To pay old pension debt, Oakland weighs bet on future
In a recent press conference, Mayor Jean Quan touted Oakland's balanced budget.
“I’m pleased to say that today we are not making any major cuts to any program,” she said. “We are not laying anybody off. In fact we are making a few modest increases.”
Still, Quan acknowledged that the city is short more than $3 billion. Half of that money is for things like road repairs, storm drains, and sewer maintenance. The rest would fund employee pensions and health care. In short, Quan said the city had enough money, and also, that it didn’t.
“They're effectively bankrupt now,” said John Russo, former city attorney and a city councilman from 1994 to 2000. “Everybody understands bankruptcy is when you can't pay your bills. Oakland can't pay its bills. They don't have the money.”
Oakland isn’t bankrupt yet. It hasn’t defaulted on its debts. There are no creditors threatening to repossess city hall, like Wells Fargo did in the city of Stockton. As the mayor said, there are some economic bright spots. But Russo says they’re not bright enough.
“Oakland can't perform 911 services,” said Russo. “I don't think there's a person in urban America anywhere who would say that a city that cannot respond to a 911 call for help is fiscally sound.”
Oakland police haven’t investigated burglaries since 2010. The department doesn't have a dedicated homicide unit. It has cut its police force to less than half what comparable cities have. For example, Detroit, with a population about twice the size of Oakland’s, has a force that’s about four times bigger. And the city still has bills it can't pay. One of the most problematic is an old account for retired police and firefighters.
Bob Crawford is a Sergeant with the Oakland Police Department. At 73 years old, he’s still patrolling his East Oakland beat, but he plans to retire soon. And the pension system that’s supposed to take care of him is short half a billion dollars.
“It’s my livelihood,” he said. “It’s what I have to live on the rest of my life.”
The system Crawford’s talking about is the police and fire retirement system, or PFRS. It started in 1951 and closed in 1976, but it’s still paying benefits to about 1100 former police and firefighters, plus one active police officer – that’s Crawford. Compared to CalPERS, the state-run pension system Oakland police use now, it’s small. But it will cost the city at least $100 million this year alone.
“Those of us that have pensions get paid less, and part of our pay is the pension. So it’s money that we earned. It’s a contract. It’s an obligation,” Crawford says.
The city funds PFRS with a property tax. Ideally, that tax – on its own – would be enough to fund the system. But the city is also using that money to pay off loans it used to help fund PFRS in the past. It’s too much debt for the city to handle. To pay for PFRS this year, the city would have to cut almost ten percent of its budget. Next year, it will be more.
Legally, the city has to fund PFRS. The only way out of it would be to declare bankruptcy – which the city’s not going to do – or to pass a law saying they wouldn’t pay, like San Jose voters did earlier this month. Instead, Oakland is considering a third option.
Oakland Assistant City Administrator Scott Johnson says Oakland has a plan to issue what are known as “pension obligations bonds.” These are a kind of loan. The plan is for Oakland to borrow about $210 million on the global bond market. They’d pay all that money to PFRS up front, and get some breathing room before the next big contribution comes due, five years from now. Meanwhile, PFRS parks that money in the stock market, and hopes that it grows.
“We really believe this is most responsible plan,” said Johnson. “This is more of a long term structure. We’re not kicking the can down the road, really, matching up special revenues that come in to paying the obligations as they become due.”
For this plan to work, two things need to happen over the next five years. First, the economy needs to improve. That would get Oakland some much-needed property tax dollars. Second, the stock market needs to grow. If the PFRS funds earn more in the stock market than the cost of the loan, then, problem solved. If not, the city owes the amount of the loan, plus interest, plus what it still owes to PFRS. The plan has support from the retired police and firefighters in the system. But critics, like Contra Costa Times columnist Daniel Borenstein, say it’s a risky move.
“Would you borrow money against your house and use that money to invest in the stock market?” said Borenstein. “They may win the bet, they may lose the bet, but what they need to do first is evaluate the risk, in dollars and cents, so that citizens and the mayor and city council all understand how much is being placed at risk. In other words, how would they pay the bill if they lose the bet again?”
Notice how he said “again.” Oakland has done this before. In 1997, the city issued about $400 million in pension obligation bonds. The point, just like now, was to buy it some breathing room. The city put all the money into PFRS and got a pension “holiday.” Fourteen years where it didn’t have to pay anything. It’s not totally clear, though, whether that was a good long-term choice. In 2010, the city auditor issued a report saying the bonds had set the city back $250 million.
“There’s no doubt the city is in deep financial trouble right now,” said Borenstein, “but this gamble could put them in much worse financial shape three and four and five years down the line.”
Whether or not the 1997 bonds were good for the city, it’s still risky to issue them now. If the stock market goes down, the city is stuck with a huge debt. So Oakland has a choice: make painful cuts now or take a bet that the future will be better.
The Oakland City Council will vote on the bond issue July 3. For an Oakland City Auditor Report concerning the city’s first attempt at issuing pension bonds, click here.