You Tell Us: Oakland can’t afford the risk of the pension bond refinance deal
on June 11, 2012
If you liked the city’s Goldman Sachs interest rate deal, you’ll love the pension bond refinance deal.
You couldn’t find a way to cozy up any closer to Wall Street investment bankers than paying them to sell hundreds of millions of bonds and then paying them to manage the investments made with the bond proceeds — a useful technique if combined with the political discipline to start now to repay the bonds without refinancing all of it again, plus losses in five to fourteen years.
For any pension bond technique to work, Oakland has to be able to afford to play the stock market and take the very real risk that we lose tens of millions in the market again, as we have twice before, because the bond proceeds have to be invested in the stock market and earn more than the fully taxable interest we’re paying the bondholders.
If our leaders understood the risks, they would go real slow about making us triple down on our stock market bet once again. Or maybe they do understand the risks, but know most of them will be retired or on to higher office when the bonds come due.
Their refrain is “We have no choice.”
That’s like a compulsive gambler telling you that he has to bet it all on red to make up for his past losses. They refuse to find the costs to cut now or taxes to raise to come up with another more than $45 million a year. They tell us that in five years we’ll be in better position to make those $45 million per year payments, but in next breath tell us that they want to refi first and figure out afterwards how to repay the bonds.
In the last paragraph of the mayor’s recent Budget Facts report, total unfunded liabilities for all retirement costs and infrastructure exceeds $2.5 billion, approximately five times our annual general fund total expenditures. That $2.5 billion doesn’t even include what we’ll owe CALPERS which is shown as “$TBD.” The CALPERS number could be very large also.
Why should we trust our officials when they tell us that in five years we’ll be in better financial shape at the same time all those Baby Boomer retirement and delayed capital costs come home to roost? From Raider deals to Fox Theatre renovations to interest rate swaps, this is not a financially savvy bunch of officials with a great track record for long term planning.
In fact our elected officials have done these refi’s several times before and each time we’ve gone deeper in the hole. The odds are not good they’ll do any better this time around in an extremely volatile stock market.
Yes, it will be extremely painful to come up with that nut each year. So we’ll probably have to do some kind of combination refinance with a big annual pay down.
For background see this short article recommended by City Auditor Ruby appropriately titled “Risky Business.”
Besides obligating all of us to a big financial risk that a city as poor as Oakland cannot handle, it is not OK to burden younger and future residents and businesses with the huge retirement costs of city employees who never served those future and younger residents.
Let’s take a few extra months to hold public hearings about the risks and benefits of mortgaging the city to the hilt once again. Give residents comprehensive five- and ten-year financial projections for the city’s general fund under different pessimistic, likely, and optimistic assumptions so that we all know what we’re getting into. Show us how we’re going to cope with the over $2.5 billion of other unfunded obligations.
Don’t stick us with another Goldman Sachs deal.
Len Raphael, a longtime resident of Oakland, is a self-employed CPA and writes about Oakland municipal fiscal issues.
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The residents who should really be po’d are those under say 50 who bought homes/condos in the last 10 years or are renting properties that changed hands in the last decade so they have higher assessed tax values.
Like every other property owner, they are paying directly or indirectly (if a tenant) about .0015 of the assessed value for old and future PFRS bonds.
Works out to $525/year on a 350k property, 750/year on a 500k property; 1.5K/year on 1Mill etc. Money down the City retirement rat hole that could have gone to targeted parcel taxes for more cops or more teachers etc.
Piedmont, SF, Berkeley, Orinda etc. does not have that same additional “ad valorem” tax which we enjoy for the privilege of living here and the honor of providing retirements to city employees the likes of which most of us will never have.
Oakland pension trivia question: did you know that PFRS retirees monthly benefits are synched to current Oakland cops and firefighters pay and benefits?
One elderly widow of a firefighter called a buddy of mine to complain that her holiday pay had been cut. He was mystified until widow explained that every time cops or fire fighters get wage or benefit increases, her pension goes up.
Because there was a modest reduction in one of those forms of pay last year, the City tried to reduce PFRS pensions. The retirees took it to court to argue that only increases get passed thru, not decreases.
