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For the past two years one of the most nettlesome budget issues faced by Oakland has been its unfunded and underfunded benefit liabilities.  As recently reported by the City Administrator, Oakland presently faces an underfunded CalPERS liability (Oakland’s current pension plan) in an undetermined amount, a completely unfunded health benefit liability for retirees of $520 million (sometime referred to as “Other Post-Employment Benefits,” or “OPEB”) and an unfunded $494 million liability for the PFRS retirement plan. The latter is a police and fire retirement plan that closed in 1976, that supports about 1000 retirees and their widows, and that only has one member presently employed by the City of Oakland.  In short, Oakland has an unfunded liability of more than one billion dollars for benefits earned by, and owed to, people who no longer work here.

The PFRS obligation should be the less troublesome of these obligations, because it has dedicated funding sources – an annuity that pays about $6 million per year and a significant tax override (i.e., property tax) enacted in 1980 that generates about $60 million per year.  The annuity was purchased in 1985 and the tax was passed by the city council using a loophole in Proposition 13 that likely no longer exists.  But PFRS became more problematic in 1997, when Council voted to issue pension obligation bonds (“POBs”) and buy the city a pension holiday for 15 years.  Of course, the market failed to perform as hoped, and as reported in an actuarial report obtained by City Auditor Courtney Ruby the City fell behind projections by about a quarter of a billion dollars.  Much more information is available here, here, here, here and here.

More than a year ago, as the pension holiday neared the end and Oakland faced a potential annual obligation of more than $45 million, staff returned to Council with a proposal to “double down,” issuing still more POBs and buying another holiday.  One argument in favor, which we heard from more than one insider, was this:  “Where in the world is Oakland going to find another $45+ million?”.

With a highly unfavorable City Auditor’s report, a lambasting in the press and charges that the plan constituted “intergenerational theft,” the proposal went into hiding for a year, then returned to Finance & Management in May and back to City Council in June and July.  Much of the debate took place on June 19 after midnight.  So for those who weren’t at City Hall or watching KTOP in the early morning hours, MOBN’s communications intern Catherine B. provides a blow-by-blow after the jump.  Short version:  Oakland will issue another $210 million in POBs that must be paid off by 2026 (when the charter requires PFRS to be fully funded);  complete pension holiday for four years;  CM Schaaf’s (admittedly non-binding) resolution to impose at least some safeguards to monitor fund performance and establish reserve, which deadlocked 4-4 (CMs Brunner, De La Fuente, Brooks and Reid voting “no”) passed on Mayor Quan’s “yes” vote.

In short, Oakland has taken on as much as $100 million in future interest costs without a long-term financial plan, and, accordingly, without a good handle on its future income or future expenses.

A complete rundown after the jump…

The Oakland City Council’s decision to approve the sale of pension obligation bonds transpired over three meetings June 19^th through July 3^rd. Here’s our rundown of events:

June 19th

Following the public hearing regarding the Oakland Army Base redevelopment, the Oakland City Council continued its June 19^th meeting past midnight with Item 14, the Sale of Pension Obligation Bonds.

Assistant City Administrator Scott Johnson opened the meeting with staff’s recommendation to issue pension obligation bonds in order to fund the Police and Fire Retirement System (PFRS). Johnson presented the city’s financial situation as a trade-off between the General Fund and PFRS bills: “The challenges facing PFRS are not new nor have they been developed in recent years, but over a long period of time…. [With] insufficient funds to pay our annual PFRS obligations in the short term…[this] would result in significant General Fund shortfalls if we don’t otherwise find a longer-term solution.” Johnson stressed future risks to city residents, stating “If we do not issue these pension obligation bonds, the General Fund would be at risk to fund over 29 million dollars in fiscal year 12-13,…[meaning] drastic cuts to this community.” Johnson repeated various phrases on numerous occasions, emphasizing the staff’s solution to be a “fiscally responsible” “long-term strategy” that would “mitigate…risk.”

In emphasizing this mitigation of risk, Johnson mentioned the city would receive an estimated interest rate of 4.75% and had been granted a preliminary double A- rating by rating agencies. In references made to the current risks to the General Fund, Johnson declared the pension bonds would “alleviate the General Fund support for a period of 5 years at a time.”

