Your parent is arguing that the lines drawn along race are merely correlated, rather than the cause. Thus, not institutional racism.
In other words, the system is failing people not because of their colour, culture, or ethnic origin, but because of their class, which happens to roughly line up with race.
The difference between "You are poor because you are Mexican/from Mexico" and "You are poor because you started out poor, and it just so happens that you are from Mexico where a lot of people started out poor".
I don't think I can refer to is as institutional racism. Maybe there are some laws that disproportionally effect minorities in California - I'm not an expert so I don't know. However, I don't think the term racism actually belongs. It seems to me that these are the effects are due to class, and (through the indirect effects of racism of old), blacks and other minorities are disproportionally poor. Because, especially in urban centers, that minorities make up most of the poor, I'm guessing, that one may mistakenly assume its due to racism, when its actually because of socioeconomic background.
"Institutional racism is any system of inequality based on race. It can occur in institutions such as public government bodies, private business corporations (such as media outlets), and universities (public and private)."
It goes on to say that the definition is contested, with one definition what you've quoted above.
Additionally: "Institutional racism is the differential access to the goods, services, and opportunities of society."
"When racism is built into the institution, it appears as the collective action of the population", thus "San Francisco is racist".