What Is The “PFRS” Obligation, And How Should Oakland Address It?

by Nathan Stalnaker

Nathan Stalnaker is a board member of Make Oakland Better Now!  Oakland’s PFRS obligation will be on the agenda at the joint Make Oakland Better Now! East Bay Young Democrats meeting on Sunday, February 20, 2011, 2:00 p.m.  at Lakeshore Avenue Baptist Church, 3534 Lakeshore Avenue (directions).  All are welcome.

Current Oakland police officers and fire fighters, like many California public employees, receive retirement benefits under the Public Employees Retirement System (“PERS”).  However, before PERS, Oakland’s city charter provided for an Oakland retirement plan for public safety employees known as the Police and Fire Retirement System, or “PFRS.”  The program was closed to new enrollees  in 1976, but there are still more than a thousand retirees and their widows or widowers receiving PFRS benefits.

Under the City Charter, Oakland was supposed to contribute annually to this retirement system on a schedule that would leave the system fully funded by 2026.  However, in 1997, the City of Oakland issued $417 Million worth of Pension Obligation Bonds (“POBs”) to buy a pension “holiday,” and cover its PFRS contributions for 15 years. In so doing the City optimistically assumed market returns from these bonds would cover the costs of the debt service; the downturn in the market serves as a good reminder that decisions of this magnitude should be based on reality and reasonable rates of return.

The contribution holiday is now over, and Oakland is required to start making payments this July.  According to an analysis performed for the Auditor’s office, the course taken by the Council cost put us a quarter of a billion dollars behind where we would have been had we made the payments.  Starting July 1st, the City will have to play catch-up with PFRS by paying more than $40M.  These payments are coming due in the middle of 3 straight years of significant budget deficits and an environment of tepid economic growth.  There is no way to spin this issue in a positive manner.  Considering the amount of fat in the budget that has already been trimmed, this new expense will be especially painful.

At the February 22 meeting of the City Council’s Finance and Management Committee, City staff will recommend a solution that involves more POBs, with balloon payments in the hundreds of millions of dollars coming due starting less than fifteen years from now.  Make Oakland Better Now! believes that neither staff nor Council have received nearly enough answers to the critical questions relating to this high-risk gambit.

Pension reform asks us to consider some of the fundamental obligations of local government. For example: 1) what are fair and equitable pay and benefits for public sector employees, 2) at what point does that pay package start to inhibit the ability of government to perform its functions, and 3) to what extent is the current generation of local leadership willing to constrain the budgetary decisions of the future legislators?

What is the way forward?  MOBN! would like City leaders to consider the following questions:

1) Should financial and budgetary concerns and reforms be brought directly to the voters?  If so, when and in what form?

If the defeat of Measure X in the most recent election  is any indicator, Oaklanders are unwilling to go forward with more taxes to institutions they perceive are not open to reform.  There are many shapes that this reform could take.  MOBN! is open and willing to discuss these options with elected officials.  We are also more than happy to put our collective efforts in ensuring the passage of reforms that we agree with.

2) What signal does the City send by issuing more bonds to cover the pension obligations?

The City of Oakland is your cousin with a credit problem.  By issuing bonds, the City is admitting that our leaders are unwilling to confront the issue and intend to continue their denial.  Whatever the chosen course of action, we cannot move forward and start the healing process by issuing more bonds to cover the cost, even for the short-term. A payment holiday only delays the pain a couple of years.

The 1997 issuance of bonds put the City in the hole by  $250M.  Making the same decision now as then, especially in this weak and uncertain economic environment, seems like madness.  The bonds will most likely cost more than they are worth, only exacerbating the situation when it can no longer be ignored.

3)      Should the City amortize its PFRS obligations past 2026?

PFRS is a creation of the Oakland City Charter, which presently requires that the entire anticipated pension obligation be funded by 2026.  But the members of the plan are expected to live and continue receiving benefits past 2050.  Allowing a corresponding amortization of the pension obligation would require an amendment to the Charter.  Such a change would limit the discretion future City Councils would have over the budget.  However, it would also ease the payments the City would have to make in the present.

4)      Can Oakland Amend Its Charter In Other Ways That Reduce PFRS Expenses?

