Sunday, July 29, 2012

Oakland's Financial Time Bomb

The SF Chronicle reports on what is a microcosm of what is going on at the local level of many cities. The time bombs will starting going off in just a couple of years. Here's SFC on Oakland:
It was 1976 when the city of Oakland realized it had a major problem on its hands: A pension created 25 years earlier to benefit police officers, firefighters and their widows was proving too costly to afford.

So the city closed the plan to new employees and later passed a parcel tax to pay for the pension. Yet today, that pension remains the source of one of Oakland's biggest headaches.

It's a generous plan that awards its retirees and widows - who now number 1,086 - raises to match up to two-thirds of the pay of the current-day workforce. But the city's costs ballooned because it never adequately contributed to the pension fund, relied on borrowing for years to give itself holidays from pension payments and watched investments go south. The result of the borrowing is that the pension, known as the Police and Fire Retirement System, has cost Oakland taxpayers hundreds of millions of dollars more than it should have. In 2010, City Auditor Courtney Ruby found Oakland spent $250 million more on the pension than it would have if the city had simply paid into the pension - and that was just for one of its bond deals.

Last month, the majority of the Oakland City Council, at the urging of Mayor Jean Quan's administration, voted to borrow money once again to cover the pension bill - $210 million in new pension bonds that will cost another $105 million in interest over the next 14 years. But the loan will allow the city to avoid paying for the pension from its general fund for four years. If the city hadn't borrowed the money, it would have been forced to take $38.5 million from its roughly $400 million general fund to pay for the pension this year. Such a move would have required deep cuts to city services, which already have taken a hit due to the slumping economy, state budget cuts and redevelopment shutdown....

Councilwoman Libby Schaaf, who voted against the bonds last month, criticized the idea of paying $105 million in interest to avoid a $38.5 million payment into the pension fund this year.

"Pensions are supposed to be paid for while the person is working," said Schaaf. "Obviously, we failed terrifically in doing that."

The bond sale relieves fiscal pressure now, but Schaaf said it creates pressure in the future. In the last three years of bond payments, starting in 2024, the city will have to pay $161 million in bond and interest payments on top of the $123 million it will owe for the pension itself.

"I'm terrified that the city of Oakland will someday need to declare bankruptcy," said Schaaf. "It creates a false sense of security that our finances are in order while our pension obligations mount and the debt balloon payment becomes due, starting in 2024."...

By all indications, the city never had a plan to pay for the Police and Fire Retirement System when it was started in 1951.

It had a $38 million hole from the beginning, said Bob Muszar, a retired Oakland police captain and president of the Retired Oakland Police Officers Association. Muszar has spent years researching the pension. He said that by the 1970s, the pension's shortfall had grown to over $200 million...

The City Council this year sued the board that manages the pension fund, alleging that retirees' benefits should have been cut when current officers got pay cuts. "All of it is outrageous," said De La Fuente, who voted against issuing the latest bonds...

Nita Balousek feels a sense of betrayal. The city's lawsuit and the city's seemingly tenuous grasp on its finances have her fearful that someday it might file for bankruptcy - and the pension might be lost forever.

"I feel on edge," she said. "I'm deferring making any financial decisions."


  1. >Oakland City Council voted to borrow money to cover the pension bill - $210 million in new pension bonds will cost another $105 million in interest over the next 14 years. loan will allow the city to avoid paying for the pension from its general fund for four years.

    Same as with much public(and some corporate)debt, it is never meant to be repaid, just rolled over(or more added).

    The new normal?

  2. Can you say: "Kick - The - Can".

    Rinse and repeat....

  3. Don't worry, the cities like these will be able to blame all of this on the free market and their idiot constituents will lap it up. Bailouts to follow.

  4. Wasn't Jerry, now California governor, mayor of Oakland?
    uh, oh :-(