If you are brave enough to look at all the PFRS projections, there is stretch of time where funding costs actually rise even though the number of beneficiaries is decreasing, because of the temporarily delayed cop/fire? raises granted by the council that kick in another year or two.
Len Raphael, Temescal
On June 19th the council approved by vote of 5 to 3 the issuance of up to 250Million of bonds payable over 14 years.
There was quite a bit of discussion in general terms of risk but nothing was provided by staff quantify the risks. The only risk calculations done for this entire 250Mill dollar decision were some abbreviated ones prepared by a consultant hired by the city auditor office last year using what are now out of date numbers.
The decision each council member made came down to what was more important to them: “protecting the general fund” for the next five years so the council members didn’t have to make any more cuts right away; or eliminating the risk of losing another 50 or 100 million playing the stock market with borrowed money by funding the old pension obligation out of the general fund now.
Pat K took the lead for the yes vote on the council.
She stated her belief that Oakland is on the cusp of a resurgence that would be killed if council had to cut spending by about 40Mill/year to supplement the approx 60Mill/year from the tax overrides. Her priority and that of the majority was thus “protecting the general fund” for the next five years.
Staff assured her that in five years there would be plenty of money available from other paid up debts. Didn’t bother to mention that we had a couple of Billion of new obligations coming up, but perhaps that’s why staff advised doing more than setting up a “reserve” for stock market losses. Staff recommended creating a restricted fund now that would accumulate any monies as other debts get paid off.
Pat likened the bonds to parent’s taking out a mortgage on their home to pay for their kids’ college education.
No one pointed out that the way 14 year bond repayment schedule worked, this was more like the parents making the kids take out loans for the parents’ ancient college debts.
Libby S. supported the bonds if her non-binding ordinance passed setting up a reserve for stock market losses and monitoring of the pension investments.
Staff had recommended something in addition that was much stronger than a reserve for stock market losses. They advised setting up a restricted fund to safeguard those monies from other debts that will be paid off before the five year PFRS holiday ends.
But even Libby S’s very mild proposal failed to pass on a tie vote.
At least one council member agreed that it was dumb to make a huge long term fiscal decision before getting long term fiscal projections from staff.
I’d have to think the others thought that way but didn’t want to discuss that because the asst. city administrator admonished them at the beginning of the discussion that whatever they said would get back to the bond underwriters and could affect the terms of the deal.
No bond underwriter or rating analyst wants to have it pushed in her face that the long range fiscal situation here is even more “dire” (a term the council members used to describe the next five years) than our current budget situation.
But as we saw during the last two market bubbles, Standard and Poors, Moody’s etc make their money helping underwriters sell stocks and bonds.
The POB decision automatically comes up for a second vote this coming Tuesday. Not likely a council majority will reject the bond issue and decide to try cut costs to get the funds to pay now rather than later.
(note: close to 1 Billion dollars of tax overrides have been collected since the early 1980’s to fund this pension with only 1,100 participants. The tax continues to 2026. If anyone at City Hall knows where all that money went, they’re not saying.)
What it comes down to is that at least some of the council members suspect that floating this additional bond issue is risky and expensive, but are so scared witless by the expected “dire” overall fiscal situation for the next decade or two, that they’re willing to borrow any money they can while we still can, regardless of risks or costs because they know we face billions of other unfunded costs and uncertain revenues.
They don’t want to publicly discuss long term planning before borrowing the 200 Mill because it would spook the bond underwriters into cancelling or more likely raising the interest rate we have to pay.
-len
repost of an email from Dave Mix, retired City employee to the City Council:
City Administrator and
All Council Members:
Without question, the proposed $250 million Police and Fire Pension Bond issue, is reckless and irresponsible. It most certainly will lead to further destruction of the City’s finances and a very possible collapse of the Police and Fire Retirement System (PFRS). $250 million is a tremendous amount of debt to take on in a period of huge market uncertainties. The City’s and PERS recent past history and devastating experience in the market is a prime example of how quickly and disastrous a turn in the economy can be. In the Year 2000, the System had almost $900 million – now it has dropped to a little over $250 million. The huge influx of cash in 1997 ($436,289,659.15 – POBs ) and the bail out/rewrite Bonds of 2001 of $195,636,449 and then the additional cash in 2005 of $18 million (2005 Series B $17,975,000) did little to help. They were all for naught. All that cash gone up in smoke in poor planning and ill conceived schemes.
