Lawsuit: SF let Uber and Lyft kill taxi cabs, and stuck credit union with the bill

In 2009, with the Great Recession at its nadir, with banks foreclosing on homes and with city budget coffers empty, then-San Francisco Mayor Gavin Newsom hit on a novel solution to keep the public sector going: Start selling off public assets.

Since the world was neither ready to sponsor City Hall (not directly) nor ready to re-privatize the 30-Stockton and the N-Judah—not quite yet—the San Francisco Municipal Transportation Agency (SFMTA) moved to monetize a valuable asset it did have, and had a monopoly on: taxicab permits.

Then and now, putting a taxicab out for hire on the streets requires a city-issued permit, called a “medallion.” In other cities such as New York, taxicab medallions proved so valuable that they fetched $1 million or more at auction.

Initial plans to market medallions to investors and speculators were dropped in favor of a more worker-friendly scheme. Taxi medallions would be sold to qualified, proven taxi drivers (who until then could only receive one of San Francisco’s roughly 1,500 medallions by putting their name on a list, and waiting until a current medallion-holder retired or died). But to sell these assets at a fixed price of $250,000 to cab drivers paid mostly in cash, the SFMTA needed a lending partner.

Since commercial banks proved unwilling to issue any additional risky loans, the SFMTA struck a deal with the San Francisco Federal Credit Union. The credit union would finance loans needed for medallion sales. Drivers would pay about $1,200 a month—in most cases, no more than 20 percent of their earnings.

In turn, SFMTA would take a cut on each sale of an existing medallion—but would be able to clear a cool $250,000 by issuing and selling brand-new permits. And at that time, there was pent-up demand for hundreds of extra taxis on San Francisco streets, according to transit experts and consultants.

In this way, beginning in 2010, the SFMTA sold 700 medallions, netting about $64 million through April of 2016.

In return, the SFMTA was to do what it could to ensure that a permit to drive a taxi in San Francisco remained a valuable asset. As anyone venturing out onto a street in this city can tell you, this did not happen.

At the same time taxicab permits became a fungible good, salable on the open market a few startup companies began offering the same service taxicabs provided—only at a lower rate, without the same regulations.

Today, city streets are now flooded with tens of thousands of privately-owned personal vehicles driving for Uber and Lyft. Taxicab medallions are now worthless. The city hasn’t sold a medallion in nearly two years. Truthfully, they are worse than worthless: They’re toxic assets. Drivers unlucky enough to have bought a $250,000 medallion—a loan that taxi-driver earnings guaranteed to make whole within ten years—now can’t cover their monthly loan payments.

Some drivers have received modifications, but buyers of nearly 100 medallions—one out of seven sold, with friendly finance from the credit union—have given up and foreclosed. The taxi industry appears well on its way toward total collapse.

Most of the blame for this is due to Uber, Lyft, and the investor-subsidized products they provide at a rate lower than a taxi. But it’s also allegedly the fault of regulators like the SFMTA, according to a lawsuit filed by the San Francisco Federal Credit Union in San Francisco Superior Court on Wednesday.

Having the credit union—which also finances civic-minded projects like affordable housing and other municipal efforts, according to CEO Jonathan Oliver—sue the city is unprecedented enough. It’s never happened.

But this also appears to be the first time a regulatory agency has been sued for allegedly failing to regulate, thereby allowing Uber and Lyft to take over.

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The suit seeks $28 million in damages from the city, money it will attempt to convince a jury to award.

Notable, and a fact surely that will not be lost on anyone: That same jury will travel through the same city streets clogged with tens of thousands of Uber and Lyft vehicles.

John Cote, a spokesman for City Attorney Dennis Herrera, who represents the San Francisco in legal proceedings, said the city had received the suit and was in the process of reviewing it. He did not comment further.

“They stuck their head in the sand,” said Oliver, the credit union CEO, describing the SFMTA’s approach to Uber and Lyft destroying the taxi industry. To this day, the SFMTA’s website declares, somewhat pitifully, San Francisco as a “taxi town”—and describes its mission as promoting a “vibrant” taxi industry.

In total, SF Federal Credit Union issued more than $125 million worth of loans for taxicab medallion sales—about 10 percent of its total assets, according to Oliver, the CEO.

According to the suit, the credit union only agreed to partner with the city to sell medallions on the promise that the city would do everything in its power to protect taxi cab medallions’ value.

Instead, despite frequent and repeated warnings from taxi drivers, certain SFMTA officials—and the federal credit union, which began complaining in 2013 that the SFMTA was letting the value of its assets crumble—the SFMTA stood aside and did nothing, the lawsuit alleges.

At any time, the SFMTA had the power to declare the sales program over and start buying medallions back from buyers. At that time, according to the terms of the agreement laid out in contracts signed in 2010 and 2013, the agency would be required to remit to the credit union any balance on any outstanding loans.

Photo by Justin Sullivan/Getty Images

By not moving to regulate Uber or Lyft and by not making any efforts to modify the medallion-sales program since the last time a medallion was sold in April 2016, the SFMTA has “constructively terminated” the program, the suit alleges.

The SFMTA also brushed off concerns from the credit union—promising at one time to alter the sales program to ameliorate the credit union’s concerns after it conducted a study. No study was ever launched.

Indeed, the city actively promoted taxicab alternatives while still offering taxicabs for sale as a viable investment opportunity.

In 2012, with the medallion sales program still in its successful early days, then-Mayor Ed Lee launched a “sharing economy working group” to ease cooperation between the crop of new tech startups and city regulators. The next year, while the SFMTA continued to push the taxi-medallion sales program and the credit union continued to write loans, Lee declared July 15, 2013 “Lyft Day in San Francisco.”

Frequent pleas to do something about Uber and Lyft were squashed mostly at the behest of Lee and others in his orbit, who preferred to promote the very entity ruining taxi medallions’ value, the lawsuit alleges—a contention supported by other observations.

“The problem is Room 200,” the city’s taxicab regulator fumed to researchers from Harvard, referring to the mayor’s office.

The suit filed Wednesday was well on its way to being filed prior to Lee’s death. The credit union first filed a claim, the precursor to a lawsuit, against the city in November. That claim was almost immediately rejected.

If the credit union’s lawsuit is successful, the SFMTA could be made to buy all of the taxicab medallions sold with credit union financing, a hit of millions of dollars—right when the transit agency is budgeting for another budget shortfall.