The COVID-19 pandemic is creating financial challenges for all levels of government, and the City of Oakland is no exception. Numerous revenues will decrease, if they haven't already, as the need for municipal services continues. This downturn occurs at a time when the city was facing very significant financial challenges due to underfunded long-term obligations and the emergence of new challenges such as homelessness.
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.
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…