The above doesn’t even begin to address the rocky road of the New York Life (NYL) annuities and the losses absorbed by the tax payers (Oakland Property Owners) or the infamous Goldman Sachs interest rate SWAP agreement . The NYL Annuity “money pit” first began in 1985 (Oakland introduced the “Pension Obligation Bond”) now commonly referred as POBs, with a Bond deal of $221, 540,000 million, (1985 Series).
Please be warned, you will need a GPS tracking devise to follow what then transpired. The City then refinanced the 1985 series with a 1988 Series A for $209,835,000 million and again rewrote that Series in 1998 to the tune of $187,500,00 million, (1998 Series A-1 and 1998 A2). Also in that same year, 1998, (actually in 1997) the City entered into the Goldman Sachs Swap agreement to protect (????) against the variable rate of those 1998 Bonds. Later, in 2003 the swap agreement was restructured by changing the formula for the floating amounts.
Enough about the SWAP, however, the City has estimated that the SWAP will cost the City (tax payer) approximately $5,000,000 million per year in annual payments through the year of 2021 and 2.5 mil for 2022. Now – back to the NY Life Annuity Bonds. In 2005 the City again rewrote the NY Life bonds for $126,975,000 million as Series 2005 A-1 and 2005 Series A-2. And, an additional amount of $17,975,000 million (as noted in the first paragraph) as 2005 Series B. But wait, there’s more ! In 2008 the city once again issued another series of bonds, as 2008 Series A-1 for $107630,000 million and 2008 A-2 for an additional $20,330,000 million.
Without question, the City – We! The Tax Payer, are literally drowning in “Pension Obligation Bond Debt”. Adding another $250,000,000 million is totally and completely absurd – it is financial suicide. Please understand, this $250 mil is not a rewrite of existing debt – nor is it for the defeasance of current bonds – it is all new debt, over and above all present PERS obligation. !!!
As you may recall (more than two years ago, May 19, 2010) I wrote extensively on this subject, as addressed to Councilwoman Kernighan with copies to all other parties. Nothing much has changed since then except that the situation has gotten worse – a lot worse.
Critical Legal Issues
1) Validation Action – The City’s Validation action in 1996, City of Oakland vs. All Persons, Case No. 772719-7 (as noted in the staff report), is not valid or binding for any other purpose except for the 1997 Bond Series Issue for which it was filed and to have judicially approved. California Code of Civil Procedures, Section 860 et. seq. clearly does dot allow for, or provide for, hypothetical or non determined future public agency actions to be pre-piggy-backed or pre-packaged and pre-validated as a single judicial action as the City is presently attempting to do with the present Bond Issue Resolution and Ordinance.
As is expressed in the Finance and Management Report the judicial order is by “default” (no opposing party and going unchallenged). It is also understood that the City authored the default order which was written and designed to apply to not only the action filed August 28, 1996 but to all other like pension bond proposals (issues) in the near or far flung future. Be that as it may and besides the City’s best efforts – it can’t be done. The 1996 filing was a “single” Validation Action, and there are no other kinds. The 1996 validation (of the then 1997 $436.3 million Bond issue) clearly cannot be arbitrarily held to encompass any and all possible future actions of or by the City simply because they may vaguely relate to the PFRS Fund or System.There simply is nothing under the law or precedence to allow or even entertain such a far flung notion. Lastly, the “default” order and the Superior Court case does not represent any kind of hearing or judicial inquiry nor determination (factually, there was no hearing or case heard by the court) or in depth analysis of the issues. Lastly, the lower court does not hold the weight of the appellate court or the supreme court and clearly the 1996 default ruling may not be cited or relied upon in any future legal challenge.
