IT'S TRULY a hidden tax.
As Oakland residents prepare to vote in November on a $360 annual parcel tax aimed at keeping more officers on the streets, they probably don't realize that homeowners already pay more than that in extra property taxes each year just to help fund the pensions for 1,155 retired police and firefighters and their surviving spouses.
In a sobering peek at what could lie ahead for taxpayers across California, the story of the Oakland Police and Fire Retirement System provides a stunning example of the long-term consequences when city officials offer pensions and fail to set aside adequate funds to pay for them.
For now, let's put off the debate over the merits of Measure X, the parcel tax on the November ballot. But, for that discussion, Oakland residents should know that they are still paying for pension miscalculations that began about a half-century ago -- and those payments will last at least another 16 years.
The Police and Fire Retirement System was closed to new members in 1976 when the severity of its financial troubles became apparent. Workers hired after that date were enrolled in a different retirement plan. Consequently, with one exception, all the workers in the PFRS have retired.
Theoretically, pensions should be fully funded when employees retire. Thus, the money in the system now, combined with future investment returns, should be enough to pay the pensions to the PFRS retirees and beneficiaries -- whose average age is 74 -- for the rest of their lives.
But that's not the case. According to the July 1 actuarial analysis, the system should have $793 million on hand. Instead, it has $298 million, 38 percent of the necessary funds. That's despite nearly three decades of extra property tax payments to finance the system.
Homeowners wouldn't know from looking at their property tax bills that they have been paying extra for the Police and Fire Retirement System. A typical California bill includes a base fee of 1 percent of the assessed value of the structure and land.
On top of that, homeowners must pay their share of voter-approved debt issued by cities, schools, transit and park districts and other agencies. For Oakland property owners, that adds another 0.4 percent. Of that, slightly more than half goes to the city.
The money for the Police and Fire Retirement System comes out of the city share. Specifically, the system costs each homeowner an additional 0.1575 percent each year. On an average Oakland home, with an assessed value of $266,267, that works out to $419 a year. For the pricier $1 million homes in the hills, that's $1,575 a year.
The unusual extra charge to fund pensions for this relatively small group of retirees is more than Oakland residents pay for school bonds and far more than they pay for bonds issued by BART, the regional park district or the community college district.
The story of the Police and Fire Retirement System tax dates to its formation in 1951, when two existing retirement funds were combined to form the new system for sworn personnel. But the system ran into deep trouble. By 1976, an actuarial analysis showed the system so short of funds that the city would have needed to spend more than half its annual budget to correct the situation.
Instead, the city responded by closing off the PFRS to new employees and sending future workers into the state retirement system. The city also obtained voter approval to pay off over 40 years the pension liability for those remaining in the Police and Fire Retirement System. That would have resolved the debt by 2016. In 1988, the city went back to voters and obtained permission to spread out the repayment until 2026. Now, it looks questionable whether they will make that date.
What voters were never told when they went to the polls in 1976 or 1988 is that they would be paying an additional property tax to cover the pension costs.
In 1981, the city started levying the tax. In 1983, the state Court of Appeal upheld it. In 1985, the Legislature placed a cap on the tax at the 0.1575 rate.
And then, in 1997, the city issued bonds to raise money for the pension fund. In exchange for that large contribution to the retirement system, the city was given a "holiday" from making payments until 2011. Instead, the tax revenues would be used to pay off the bonds.
In essence, the city was betting that the money raised by the bond sale would earn more investment income than the interest the city would have to pay on the bonds. It didn't work out that way. The stock market tanked and the city is left with the bond payment obligation and a badly underfunded pension system.
In 2001, the city refinanced the bonds, pushing the repayment dates further into the future. As a result, come next year, the city will have to start making payments to the pension system again, while it still has outstanding bonds to repay stretching through 2023. The property tax revenues won't cover both. The city will be about $53 million short, money that would have to come out of the general fund at a time when the city is already strapped for cash.
The city's proposed solution: issue more bonds. In essence, kick the can farther down the road. City officials are working on plans to issue bonds that would be paid off in 2024-26. That would raise cash now that would be used to partially fund the retirement system.
In exchange, the retirement system would grant the city another payment holiday, this time for five to seven years.
That would mean that in the second half of the decade, the city would once again have to face tapping the general fund to cover its pension payments because most of the property tax revenue would be committed to paying off bonds.
Absent a remarkable turnaround in the economy that drives up property tax revenues and investment returns far beyond expectations, this scheme will leave the city with even greater general fund costs down the road, and unable to meet the 2026 deadline for fully funding the pension system.
At some point, someone must step in and stop this financial train wreck -- and that person is City Attorney John Russo. The city charter requires the funding of the Police and Fire Retirement System to be completed by 2026. The latest bond scheme makes that nearly impossible. It should prompt Russo to question its legality. If he doesn't act, taxpayers, who were never told what they were committing to when they went to the polls in 1976 and 1988, will be exploited once again.
Daniel Borenstein is a staff columnist and editorial writer. Contact him at 925-943-8248 or email@example.com.