By now, the meeting room was virtually empty. Oakland resident and CPA Len Raphael was the lone public speaker: “The main problem I have…is that the staff is going about this backwards. They’re saying, borrow the money first, and then we’ll do the planning?”

Raphael continued, “They keep using words like ‘responsible’…‘mitigating risks,’ ‘long-term planning,’ but they’re not doing that…. They’re acting on the assumption that our current dire financial situation is probably gonna end somewhere in the next 5 or 6 years…. Except everything I’ve seen is that we’re facing really dire stuff somewhere in the next 5 to 10 years.” In closing, Raphael ended, “I think it’s irresponsible to say that.”

Councilmember Libby Schaaf was first in the queue, beginning with her own concerns about the deal: “I have agonized over this decision, agonized. Because I agree with what Mr. Raphael said, that this feels a little bit like the cart before the horse. I keep on using the analogy: I’m being asked to jump out of the airplane and then check to make sure that my parachute has been packed correctly.” To alleviate these concerns, Schaaf “prepare[d] a motion…joined…with Councilmembers Kaplan and Kernighan, that potentially gave…[her] a level of comfort that is feasible within the time that we have.” Schaaf’s motion (though non-binding) outlined a formal requirement to monitor the pension investments as well as establish a reserve fund.

The rest of the councilmembers then took the floor.

Councilmember Rebecca Kaplan seconded Schaaf’s motion, considering the proposal “a compromise…to deal with the current crisis but…also commits us to a path of not doing the same thing that was done the last time – which was no money put aside during the interim period.” Instead, “[Schaaf’s] motion…commit[s] us to put aside money for this purpose, even during the interim period, and so it’s more financially protective of the long-term.”

Councilmember Ignacio De La Fuente did not support Schaaf’s motion, rather expressing frustration with the PFRS budget problem as a whole. De La Fuente acknowledged the budget difficulties as an ongoing phenomenon he had encountered year after year: “It’s $250 million. The reality is that we’ve been doing this for several years now, [and] I’ve recognized that I have to learn from the mistakes of the past, and we’ve been doing the same thing without changing anything.”

De La Fuente continued with his annoyance regarding the Council’s little influence over the pension fund’s board: “The reality is that you don’t have no power over the PFRS board…. [PFRS retirees are] the only group of people that have not shared the pain.” He continued, “the cost of less than a 1000 people is more than the entire active groups that we have in the city working at this point. But they know – they know that every council and every administration will cave, and every mayor…and nothing happens…. We are issuing 250 million dollars. And I will not support that.”

Councilmember Pat Kernighan responded to De La Fuente’s indignation, acknowledging that the city cannot revoke PFRS’ written contract. Moreover, in addressing worries of the cart before the horse, Kernighan stated the bond measure was necessary to protect the General Fund, which would provide for services like police staffing. Kernighan considered the proposal similar to “taking out a second mortgage so our kids can go to college instead of working at McDonalds.” Kernighan did, however, support Schaaf’s additional motion.

Councilmember Nancy Nadel similarly addressed De La Fuente: “I certainly understand Mr. De La Fuente’s frustration with the [PFRS] board, but not buying the bonds at this point doesn’t punish them, doesn’t make them change – it actually hurts our constituency by forcing us to use our General Fund money to fund our obligation…so that’s why I support this, with the same unhappiness you [Councilmember De La Fuente] have.”

Councilmember Jane Brunner opposed Schaaf’s motion, explaining that she would only support annual contributions by the city: “I think we have to be paying now down some every year, and that’s the only thing I’d be willing to support.”

During the final voting, Councilmember Brooks remarked, “The Council is not an appropriate place to conduct rules, and so I’m voting no on…[Schaaf’s] motion.” Councilmembers Brunner, De La Fuente, and Reid joined Brooks in the opposition.

Councilmembers Kaplan, Kernighan, Nadel, and Schaaf voted for Schaaf’s motion. With this 4-4 deadlock, Mayor Jean Quan would have the tie-breaking vote July 3^rd.

Following the deadlocked motion, the City Council approved the ordinance issuing $210 million in bonds (not to exceed $250 million), passing with the necessary five votes (supported by Councilmembers Brooks, Kaplan, Kernighan, Nadel, and Reid). Councilmembers Brunner and De La Fuente were in the opposition, as was Schaaf after her reserve fund motion tied.