2) Property Owner Override Taxes – The City cites Valentine vs. City of Oakland (1983) 148 Cal.3d 139, as authority to assess and collect the 0.1575% in property tax revenue to meet its obligation to support the (now closed) Police and Fire Retirement System (PFRS). However, the Court ruling does not provide that the City may or is permitted to use those specific tax funds to pay or support pension bonds, the principal and interest or to service the bond issue in any other way. The tax revenue is strictly restricted to the “system”, pensioners direct retirement payments and benefits. There is absolutely no law or precedence that allows those funds to be used for any other purpose other than as expressed in Valentine.
The Valentine decision (1983) predates the first Pension Obligation Bonds (1985) as introduced by the City of Oakland, thus there is nothing found in Valentine that specifically addresses the pension bond issue or that can be said to sanction or approve it. As a practical matter it is absurd to contend that the City may legally use tax revenue (public funds) assessed and collected for a very specific and limited purpose (Police and Fire Retirement System) for any other purpose other than the original intent. To use those funds to speculate on the open stock market, engage in questionable interest rate SWAP agreements, or to support bond Issues or the service thereof, or the proceeds thereof, which are in turn used for market speculation, must not be permitted and cannot be permitted. It is unquestionably a misuse of public funds.
Unfortunately, there is a clear indication that the City has been using those funds to service several different bond issues (pension obligation bonds, New York Life annuity purchases, SWAP agreements, convoluted transactions (lease backs etc.) between the Redevelopment Agency and the City, etc.) and, additionally using portions of the override tax and bond proceeds to pay Cal PERS premiums along with other non-authorized expenditures. It is estimated by the Retired Oakland Police Officers Association (ROPOA) that the City of Oakland has diverted (misused) more than $450 million in NYL Annuity proceeds, in violation of the NYL Annuity agreement, laws governing pension funds, and clearly the provisions of the Valentine Court. See ROPOA request for an Independent Inquiry Regarding the Expenditure and Use of New York Life Annuity Reserves (February 21, 2012).
3) Override Tax “Reserve Fund” – The City has unlawfully created a Tax Override Reserve fund in excess of $115 million which it used this past year to pay down its obligation to the system or to service the outstanding bonds. As in #2 above there is nothing under the law or precedence that allows reserves or the stockpiling of excess funds or the purposeful collection of excess funds in order to create reserves or stockpiling. All funds assessed and collected are to be strictly used in support of the system (the fund) and specifically for retirement benefit payments. The City is not legally permitted to assess or collect excess override tax funds beyond or over and above what is proven to be needed to fund the system for direct retirement payments. The Override Tax may only be used for a pre-determined voter approved financial support mechanism of the PFRS fund and any annual excess amounts assessed and or collected must be returned to the taxpayer. Lastly and in addition, funds are prohibited from being used for enhanced benefits over the original provisions of the voter approved system.
The Death Spiral
The City (Finance and Management Agency) “Reports” clearly indicate a complete failure of the system. The problem being , they refuse to believe their own research and their own numbers. As the F and M report states (aside from a small annual amount from the NYL Annuities) there is but one revenue source for PFRS. Tax Overrides – Unfortunately they have grossly “padded” the numbers in order to achieve a predetermined goal.
There Are No “Excess” Tax Override Revenues
(The Finance and Management Agency Big Lie!)
Finance and Management Treasury Manager (Katano Kasaine) depicts overstated (false) and misleading override tax revenues. Her contention of excess revenues is base on a completely false and bogus premise. The Treasury Manager bases her computations on an annual 2% growth in property taxes along with a 5.69% annual (25 yr average) increase in assessed property values. The County and City records clearly indicate just the opposite. As everyone is aware, we are in a severe financial (housing) downturn. While Kasaine’s figures show an inflated, “pie in the sky” amount, the real revenue is quite different.
While County records (Oakland) show a healthy increase for 2008-09 of 4.9%, the years following are down considerably with 2009-2010 at -2.91% and 2010-2011 at -3.09%, for a two year total of – 6%. That is a negative 6%. While Katano is trying to convince us the rate is climbing by two percent (2%) a year plus the 5.69%, 25 yr average, in real life there is no increase (minus 6%). In fact, it is in the toilet. However, the 2011-2012 rate is up by 1.6% from the year prior but that still leaves a negative of 4.4% (-4.4%).
