wants the City effectively neutered; we just don’t understand why Mayor Arregiun agreed to be neutered and to neuter all future mayors (but see below as to one possible explanation). 

Secrets & Lies 

We believe that Jesse Arreguin decided to handle the Settlement Agreement approval process in closed session with just the city council present. While there is precedent (and possible legal justification) for holding a discussion of a settlement of a specific pending lawsuit in closed session, there is no precedent for holding a closed session to discuss matters far outside the narrow scope of a single lawsuit, as happened here. 

As noted above, the Council’s secret vote to accept the Settlement Agreement terms ventured far outside the narrow lawsuit challenging UCB’s environmental impact report on the Upper Hearst project under CEQA. It also addressed the enforcement of the City’s municipal tax code and allowed UCB to keep the accumulated millions in City funds that UCB collected over the years from its public parking lots by way of City parking taxes paid by parkers. The Council also agreed to conditions on UCB’s future pay-over of collected City parking taxes in a way that is directly at odds with the City’s municipal tax code. That is a big no-no, to use a legal term of art. The City Council does not have the power to do either of these things, much less do so in closed session where there is no lawsuit involving taxes pending.[9] 

Another irregular aspect of the whole situation is that the Settlement Agreement was not announced on the City website and still has not yet been posted there despite the fact that the City has already executed the agreement. The announcement of the settlement, which appeared on Jesse Arreguin’s personal campaign website, jessearreguin.com, featured a campaign-like ad, complete with a video in which Chancellor Christ lauds the mayor personally. Presumably this slick public (partial) reveal was the work of the outside public relations firm recently hired at taxpayer expense to work for the Mayor’s Office. (Interesting fact: Immediately after announcing the existence of the UCB settlement agreement, Arreguin asked the City Council to approve increasing their contract amount by about 300%.) 

Nevertheless, the lack of information from the City proper and the degree of disinformation put forward by the Mayor is startling. For example, he apparently told Berkeleyside that UCB agreed to pay its parking taxes going forward but neglected to mention that it would only do so if certain conditions are met and was being allowed to keep all of the City’s funds collected from parkers in prior years.[10] He also touted payments he claimed UCB would be making towards certain of his pet projects —for example, public toilets in the Telegraph area—but neglected to mention that UCB was controlling where UCB’s money was spent and that the City had no way to enforce these payments. 

Recall or Cuffs: What are the options now? 

If you are wondering whether this settlement deal is legal, you are not alone. How can a democratically elected mayor agree with a large tax cheat (UC) that it can keep millions in City Funds and dictate how the City can apply its voluntary impact fees (paid in lieu of general taxes)? Likewise, how can one mayor bind the hands of all future mayors on the circumstances under which taxes can be assessed UC that are at odds with the City’s tax ordinances or sign away the right to challenge UC over a development project that UC has not yet proposed? We seriously doubt any of this will pass constitutional muster. It also just plain smells bad. Ratified in a closed City Council session and leaked to the public weeks later, the agreement has already spawned one lawsuit and we predict more to come. 

One very credible take on this whole situation—heard from several sources—is that the Mayor agreed to look the other way at UC’s illegal behavior such as not paying taxes and not abiding by CEQA in exchange for some really great press. The “bribe” in this case would be all of those nice things Chancellor Christ said about him and the settlement on the video featured on jessearreguin.com that extolls his achievement in reaching such a “historic” settlement. Why would the mayor do this? Well, according to many sources, Jesse Arreguin plans to run for higher office soon. 

Viewed in that light, the unenforceable promises begin to make sense. They allow Jesse Arreguin to boast about the promises he got from UCB, but UCB never actually has to honor those promises in the future. So, UCB and Jesse Arreguin got a deal that works for both of them: UCB does what it wants, and Jesse gets good press.[11] But what about the citizens of Berkeley? 

Hmmm. We smell a rat and an elections violation. 

Hearing rumors of a recall election. Perhaps it is time for one.