June 28^th

The ordinance’s second reading, and passage, were at Council’s June 28^th special meeting (when Council also adopted the mid-cycle budget adjustments).

Len Raphael spoke again publicly, this time along with long-time City Council critic David Mix. In his speech against the sale of pension bonds, Mix relied heavily on numbers, stating “It doesn’t work, folks, it just doesn’t work.” Mix directed councilmembers to “work the math” as the estimated “earnings simply aren’t there.”

Raphael echoed Mix’s sentiments, addressing what he called the “elephant in the room”: the possibility that Oakland could follow in Stockton’s footsteps of bankruptcy. Raphael proposed his own solution, “tak[ing]…another few months to use those tax override excess funds to pay for the PFRS contribution [in order] to do some long-range planning first before borrowing an additional $200 million.”

Councilmember Kernighan chose to address constituents, stating “Some people are characterizing this….as putting off debt that is going to go to our children and grandchildren…. [But] these bonds only extend the payments that the city will be making for 3 years.”

Mayor Quan declared that without the passage of the bond measure, the city would undergo a $20 million budget cut as early as next week. Councilmember Schaaf, though, disagreed: “I just want to clarify that it wasn’t necessarily a decision of $29 million or not. For me, I felt that it’s unreasonable to ask us to make this level of a financial risk without having more information, without having a 5 year financial plan and without having already taken the steps to safeguard us from the risk we are about to enter into.” In straightening out the $20 million number, Schaaf stated “It is not a $29 million hit all at once, it is a little over [a] $3 million a month payment.”

As he discussed June 19^th, Councilmember De La Fuente continued with his distrust and disappointment in the PFRS board: “You don’t hear me arguing about [other pension boards]. But you will hear me continue arguing about this…. [By] voting for issuing bonds, we continue perpetrating the fact that the PFRS board had to do nothing. And I do understand – I’m not dumb – I do understand that we still have to make the payments but with that frame of mind, we’ll never get to recognize that not only the actives, not only every other union and every other employee has to chip in and give back, but they [PFRS] have to do it too.” De La Fuente subsequently voiced hesitancy with the financial projections for the bonds, remarking “I think some of the [public] speakers are correct. There’s no way that the projections…[are] real. If we look at history, we know that.”

Councilmember Brunner changed the game by proceeding with a new motion: “If I get this, I’ll vote for the bonds.” Occurring in fiscal year 2015-2016, Brunner’s proposed motion reserves up to $10 million in convention center fund savings to solely finance pension and retiree costs. Kaplan voiced her support, commenting “It is our definitive goal that beginning immediately upon the year that we have extra money from the retirement of the other bonds, that we will immediately start to use that money to pay down our retiree costs of pension and OPEB. So I’m very grateful to see that we are moving in that direction.”

Brunner’s motion passed with all of the votes.

In the landmark pension bond decision, the City Council finally approved the issuance of $210 million in pension obligation bonds, passing with six votes (opposed by Councilmembers Schaaf and De La Fuente).

July 3^rd

Returning back to Schaaf’s previously deadlocked June 19^th motion, Mayor Quan cast the tie-breaking vote during July 3^rd’s meeting. Quan voted in favor of Schaaf’s motion, stating she and City Administrator Deanna Santana were already planning on pursuing several of the motion’s tasks. Councilmember De La Fuente once again continued his support of cracking down on the PFRS board and, in this regard, agreed with the creation of a reserve fund, remarking, “Everybody has to share the pain.” David Mix, a previous public speaker on the pension bonds, spoke again, declaring “You’re trying to bail yourself out of a dire situation with borrowed money. It doesn’t work, it won’t work, it will never work.” Schaaf’s motion, though, passed with Quan’s final in-favor vote, breaking the 4-4 tie.

With that and the City Council’s June 28^th 6-2 vote in approval, $210 million in pension obligation bonds will be issued.

Note: In addition to pension obligation bonds, councilmembers also discussed their 2011-2013 Budget Amendment on June 28^th’s City Council meeting. A summary of the final budget decision and the process that got us there is next on the Oaktalk agenda – expect to see it soon.