Clearly, the county records depict a substantial decline in revenue and there is no expectations that the revenue will at any time soon recover. (See County Tax records). Yet, the F and M agency insist on using grossly inflated numbers. At the same time irresponsibly failing (purposely avoiding) to show and report real past and present figures to the Council or the public. While the F and M Agency is touting a 2013 Tax Override figure exceeding, “$62.4 million” and erroneously projecting that it will climb to over $80.7 million by 206, they are purposely hiding the real and factual numbers. It is believed that the real revenue is not presently at $62.4 mil and climbing, as the F and M report indicates, but in fact closer to $52 mil and steadily decreasing.
Added to this decline in override tax revenue, due to the financially stressful times we are experiencing, the County is experiencing an extremely high “default” rate in tax collections rapidly approaching 10%. Obviously the big question is, Why hasn’t the Finance and Management Agency produced the real override tax figures.? Not just the assessed amounts but the amounts actually collected – including the default losses. Clearly, the Council cannot be expected to make an informed decision without all of the correct information.
Bond Debt Service
As with the override tax above the F and M Agency Report fails to paint a true and clear picture of the total debt service encompassing all pension bonds and related pension bond debt regarding or in support of the PFRS Trust. While the latest report (May 22, 2012), at page 3, indicates an amount (FY 2012-13) of $59.5 million, an earlier report shows $64,784,997 million. The latter amount is believed to include the annual $5 million SWAP payments that F and M neglected to mention as part of the total debt. At any rate, the amount is expected to climb to a high of $66,055,803 in 2014 and then drop to $53,130,000 in 2023.
Also, the May 22, 2012 Report makes the very bold statement that, “The revenues the City receives from the Tax Override and the annuity (NYL) are sufficient to pay the debt service on the existing PFRS bonds…”. Oh Sure! With the NYL annuity shown at $6.2 mil for 2013 – just barely. If, and only if, the Override Tax is as it is reported. The result of a quick calculation (for that to hold true) indicates that the minimum override tax would need to be $58.5 mil with absolutely no residual as the F and M Agency falsely claims – clearly, none left over for the new bonds.
The $250,000,000 New Bonds
(How will the New Bonds be paid)
Remarkably, the Finance and Management Agency fails to show how the new bonds ($250,000,000) will be paid, (principal and interest). By the Ordinance the maturity date extends to December 15, 2025. With a five year payment holiday and as a “Capital Appreciation Bond” it is assumed that they will be zero coupon and back loaded with payments beginning Dec. 2019 and running to Dec. 2025, although from the City’s report it is not clear what their scheme is. Suffice it to say, this type of bond financing for this amount of money ($250,000,000) could end up costing the city and ultimately the tax payer, close to $380 million for the full period and with annual payments exceeding $54 million.
It is obvious that the City cannot possibly afford those kinds of annual payments for PFRS, even if they are deferred for 4 or 5 years and most certainly cannot endure the total debt amount of the above estimated $380 million. Even when the PFRS debt is expected to drop in 2015 ($5.5 mil) and 2018 ($15.1 mil.) respectively (total of $20.6 mil) in not nearly enough to cover the expected new debt service on the new bonds of over $54 mil. beginning in 2018. Even in considering the potential for other additional new debt based on the exhaustion of other City bond debt, there simply is not enough potential revenue.
More importantly, the foregoing fails to factor in the PFRS annual payments (yr. 2018) of $70 mil plus. By 2018 the aggregate debt service will exceed $104.925 million, (new debt service $54 mil + $50.9 existing reduced debt service, projected for year 2018). With a realistically projected Override Tax for yr. 2018 of $60 mil. (if luck holds) just how is the above $105 million paid. Even with the then projected (2018) NYL annuity payment of $6.8 mil. added on, it is clear that the plan will fail. Furthermore, added to this is the oft ignored annual $70 million retiree benefits. If the fund is exhausted at that time (which it will be) the annual $70 mil (or close to that amount) must be paid. Where will that money come from?
The most disturbing aspect of this proposal is the City’s acute and dismal failure (City Administrator and The Finance and Management Agency) to provide complete, adequate, in depth, and most importantly, understandable figures and numbers. Clearly, in full respect and appreciation of our duly elected City Council Members, they cannot be expected to make any type of intelligible decision without the appropriate and very necessary information. The City Administrator and the Finance and Management Agency’s failure to provide the necessary vital information and analysis so critical to this matter is indeed incredulously and inexcusable.
