SOME OFFICIALS never learn. After gambling and losing $250 million of taxpayer money, Oakland leaders want to double down.
In 1997, city officials issued bonds in a bet that they could earn more interest on the money from the sale than the interest they would pay to borrow the funds. They lost that wager and, as a result, drove up their pension debt.
Now they want to issue more bonds, this time to raise money so they don't have to make payments on that pension debt for the next five to seven years. The deal is more complicated this time, but it contains the same investment gamble.
Finance Director Joseph Yew says the city has no choice, that it can't afford to pay the pension bills now. But new numbers from the city auditor's office show that the borrowing scheme will drive the city off a financial cliff, starting in 2024.
Rebecca Kaplan, one of two council members balking at the plan, rightly questions the wisdom of pushing debt further into the future.
"This is about robbing those who are 40 and under," she says. "This is cross-generational theft. And it's somehow politically viable because the people whose lives are most devastated by it are often not in a position to do anything about it."
At issue is the funding of pension payments for 1,155 retired workers and their surviving spouses who are covered by the city's small Police and Fire Retirement System. That system was closed to new members in 1976. Workers hired since then enrolled in a state plan instead.
At the time the city plan was closed to new members, it was badly underfunded. Consequently, since 1981, city property owners have paid taxes to cover the shortfall. The levy works out to $419 a year on an average home assessed at $266,267. For a $1 million house in the hills, the tax is $1,575 a year.
The tax is scheduled to expire in 2026, when the retirement system is supposed to have enough money to cover payments to the remaining pensioners, whose average age is 74.
In 1997, city officials devised a plan to try to leverage the tax money. They sold bonds and pledged property tax revenues to pay them off. They then used the cash from the bond sale to pre-fund the pension system until 2011.
The hope was that the money invested by the pension system would earn more than the interest rates on the bonds. As I've reported, the pension fund investments soured.
The magnitude of the loss was unclear. Now, thanks to an outside review commissioned by City Auditor Courtney Ruby, we know the gamble cost a quarter of a billion dollars.
When the City Council approved the bond scheme on a 5-4 vote in 1997, some members recognized the downside risk. One was John Russo, who is now city attorney. He recalls warning then, "Tonight is the night we put a second mortgage on the house to bet on the stock market."
To put the loss in perspective, consider that the city this year laid off 10 percent of its police force to help solve a $31 million budget shortfall. The loss on the bond scheme is eight times as large. Or, put another way, it equals more than half the city's annual budget.
Some backers of the 1997 scheme -- Jane Brunner, Ignacio De La Fuente and Larry Reid -- are still on the council, as is Nancy Nadel, who opposed that plan. Now, they, like the rest of the council, are being asked to do it all over again, in part, because the first gamble failed.
Because of the market losses, when the city resumes payments to the pension system next year, the rate will be significantly higher than planned. At the same time, the city still owes on the bonds. The two payments in 2011 will be about $39 million more than the property taxes collected for the pension system.
Mayor-elect Jean Quan says the city would have to cut or eliminate the budgets for parks and recreation, senior programs, library services and after school programs to make up that shortfall.
So Yew, the finance director, says the council should issue more bonds. The money raised would be used once again to make advance payments into the pension system, this time to cover another five to seven years. But most of the new bonds would not be repaid until after the current ones are retired in 2023.
Moreover, the new bonds must be repaid by 2026, when the property tax levy for the pension fund expires. Consequently, most of the new bonds would be repaid in just a three-year window, driving up the annual payments to astronomical levels.
If the city wins its bet this time, if investment returns average 7 percent annually over the next 15 years, the city would still have to tap its general fund for about $154 million each year from 2024 to 2026 to cover the costs of the small pension program, according to the auditor's report.
If investment returns are flat, those payments would be about $172 million. Either way, it will choke city finances. And that doesn't account for expected payment increases for the city's much larger pension plan for employees hired after 1976.
In May, the council directed Yew to move forward with planning for the bond sale. He says he plans to bring final details to the council in January or February.
Yet, Yew and his staff didn't warn the City Council about the risk or the long-term costs of another bond issue. In his staff reports for the May meeting, Yew talks about benefits of making advance payments into the pension system to cover the next five to seven years. But he never addresses the cost of the borrowing he proposes to raise the money. He never mentions the huge payment spike in 2024 to 2026. And he never addresses the risk, even though the city lost $250 million in the earlier bond deal.
Six of eight council members gave their blessing to starting the process. That included Nadel, who had opposed the 1997 bond measure. Conversely, De La Fuente, who supported the 1997 bond measure, opposed this one, saying it was time to stop refinancing debt and burying the city in a deeper financial hole.
Kaplan, who abstained, was the only one to recognize that key information was missing, that Yew had not analyzed the long-term fiscal impacts.
Thanks to the city auditor, that has now been done. Let's hope council members read her report before they gamble again with the city's future.
Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or firstname.lastname@example.org.