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City funding for police and fire retirement system still unclear

on February 23, 2011

Oakland City Council’s finance and management committee met Tuesday to discuss several city budget and finance issues, the most contentious of which was how to pay for the Police and Fire Retirement System.

After several presentations by pension experts and the city’s auditor office and treasury office, the finance committee decided it needed more time and further information to discuss the different options before moving the agenda to the entire city council.

“There’s no question about it, the finances in the city are in a critical condition now,” said committee Chairperson, Ignacio De La Fuente of District 5.

Tuesday’s committee meeting had several agenda items, including parking meters, city housing bonds and budget reports, but the Police and Fire Retirement System was the most discussed. Created in 1951, this retirement system’s benefits are pegged to current salaries for the police officers and firefighters—this means that someone who retired in the 1970s would get the same pension pay as someone who retired last year.

The system was closed to new members in 1976, but the city still has to pay $70 million per year to its retired membership of 1,125 people.

Some of the annual payment is covered by an existing tax on Oakland residents, but beginning on July 1 of this year, the city will be required to make additional payments to cover the full amount. The payment for this year alone is $45.6 million.

The City of Oakland’s budget deficit is currently $40 to $50 million and now the city government is trying to grapple with how to come up with the extra money to pay for retirement pensions.

According to City Auditor Courtney Ruby, part of the problem is that in 1997 the city issued a bond to give itself a 15-year holiday from paying the fund. During this time the fund was paid through profits made on the bond. But as the stock market bubble popped in the late 1990s, returns on the pension’s investments were only a minimal portion of what the city anticipated.

Now with the city in even further financial dire straits, some staffers are suggesting issuing another bond to buy five more years of pension holiday, while others are recommending that the city pay a portion of the money each year for the next five years.

During Tuesday’s meeting, Ruby announced she had hired pension experts to provide analysis on the Police and Fire Retirement System conundrum. William Fornia, one of the experts who is president of a pension consulting firm, Pension Trustee Advisors, warned about the danger of issuing a new round of bonds. “Starting five years from now, you’re going to have to find more money,” he said. “Starting 15 years from now, you’re going to have to find a lot more money.”

The City of Oakland’s Treasury Manager, Katano Kasaine, disagreed with Fornia and said that the bonds are not the problem and that Oakland’s declining revenue base is one of the main issues that led to the city’s deficit. She said that she was not looking for authorization to sell the bonds quite yet, since more analysis is needed, but “If you cannot afford pay-as-you-go, this is a good solution,” she said. “We are really trying to see how we can best manage our resources.”

Dozens of Oakland residents lined up during open forum to opine on the matter. Joe Tuman, who ran for mayor last November, spoke during the open forum and said that the financial situation the city has gotten in with the Police and Fire Retirement System is a perfect example of poor long-term planning. “We strongly advocate an emphasis on long-term planning,” he said. “The question for you is: Are you going to react when the deadline comes or are you going to think long-term?”

As the meeting concluded, Councilmember Jane Brunner of District 1 said, “I’m not prepared to make this decision in committee or council unless we make the decision with the budget. It has to be connected to the budget.”

Other committee members agreed and District 6 Councilmember Desley Brooks suggested they have a special committee session to specifically workshop the Police and Fire Retirement System. No date was set for that session.

The next finance and management committee will be on March 8 at City Hall.

1 Comment

  1. len raphael on February 25, 2011 at 10:15 am

    Sad thing is that this specific pension fiasco was not the result of extravagant pension promises. These really are elderly retires and spouses.

    Very different from the truly extravagant 32% retroactive Calpers pension increases given in 2003 or the unsustainable retiree medical benefits.

    PFRS situation is a combo of bad investment decisions over decades with many trustees and elected officials betting that they could recover their losses by floating bonds at low interest rates and trying to do better than that in the stock market.

    That was a reasonable strategy for a wealthy individual or a hedge fund, but was always nuts for a public retirement fund which can’t afford the downside risk that comes from investing “on margin”.

    Two council members, Nadel and Russo in fact did vote against renewing the bond about 10 years ago.

    Oakland with the aid and comfort of its law firm and investment bankers, single handedly invented the “Pension Obligation Bond”. Now it’s a rock around our necks.

    If a private sector employer had done this for their employee retirement, it would have been sued for failing to act prudently, fined by the Fed govt, and it’s trustees face serious charges. But government pension funds are exempt from the laws protecting private pensions, even though the public is stuck with paying the bill for the screwups.

    -len raphael, temescal

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