PFRS – Fund Annual Disbursements
The PERS Fund (Disbursements) Payments had a high of $75,709,964 in 2008 (annual report). And, although the amounts have dropped – the 2010 report depicts an amount of well over $70 mil. ($70,589,319). The 2011 amount is expected to drop below $70 mil, but, with deferred police and fire employee payments coming due in the very near future the fund expenditures are expected to easily reach $80 mil.and soon thereafter. Even though the fund membership is declining, inflation (3.5%) and increasing wages are having a dramatic effect on the fund balance.
Non Existent – Investment Earnings
The most common error in computing interest earnings is ignoring the declining balance. It should be obvious that interest earnings (regardless of the rate) are extremely hampered by a rapidly decreasing fund balance. If a substantial fund amount (investment portfolio) is not maintained the interest rate is soon rendered meaningless. Simply put, earnings of 7% on the funds high, $900 million (yr. 2000), is dramatically different from 7% of the present plan’s value of $250 million. As shown below, the huge $70 million annual deduction for retiree benefits (plus expenses) undeniably raises real havoc on the Trust Fund.
The City’s plan to deposit $210 mil in the fund, (from proposed 2012 bond proceeds) added to the present $250 million would provide an investment portfolio of $460 mil. At first glance that may appear to be a substantial amount. However, as noted above, annual withdrawals of $70 million, very rapidly decrease the fund. Added to this dilemma – the City has a bad habit of not showing the full annual amounts – see annual reports. The City, all too often, reports only the retiree benefits, omitting the administration expenses, investment fees, and other expenses.
As noted previously, even with the exhaustion of the 20088B and 20088A bonds in 2014 and 2017 respectively, it only frees up $20 million annually. Not nearly enough to meet the new debt service of the proposed 2012 Bonds of (approx.) $54 million annually, plus $70 million in benefits and expenses, plus $50.9 in existing bond debt. With these amounts totaling more than $174.9 million, it is exceedingly clear and brutally obvious that the annual Override Tax of approx. $60 million, plus $6.8 million in NYL Annuity payments, totaling $66.8 million, doesn’t even come close to meeting the $174.9 million (yr. 2018) annual debt.
Declining PFRS Trust Fund
As shown below, even if earnings are a consistent annual 7%, the fund will completely exhaust at the end of seven (7) years. Likewise, at 4.5% it will completely exhaust at the end of six (6) years, and completely exhausted at the end of four (4) years at flat earnings (0%). Even with the City scheduled to resume minimal payments and or contributions in five (5) years, 2018, it simply won’t be enough to keep the plan afloat.
Earnings @ 7% Earnings @ 4.5 % Earnings Flat
0%
Fund Balance Fund Balance Fund Balance
1st yr. 460 – 70 = $390 + int. = $407.55 460 – 70 = 390 + interest = 407.55 460 – 70 = 390 + (O) int. = 390
2nd yr. 407.55 – 70 = 337.55 + int. = 361.18 407.55 -70 = 337.55 + int. = 352.74 390 – 70 = 320 + (O) int. = 250
3rd yr 361.18 – 70 = 291.18 + int. = 311.56 352.74 – 70 = 282.74 + int. = 295.46 250 – 70 = 180 + (O) int. = 180
4th yr. 311.18 – 70 = 241.18 + int. = 258.06 295.46 – 70 = 225.46 + int. = 235.61 180 – 70 = 110 + (O) int. = 110
5th yr. 258.06 – 70 = 188.06 + int. = 201.22 235.61 – 70 = 166.61 + int. = 173.57 110 – 70 = 40 Fund Exhausted
6th yr. 201.22 – 70 = 131.22 + int. = 140,41 173.57 – 70 = 103.53 + int. = 108.19
7th yr. 140.41 – 70 = 70.41 + int. = 75.34 108.19 – 70 = 38.19 Fund Exhausted
8th yr. 75.34 -70 = 5.34 Fund Exhausted
Note! Based on deductions to the Fund at the beginning of the year and interest earnings posted at years end.
