Budget Bits No. 5: Unfunded Pension and Healthcare Liabilities

This is the fifth installment in our series on the 2015-17 budget process, and the last one before the mayor’s budget is released today. Once the proposed budget is released, we will start discussing that document, first with a general summary, then a deeper look. For now, we take a brief look at the oft-discussed subject of pensions.

In any budget process there are many competing interests. Resolving these conflicts and arriving at a balanced budget is more art than science, involves trade-offs, and in the end, always involves prioritization. So what are some of the biggest priorities, aside from police, fire and other core city functions? Pension and retiree health care shortfalls have been the subject of much public attention. They were the subject of a City Auditor’s report about a year ago, a detailed report by the administration to Council in January of last year, and State legislation (the Public Employees’ Pension Reform Act of 2013, or “PEPRA”, more discussion here)  in 2012.

The general sense of the discussion in Oakland has been that

  • The closed police and fire pension plan (“PFRS”) will start requiring very significant annual General Purpose Fund contributions (probably about $34 million and climbing) in 2017-2018,and continuing through 2026;
  • The City’s “Other Post Employment Benefits” (“OPEB”), by which the City pays retirees a fairly modest medical benefit reimbursement is paid on a pay as you go basis. It presently runs just over $20 million per year, and is projected to hit over $35 million in ten years and almost $50 million in less than twenty years.
  • Much like other California municipalities, Oakland faces hundreds of millions of dollars in underfunded pension liabilities for its active employees, and serious State law constraints on steps that would reduce costs.

By the numbers, on an actuarial basis, Oakland is about 78.66% funded in terms of its pension liabilities. The US Government Accountability Office (GAO) holds that the minimum ratio should be 80%. In Oakland, the difference would be about $46.5 million. On the other hand, there are some financial economists who argue that the proper way to assess funding levels is based on asset and liability market value, and by this standard, Oakland’s funding level is closer to 65% and the shortfall in dollars much greater.

According to the Pew Foundation this funding level puts Oakland in about the middle of the pack of cities in the US. Not great, but not terrible. The much bigger problem is OPEB, Oakland’s retiree health care obligations. Depending on who you talk to, Oakland has funded either none or a minimal amount of these healthcare obligations. With many set to hit retirement, this is clearly an issue that must be addressed with some urgency.

In addition, going forward, due to CalPERS requirements, plan benefit and other changing regulations, these pension and medical costs are set to rise even further.

Pensions and benefits have been a politically volatile subject in Oakland and many other cities. When residents or their representatives complain about them, labor believes – and sometimes rightly so – that they as public employees are under attack. On the other hand, residents sometimes feel labor doesn’t get that pension and benefit costs seem to climb while there is less and less money for municipal services.

The choice to defer tough decision making on the pension and health care problem only results in higher costs down the line. Our leaders must acknowledge the scope of the problem and then realistically present options for moving forward. We are encouraged by the proposal Mayor Schaaf made during her campaign:

When I am elected, I will convene a task force consisting of myself, the City Administrator, the budget director, City Auditor, President of the City Council and Chair of the Council’s Finance and Management Committee, together with representatives of the city’s unions, to design a scope of work by which we will ask accountants with expertise in municipal finance (possibly Oakland’s outside accountants, who are already familiar with our finances), to answer these questions:

  1. From an accounting point of view what liabilities actually are deferred, what is the accurate amount of these liabilities – showing not just actuarial valuation, but the more accurate market valuation?
  2. What are the costs in continuing to defer them?
  3. What are the least onerous fiscally responsible plan and schedule for amortizing each of these liabilities?

Once we have that answer, I will ask the City Council to adopt a financial policy of retiring deferred liabilities based on that schedule.

Make Oakland Better Now! believes that this approach, applied to all deferred liabilities, certainly including pensions, will help put Oakland on the road to sustainable financial success.

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One response to “Budget Bits No. 5: Unfunded Pension and Healthcare Liabilities

  1. I would suggest that there may be alternative ways to look at municipal pension and health plan liabilities. I know that Oakland has established a strong pattern of never considering a “Plan B” but some thinking out of the box could be very useful for at least a couple of reasons: Oakland is far from alone in having these liabilities and it’s likely that the proposed MOBN/Schaaf plan for dealing with these liabilities may put this city in a socially and economically destructive financial straightjacket.

    http://www.nytimes.com/2013/08/05/opinion/a-plan-to-avert-the-pension-crisis.html?_r=0

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