OAKLAND -- Pension costs have more than doubled over the past decade, leaving Oakland with fewer police officers, more potholes and a growing threat of insolvency, City Auditor Courtney Ruby warned in a report released Sunday.
Oakland's payments to the state pension system jumped from $37 million in 2003 to $89 million in 2012, the report found.
That $52 million gap is enough to pay the salaries of 300 police officers, according to city budget estimates.
Unlike most private sector workers, government employees in California receive guaranteed annual retirement income that can approach their final year's salary.
Oakland's pension problem is emblematic of a statewide crisis caused in large part by governments guaranteeing workers unaffordable pensions based on overly optimistic investment projections, Ruby wrote. As investment returns fell short of expectations, governments have had to pour more money into pensions plans at the expense of providing basic services.
Because Oakland is a member of the state's pension system, it has few options to tackle its pension burden alone other than asking employees to pay more toward their retirements, the report found.
With Oakland's pension costs forecast to keep rising, Ruby recommended city leaders work with union officials and pension experts to devise a strategy for funding pensions without further eroding services or risking bankruptcy.
"Oakland has to get its head out of the sand and be very clear that we have significant unfunded liabilities and we have to have a plan to deal with this," Ruby said. "It's such a complicated problem that there is no prefabricated solution."
Ruby's audit report actually underestimates the city's plight, pension experts said.
Her finding that the city has a $1.5 billion unfunded liability for employee pensions and retiree health care benefits is based on figures that do not take into account losses the state pension fund incurred during the Great Recession.
Ruby said she used the same figures that California Public Employees' Retirement System has used to determine the city's annual pension payments.
But former Assemblyman Joe Nation, who teaches public policy at Stanford University, said CalPERS has told public agencies to use the less rosy market-based valuations it also provides.
"You have what the market says you have," he said. "The other number just provides a lot of excuses for actuaries to argue that (pension funds) are in better shape than they are."
The market-based figures provided by CalPERS shows that Oakland's pension plan is only about two-thirds funded, well below the 80 percent level recommended by the U.S. Government Accountability Office. And total unfunded liabilities jump to about $2 billion -- roughly double the city's annual budget.
Unfunded liabilities soar even higher if one includes recent borrowing by the city to fund a separate pension system for police and firefighters hired more than three decades ago. Property owners have been paying a special tax since 1981 to help fund that system. The tax, which amounts to $788 a year for a $500,000 home, expires in 2026.
Ruby's report is her first since announcing her intention to run for mayor in November. She said it would be inappropriate for her to discuss how she would deal with the pension crisis as mayor while acting in her official capacity as city auditor.
In a written response to the audit, City Administrator Fred Blackwell accepted Ruby's recommendation for high-level pension talks and cited employee concessions to pay more toward their pensions and reduce benefits for new hires.
Renee Sykes, a city employee and vice president of IFPTE, Local 21, said in a prepared statement that members of her union had picked up nearly 90 percent of increased pension costs while the city struggled through the financial crisis.
"City employees have been part of the solution in the steps the city has taken so far," she wrote.
The state's pension crisis, Ruby wrote, is rooted in two landmark laws: The passage of Prop. 13 in 1978 that severely curtailed tax revenue and a 1999 state bill that allowed public agencies to retroactively boost employee pension benefits.
At the time the 1999 law was passed -- during the dot.com boom -- Oakland's pension costs were minimal.
By 2017, however, the city anticipates having to pay $148 million to cover employee retirements, according to budget forecasts. That would amount to nearly 40 percent of what the city expects to spend on employee salaries.
"There is no doubt that Oakland is already in the danger zone," Nation said. "But virtually every entity in California is in the danger zone."
Contact Matthew Artz at 510-208-6435.