City’s Long Term (Funding Strategy) Scheme
The City outlines its strategy at page 11 of their report. The city anticipates that in the not too far future certain debts will be paid (i.e., Convention Center and Master Leases) and then those funds may be dedicated to support PFRS. Staff is recommending that the Council designate and commit these funds for the sole purpose to fund PFRS. WHY? Firstly, can that be legally done, but more importantly why, in the absence of a firm and designated revenue stream why would anyone want to tie up possible future reduced budget obligation. Does that even make any sense.
No doubt the City will rewrite these bonds as it has many times before with all of the previous bond issues, extending the time period, driving up exorbitant additional cost and costing the taxpayer thousands.
.
If this is the scheme the bond issue is based on (and it appears to be as there is no other expected future revenue) then we are all in deep and serious trouble.
David E. Mix
short version of David Mix’s analysis:
There simply is no Bond Issue “urgency”
Currently there in over $58 million in the Tax Override, Reserve Fund. There is absolutely no reason why this money cannot be used to meet the City’s annual obligation ($45.5 mil.) to PFRS. That is easily enough money to fund PERS for an additional year, (just as was done last year). The City’s contention that it cannot afford to take it from the general fund, “Without putting the General Fund at risk”, is unadulterated “Bull”. The money the City used this past year, $3.8 mil. per month, didn’t com from the “general fund” – it came from the Tax Override fund. The City is “calling wolf” – a cheap scare tactic.
Furthermore, the fund was never intended (nor legal) to be stockpiled as a reserve. It should be sent to PFRS and used for retiree benefits according to the original intent – it is not legally the City’s money and it needs to be immediately paid down.
Additionally, the Trust Fund presently has a little more than $300 mil. in its investment portfolio. That is easily enough to satisfy an additional years benefits of $70 mil. With earned interest (5%) and a net of $55 mil. the benefits are easily covered, leaving a healthy $245 mil. An additional “two” years without any deductions to the General Fund – more time to develop a “better plan”, while saving thousands in unwarranted Bond fees and expenses.
My last letter regarding PFRS and the proposed $250 bond issue was too long and too complicated. By this correspondence the points and issues are reduced to bare bones.
The following figures (#1, #2) are based on City’s F&M Agency Reports and year 2013.
1) PFRS Revenue (A) Override Tax, approx. $60 mil. annually.
(B) NYL Annuity payments, $9.6 mil.
Total Annual Revenue, $69.6 mil.
2) PERS Expenses (A) System (pension trust) obligations (benefits and expenses) approx. $70
mil.
(B) Bond Debt Service, approx. $60 mil.
(C) Goldman Sachs SWAP payments, approx. $5 mil.annually
Total annual (current, 2013) obligation, $135 mi.
3) New Debt – $250 mil. bond issue (A) $27.3 mil. annual payments (amortized over full period).
or (B) $54 mil. (annual payments, following 5 yr. holiday)
Total annual payments (with bond payment option (A) above) $162.3 mil.
and (with bond payment option (B) above) $189 mil., following 5 yr. holiday (2018)
(Note! Bond issues may be structured in many different ways).
Clearly, the Expenses far out weigh the Revenue. Once the fund is exhausted (4 to 8 years), depending on “market”, earnings or losses, it will result in an annual General Fund debt of approx. $127.3 to $254 million (existing bond debt + new bond debt (option A or B) less the projected (increasing Override Tax + decreasing NYL annuity) of $70 mil. annual revenue).
David E. Mix
Could Never Happen Here dept:
”Stockton owes about $700 million to bondholders, including $125 million it borrowed in 2007 in a poorly timed bet to buy investments for its pension fund. The city plans to stop $12 million in debt payments immediately and reduce pension payments by $13 million a year. The elimination of retiree health care could save $19 million.”
http://www.kcra.com/news/local-news/news-stockton/Stockton-bankruptcy-is-hard-hit-for-city-retirees/-/12969936/15299304/-/a0j9rs/-/index.html
The POB’s was approved tonight on a 6 to 2 vote. Only Schaaf and De le Fuente opposed.
