Category Archives: Pensions

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.

Continue reading

Advertisements

Oakland City Council Approves Sale of Pension Obligation Bonds

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…

Continue reading

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.