OPINION: City Auditor warns pensions threaten Oakland’s solvency

April 20--Oakland's pension shortfall threatens the city's solvency, raising questions of whether it will have enough future assets to pay its debts, City Auditor Courtney Ruby concludes in a new report.

Unfortunately, even Ruby, one of only a few city officials acknowledging the seriousness of the situation, substantially understates the problem's magnitude and holds out false hope that Sacramento might come to the rescue.

For three years, Mayor Jean Quan has ignored reality as the Bay Area's third-largest city slips slowly toward bankruptcy. She has done no financial planning to head off calamity.

It's time for candidates seeking to unseat Quan in the fall election, including Ruby, to honestly discuss inevitable cuts to nonessential services. There's no other way out.

While Quan argues that she has taken steps to shore up city finances, her former city administrator's financial forecasts show otherwise. Oakland faces a $28 million projected shortfall at the end of next year, a $241 million imbalance the following year and a $292 million deficit in fiscal year 2017-18.

Escalating retirement costs for city employees help drive those numbers.

"While formerly viewed as a cash-flow issue, we now know pension obligations are a solvency issue," Ruby writes in her report to the City Council. "There is simply not enough money coming in to pay for what must go out."

Oakland's three major retirement plans are badly underfunded, with just over half the assets they should have. Ruby and the city administrator's office place the total shortfall at $1.5 billion. In fact, it's about $2.4 billion, equal to about eight years of base city payroll, excluding overtime.

It's like a huge credit card debt. The city will soon need at least $93 million more annually to cover increasing installment payments.

Here's the breakdown:

--California Public Employees' Retirement System ($1.2 billion debt). This pension plan covers current Oakland employees and most retirees. Ruby and the city administrator's office understate the debt because they use a CalPERS figure that has yet to recognize most investment losses from the Great Recession.

CalPERS is phasing out use of that number, and reports the true underfunding for Oakland at $1.2 billion.

Due largely to rising payments on that debt, the city's contributions to CalPERS will increase at least 50 percent, requiring $40 million more annually by 2019.

--Police and Fire Retirement System ($666 million debt). This Oakland pension plan covers, at last count, 1,082 retired public safety workers hired before 1976. The system is short $204 million, and the city also owes another $462 million to bondholders from whom it borrowed money to prop up the pension plan. Ruby and the city administrator's office wrongly fail to count the bond obligations as part of the debt.

Since 1981, property owners have paid an exorbitant extra tax just to help cover the shortfall from this small pension plan. The surcharge, based on assessed property value, costs $788 a year for a $500,000 home.

Because of past city mismanagement, those tax revenues won't be enough to cover the installment payments. The city will have to add an estimated $24 million annually from the general fund starting in 2017.

--Retiree health coverage ($554 million debt). The city promises workers health care coverage in retirement but currently irresponsibly underfunds the plan by about $29 million a year, essentially failing to make the minimum payment on the credit card. As a result, this debt continues to mount.

In sum, the city faces a financial disaster. Ruby deserves high marks for emphasizing that the city's solvency is at stake. But her recommended solutions are inadequate, and they avoid the tough decisions.

She proposes forming an advisory group to "design a plan to impact" pension changes at CalPERS, the federal and state governments, and within Oakland.

Let's get real. Federal officials won't bail out a city that's mismanaged its finances. While state lawmakers should make more pension system changes, they falsely consider the problem solved. As for CalPERS, it is making much-needed reforms to shore up its finances; but those require more, not less, money from local governments.

It's long past time for Oakland officials to face reality. They're living beyond their means. No one will rescue them. Deal with it.

Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or [email protected]. Follow him at Twitter.com/BorensteinDan.

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