IF YOU think Oakland city finances are bad now, you haven't seen anything yet. Although city officials laid off more than 10 percent of their police force last week to wipe out much of a $31 million budget deficit this fiscal year, they face a much bigger problem that has barely been mentioned.

Simply put, the city faces a financial time bomb, fueled by at least $2 billion of unfunded liabilities for employee pensions and retiree health care costs.

That's an amount equal to about five times the annual general fund budget. It's the result of unrealistically generous benefit promises to workers, the city's failure to adequately fund the benefits, and the financial downturn's erosion of money that was set aside.

Little wonder that, as city officials last week sought pension contributions from the police union, they could ill-afford to promise there wouldn't be layoffs in the future.

The city's looming debt means that more belt-tightening is a necessary, but not sufficient, step to avoid a total fiscal meltdown. In essence, city officials are struggling to figure out how to make the short-term credit card payments while saying little about the ballooning mortgage.

To be sure, the short-term problem is huge. For the current 2010-11 fiscal year, before the police layoffs, the roughly $400 million in general fund revenues would have been short $31 million. By 2013-14, the annual shortfall would have increased to $66 million. That alone was reason to reject the officers' demand for job security. When public safety accounts for 72 percent of the general fund budget, there's no solution that avoids police cuts.


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Cheryl Taylor, the city's Budget Office director, warned in a recent memo that "the severity of the city's fiscal crisis is unprecedented." In the past four years, general fund reserves have been almost exhausted. Real estate transfer taxes have plummeted. Spending and programs have already been cut drastically. "The city's back-office functions — finance, human resources, legal counsel — have virtually been gutted, diminishing oversight of the city operations," Taylor writes.

But, while the work force paid out of the general fund has been cut by 12.5 percent, personnel costs have declined less than 3 percent. The reason: Salary increases for police and firefighters along with rising payments for health care and retirement benefits have offset most of the savings from layoffs.

That's why City Council members were asking police, the only city workers who pay nothing toward their retirement, to start making pension contributions. And that's part of the reason why council members are considering a November parcel tax measure that would raise another $360 a year from each house-owner in the city.

To get some idea of the magnitude of employee benefit costs, consider this: For every dollar Oakland spends on city workers' salaries, it pays another 62 cents for health care, pension and other benefits. By fiscal year 2014-15, that's projected to grow to 77 cents.

In that, police have the most expensive pensions. For every dollar the city currently spends on an officer's salary, it spends an additional 37 cents on his pension. Don't blame that on the downturn in the economy. The rate has been roughly the same for the past seven years. Most of the investment losses of the past couple of years have not been built into the city's pension payments. Those increases are yet to come.

Rather, blame the lucrative pension benefits that Oakland and most other law enforcement agencies across the state began offering their officers about eight to 10 years ago.

The benefits are based on a pension formula that grants an officer a pension equal to 3 percent of his final salary for every year of work as early as age 50. Thus, a 30-year veteran can collect 90 percent of his salary. It's a benefit unmatched in the private sector, and in most of the public sector, too.

For those reasons alone, city leaders were correct to insist that officers contribute to their pensions and were unable to offer any long-term job guarantees in return.

Such promises would have been fiscally irresponsible based on the budget forecasts of the next few years.

If only that were the extent of the problem.

Unfortunately, it's much worse than that. The city faces huge long-term debt because of the unfunded costs of employee retirement benefits.

The city has three major debt obligations stemming from employee retirement benefits:

  • First, the California Public Employees' Retirement System administers the city's pension program for employees hired after August 1970 and police and firefighters hired after June 1976. As of June 30, 2009, because of investment losses, the city's pension plan with CalPERS was about $1.3 billion short. It was only about 57 percent funded, meaning that it had barely half the assets it should to pay current and future retirees.

    As a result, CalPERS will require the city to make greater pension payments in the future to make up for the shortfall. Unfortunately, even those payments will not be adequate. That's because CalPERS uses overly optimistic assumptions about investment returns. And it is allowing cities to take up to 30 years to replenish the money lost during the past two, thereby unreasonably adding financing costs and pushing the burden onto future generations.

  • Second, the Oakland Police and Fire Retirement System administers the pensions of public safety employees and retirees hired prior to July 1976. The system is supposed to be funded by a special annual city property tax assessment of 0.1575 percent. That works out to $788 a year for the owner of a $500,000 house. But the property tax revenue hasn't been enough. As of July 1, 2009, that system was $435 million short, with only 44 percent of the funds it should have.

    That's despite the 1997 city-issued bonds that were supposed to cover the system through June 30, 2011. The bonds were to be repaid by 2023 from the property tax revenues. But, with the pension system underfunded, the city will need to start making annual payments of $44 million to make up the shortfall.

    Rather than use general fund money to make those payments next year, the city is looking to issue more bonds and repay them primarily with property tax revenues collected more than a decade from now. Like the bond issue of 1997, this would be another horrible example of pushing debt obligations into the future.

  • Third, there's the city's promise to its employees that it would pay part or all of their health insurance premiums when they retire. It's like a pension, a promised benefit in retirement for which the city should be setting aside money now. The problem is that the city hasn't been setting aside money. It's been merely covering the health premium payments of retirees as they come due.

    With an increasing number of retirees, stagnant or declining tax revenues and increasing health costs, that's a recipe for disaster. Costs will escalate in the future while available funds will decline. Actuaries in 2008 calculated the city should have set aside $592 million by then to ensure there is enough money in the future to cover retiree health costs.

    To make up for that, the city should now be budgeting $86 million a year for retiree health, according to actuarial estimates. Its failure to do so now means that annual payment figure will increase in the future.

    With the upcoming mayoral election, coupled with the parcel tax proposal on the same ballot to raise money for police, there undoubtedly will be much finger-pointing by the candidates over last week's layoff of 80 officers. The reality is that city officials had no choice. Failure to act would have been fiscally irresponsible, as would have been promising job security in exchange for pension contributions. Any candidate who says otherwise is merely pandering.

    But it's critical to recognize that the police layoffs are only a small part of a much larger fiscal crisis. Voters should demand that the mayoral candidates address the bigger problem.

    Daniel Borenstein is a staff columnist and editorial writer. Contact him at 925-943-8248 or dborenstein@bayareanewsgroup.com.