Here’s one example:  The City Charter provides that PFRS pension payments track compensation increases of current police and fire employees.  Put simply, this means that if a current police sergeant gets a raise, a retired police sergeant gets a raise.  The City’s actuaries have set the City’s required contribution to PFRS, in part, by assuming increases starting at 3.5% annually (this year for fire, in 2013 for police) and increasing to 4.5% for police and fire in 2016.

Are there other, more conservative escalators that make more sense?  What would be the effect on the expense side of the equation of a Charter amendment that changed escalators?

5)      What are all of the possible options?

City staff needs to present Council with a greater range of bold options to address the PFRS issue.  None of the actuarial assumptions used in the analysis are above examination.  No one condition in this puzzle is sacrosanct.  Significant drivers on the expense side are not set in stone.  The same holds true for factors on the revenue side (tax revenues, return rate assumptions). The options in the staff report should reflect this courageous, broad approach to its analysis of the PFRS situation.

The way forward on the PFRS issue is bound to raise ire and contention.  MOBN! is committed to advancing this issue in an environment of respect and openness.  We ask that the parties involved not engage in a financial shell game  and proceed forward with facts and honest numbers that are not manipulated for political gain. MOBN! will advocate for public policies that help create an environment of fiscal sanity in City Hall.  Fiscally sustainable government protects our interests as well as those of future generations.

6)      What Is The Big Hurry?

Does this really have to be decided before July 1, or does the City have time to look at all of its options, including Charter amendments?  The City staff report (page 6) indicates that the Tax Override account dedicated to payment of this obligation presently has a surplus of more than $76 million.  Is there a reason the 2011 installment cannot be paid from a portion of this surplus to allow the City to openly and publicly look at all of its pension questions?

Oakland is a beautiful City with great potential.  The way forward is working together and thinking broadly; not on how to protect my own interest or group, but with an eye to the whole.   If we’re pitted against one another, then we lose.

For other commentary on the PFRS quandary, see Daniel Bornstein’s recent article here, City Attorney John Russo’s article here and the City Auditor / AON special audit report here.  City staff’s report for the February 22 meeting is here.

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26 responses to “What Is The “PFRS” Obligation, And How Should Oakland Address It?

  1. The City Of Oakland retired medical reimbursment is also underfunded.

    • anybody remember this blast from the past ..?Comment from gizmoTime: April 15, 2009, 7:51 amSadly Yakima connuties to be the butt of depreciating comments throughout the state and beyond and “Dave” is becoming a charicature of the bloviating bag of long winded right wing nuts who just don’t seem to realize that their philosphy and system of governing is GONE, Rejected by the voters of America and at present 66-68% of the people. We have had 8 years of failed government, why in the heck would we want more of what does not work? The frantic and desperate ranting of “Dave”and his ilk are not adding anything to the debate other than “NO”. Get with it man, you are out of sync with the rest of the state and country. Get over it and get on board to help rebuild what the failed philosophy has destroyed or keep it up- we enjoy the wailing and moanng for that what WAS knowing that like the dinosaures- doomed to extinction eventually. Go buy your assault guns and load up on ammo in preparation for the retaking of America! HAIt is sad.charicature:ludicrously exaggerating the peculiarities or defects of persons or thingsRight on.***gizmo come out come out wherever you are

  2. Nathan: asking City officials to “not engage in a financial shell game,” use “honest numbers” that are “not manipulated” and demanding “fiscal sanity in City Hall?” These are radical concepts you are advancing! Good luck!

  3. Unlike CalPERS and the closed end fund OMERS for civillian employees that predates entering CalPERS, PFERS is a poorly designed and managed system. That said, it is not legal to change benefits on retirees. It would be like your bank telling you that your 30 year fixed morgage is all of a sudden going to be raised to 20%..

    What to do?

    1. We should look at how PFERS can be properly managed by its governing board.
    2. Floating bonds is reasonable if the city also begin to save money as the economy improves to pay them off. Many cities have done this successfully.
    3. Given that the amount coming due for the bonds is greater than the entire city general fund (excluding Police and Fire), not refinancing means shutting down the city.
    4. Who should pay? This generous retirement program should be paid for by the Police and Firefighters it was designed for. City employees have already taken a 10% pay cut and Firefighters have put money on the table too. Who hasn’t? The Police deferred a raise and City Attorney John Russo and Auditor Courtney Ruby still take home their full salaries.

