OAKLAND -- The last time Oakland issued bonds to prop up a woefully underfunded pension system for retired police and firefighters, it lost a quarter-billion dollars, according to the city auditor.

On Tuesday, City Council members are all but certain to hold their noses and approve issuing up to $250 million in additional bonds to stabilize the pension fund because rejecting it would ravage the city's finances.

The bond issuance will allow Oakland to postpone payments into the pension system for five years. Without it, the city would have to spend about $40 million a year to keep the system afloat, resulting in major layoffs and service cuts.

"I do think we need to do the bonds," Councilwoman Pat Kernighan said at a recent city meeting, "because of the immediate disaster if we didn't."

The Police and Fire Retirement System was closed to new employees in 1976 because it was so badly underfunded. There are still 1,086 benefactors in the system, only one of whom still works for the city.

The city approved a special tax to fund the pension system in 1981 that currently costs the average homeowner $419 a year. But when the tax revenue proved insufficient, council members in 1997 voted to issue bonds.


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City leaders expected that the bond proceeds would be invested and yield more than enough money to cover the interest Oakland had to pay on the bonds -- thereby reducing the city's overall liability. Instead, the market tanked twice, saddling the city both with a pension system that still was badly underfunded and $270 million in payments on the outstanding bonds.

The pension system's unfunded liability stands at $427 million. It must be fully funded by 2026 -- the same year the tax expires.

The proposed bond issuance carries similar risks as the previous one. If the market flourishes, the city's overall payments will decrease. If it swoons, the city could wind up even deeper in debt. This time around, however, interest rates on bonds are near all-time lows, which should work in the city's favor, assistant city manager Scott Johnson said. Also, the city will maintain a reserve to help guard against further losses.

The key benefit of issuing bonds is that it allows Oakland to postpone payments until 2017. At that point, Johnson said, the city will have cleared about $35 million in annual debt payments from other sources. That would provide a partial funding source for the pension system and the city's unfunded retiree health benefit plan, although it's money that could have been used to hire more police officers or repair streets.

The only council member publicly opposed to the bond plan is Ignacio De La Fuente, who's frustrated by the city's lack of control over the independently managed retirement system. The city recently won a tentative ruling against the system, which Johnson said will save it about $3 million a year by forcing the system to lower benefits for retired police officers to mirror concessions agreed to by active police.

"I like to learn from my screw-ups," De La Fuente said during a recent city meeting. "There's got to be some recognition that we cannot keep paying (this) at the expense of other services and other employees of the city."

Contact Matthew Artz at 510-208-6345.