A COMPLEX financing scheme proposed by Oakland Mayor Jean Quan to meet some of the city's pension obligations relies on optimistic assumptions and does not consider the downside risk if they don't pan out.
Quan wants the City Council to approve borrowing about $300 million to make city payments to a small, badly underfunded pension system for retired police and firefighters.
But the architects of the plan, Finance Director Joe Yew and Treasury Manager Katano Kasaine, are counting on strong investment returns and a rebounding housing market to help finance the repayment. They have presented no picture of the debt the city would face if that doesn't happen.
Even with their optimistic forecasts, the scheme would increase total general fund bond payments by at least $12 million starting in 2017, setting the city up for another crisis over how to pay its bills.
Even slight changes in the assumptions would affect future city payments by tens of millions of dollars annually. Thus, the plan understates how much the city should set aside each year to ensure the pension system is fully funded by 2026, as voters and taxpayers have been promised.
Without a careful risk analysis using more-conservative assumptions, the City Council lacks the information it needs to make an educated decision. Yet, Quan, in a March 30 budget memo to the council, insists members decide now how they wish to fund the pension system.
Slow down. When the City Council approved a similar pension bond scheme in 1997, it bet the money raised would do well in the stock market. The city lost that gamble -- and about $250 million, according to independent City Auditor Courtney Ruby.
Nevertheless, Yew for a year has been pitching a repeat plan, which Quan has embraced. Yew argues the cash-starved city has no choice, that it doesn't have the money now to meet its pension obligations.
He might be right. But that's not an excuse for an uninformed rush to action, nor to push the debt years down the road. The city has repeatedly botched its funding of the pension system. This time, it must get it right.
At issue is funding of pensions for 1,153 retired workers and surviving spouses covered by the city's Police and Fire Retirement System. The pension plan was closed to new members in 1976. At the time, it was badly underfunded.
Since 1981, city property owners have paid extra taxes to make up the shortfall. Today, the owner of an average home, assessed at $266,267, pays $419 a year toward the pension debt. For a $1 million house, the pension tax is $1,575. In exchange, voters insisted the system be fully funded by 2026.
But the system now has only 38 percent of the money it should, a $494 million shortfall. That's more than the city's entire annual general fund.
There are two reasons for the deficit. First, average pension payments have risen 59 percent since 1997 because they are tied the rate of salary increases for current officers and firefighters. Second, bad city investment decisions eroded available funds.
The city issued bonds to buy annuities in 1985, engaged in a complex interest rate swap agreement in 1988, and floated the 1997 pension bonds to prepay the retirement system. Each was a bet on the future of the market. Each proved to be a costly loser.
The 1997 prepayment allowed the city to avoid making contributions into the retirement system. But the "holiday" ends July 1. So the city now faces annual general fund payments of about $32 million. That's on top of a $46 million general fund shortfall for city services.
The city could delay the pension payments for a year by using a reserve fund. That would give the council and the mayor time to thoughtfully plan the next step rather than rush into another bad deal.
Unfortunately, some borrowing seems inevitable. But the current plan must be improved and the downside risks must be analyzed honestly.
In their proposal, Yew and Kasaine project an annual 7 percent investment return, an aggressive assumption for a pension system that must be fully funded by 2026. They also predict city property tax revenues increasing at a steady 2 percent annual rate until 2026. And they assume the city will be able to adjust to a $12 million jump in its total bond payments starting in 2017.
That's not responsible planning. The City Council must demand better.
Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or email@example.com.