    • I’m glad no one is talikng about the real cause. Every single member of the city council and mayor in recent years has been elected with the financial and volunteer support of our very own employee unions. These unions have found the ultimate loophole in contract negotiations: own the guy on the other side of the table.I suggest you watch how Wisconsin plays out. It may be the only alternative to ultimate bankruptcy, as the grand total of all the pension obligations we have now indentured the taxpayers to (for work performed up to now, let alone the continued accumulation into the future) greatly exceed any reasonable level of taxation for a sustainable city.But that is only true if you compute the pension obligations on the basis of assumptions deemed reasonable by generally accepted governmental accounting practices. Which we have never done, and won’t as long as the guys negotiating contracts with the unions are owned by the unions.Stick a fork in this city, it’s done.

  4. Love Oakland:
    PFRS closed in 1975. (measures R&S) which placed new hires of the Police and Fire Department in CALPERS. PFRS has been historically underfunded. Members of PFRS contributed their share based on periodic actuarial projections.

    PFRS was voted on by the taxpayers at the time of it’s creation.

    While I am in full agreement that all employees must help with their pensions they will receive in the future. The PFRS mess is completely a creation of the city and a function of historical underfunding and questionable fund management

  5. 400Mill works out to some 1,000 per every child/man/woman currently living here. a good chunk of those residents are below poverty level, another chunk just making ends meet. a large portion of our businesses are not for profits and government entities that don’t pay any taxes.

    Only are a couple of options. One is to kick the can down the road by hoping the bond market bets we won’t go Chapter 9. Very possible that when all the other cities and states catch up to our dire situation, there will be safety in numbers and the retirees will accept massive cuts in contractual benefits.

    The other option is lay off say 40% of city employees and cut the compensation of the rest. That will make it impossible to even imagine growing our city out of it’s fiscal hole.

    Go for option one but lay the political groundwork for the battle that will come when the balloon payment comes due and can’t be refid.

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  8. I’m glad no one is talking about the real cause. Every single member of the city council and mayor in recent years has been elected with the financial and volunteer support of our very own employee unions. These unions have found the ultimate loophole in contract negotiations: own the guy on the other side of the table.

    I suggest you watch how Wisconsin plays out. It may be the only alternative to ultimate bankruptcy, as the grand total of all the pension obligations we have now indentured the taxpayers to (for work performed up to now, let alone the continued accumulation into the future) greatly exceed any reasonable level of taxation for a sustainable city.

    But that is only true if you compute the pension obligations on the basis of assumptions deemed reasonable by generally accepted governmental accounting practices. Which we have never done, and won’t as long as the guys negotiating contracts with the unions are owned by the unions.

    Stick a fork in this city, it’s done.

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  13. Why not try and move all the PFRS people to Calpers . It would be costly but ,so is the present status…If the PFRS people were rehired they would be eligible to go to Calpers . If the PFRS people on disability retirements claimed they are no longer disabled , they could return to work and retire with a Calpers retirement immediately . Oakland could do this and greatly reduce its PFRS obligation….I don’t know why this isn’t done….or at least give the PFRS retirees the option of doing this …..

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    shared this fantastic piece of writing at here.

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  17. I remember when the city council, at the time, decided to borrow monies from the PFRS, by way of not meetng the required deposit, deferring that payment, and now after many years of deferral and the lack of interest and growth that those monies would have produced, we now have a whinning need to chastize the few pensioners that are left in the system as gougers, and parisites to the taxpayers of Oakland, when in fact it was the city councils and management of the city that allowed this to continue that has caused the problem. They then switched to a State run system called PERS which is costing the city more than the deficet it owes to the PFRS system.
    in teenty yraes or less this systm PFRS will no longer exist, as thehe will be no more receipants alive to collect it.

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  21. When is the real truth to be told, the City borrowed from the fund via differed payments to the system for years, then invested heavily the housing market, which lost millions, they planned to cover this with an annuity policy, and did not pay the premiums.
    Where did this action by the city become the recipients fault.
    The City need to honor it’s obligations to the system.
    The system is dying, every year loosing 6 to 10 recipients, lowering the capital output.
    There are about 800 surviving members in the system, most over the age of 65, when they are gone he system is gone.

  22. Sounds like the PFRS funds were looted …The City called ,” investments”but it was really looting by insiders…

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