Schaaf summed up her opposition succinctly as that it was worth paying a few month’s of PFRS payments to take the time to get comprehensive evaluation of the costs and risks of the deal.
I couldn’t agree more with her statement that the pages and pages of staff and expert charts failed to use realistic assumptions to quantify the risks to the city.
Nor would I disagree that we might well decide to use POBs after doing such a study and after we have done our long range budget planning.
But to borrow first and plan afterwards is stupid (my word not hers).
My two favorite lines were one from Quan where she matter of factly stated that POBs “would save us money.”
Even Pat Kernighan, most vocal supporter of the POBs, couldn’t let that go by uncorrected. As Pat explained, only in a rosy scenario where investment returns exceeded our interest and other costs would it save us money. If the returns were lower it would “not be so hot.”
Calpers Misses Big on Investment Target
WSJ July 16, 2012
By MICHAEL CORKERY
The California Public Employees’ Retirement System said financial turmoil in Europe and subpar performance by outside stock-fund managers left the U.S.’s largest pension fund by assets well short of its annual return target.
Calpers’s 1% return for the fiscal year ended June 30 could force the state of California and its cities to contribute more to the $233 billion retirement system to make up for the investment shortfall.
“The last 12 months were a challenging period for all investors,” Joe Dear, Calpers’s chief investment officer, said Monday.
Calpers is a bellwether for retirement systems that confront many of the same challenges. Historically low interest rates, volatile markets and slow economic growth have shaken many public funds’ confidence in their ability to meet investment targets.
Calpers’s underperformance was particularly stark because the fund missed some of its own internal benchmarks. Mr. Dear blamed the fund’s negative 7.2% stock return partly on losses in emerging-market investments and on the selection of certain investment managers. He didn’t name them.
Over the same one-year period ending June 30, the Dow Jones Industrial Average rose 3.8%.
Calpers’s announcement puts the spotlight on other public-pension systems that are expected to report annual results in coming weeks and months. In some cases, subpar investment results can dial up the pressure on states and cities to force employees to contribute more to retirement plans or cut the benefits retirees are due to receive.
Mr. Dear pledged to review the choices the pension plan has made in hiring outside money managers. He also said the retirement system would continue to reorganize its private-equity portfolio; the fund sold about $1 billion of private-equity stakes recently, and Mr. Dear said Calpers likely would restructure several other partnerships with private-equity firms.
This year, Calpers lowered its annual investment return target to 7.5% from 7.75%. Despite recent difficulties, Mr. Dear said on a conference call Monday that he believed the fund’s target still was attainable, though he acknowledged “we are going to have to employ new strategies.”
In addition to losses on stocks, Calpers reported a negative 11% return on its forest holdings due to what Mr. Dear called an overexposure to U.S. southern timber and a weak housing market.
On a bright note, fixed-income investments rose 12.7%, while its real-estate portfolio returned 15.9%. That represents a significant turnaround since the financial crisis when Calpers’s land and housing investments resulted in big losses.
Mr. Dear said the fund isn’t planning to abandon its long-term strategies because of one bad year. Calpers’s 20-year investment return is 7.7%. “It’s important to be realistic but you also have to have confidence,” he said.
Mr. Dear also said pension-fund officials are examining whether Calpers was harmed by the alleged manipulation of the London interbank offered rate, or Libor, a benchmark for trillions of dollars of loans and derivatives around the world. At least 16 financial institutions are under scrutiny in a global investigation of attempted interest-rate manipulation.
“Once again the financial-services industry has determined it cannot be trusted to make decisions for the long-term interest of its investors,” he said.
In some cases, Mr. Dear said the lower rates may have hurt the pension fund and in other cases it may have helped. “My hope is that the authorities will review the situation and prosecute where possible those who have done the harm,” he said.
SACRAMENTO, Calif. (AP) — The nation’s largest public pension fund collected a dismal 1 percent annual return on its investments, a figure far short of projections that will likely bring pressure on California’s state and local governments to contribute more money, officials said Monday.
The return reported by the California Public Employees’ Retirement System was well below its projected return of 7.5 percent for the fiscal year that ended June 30 and is prompting administrators to consider changes to investment strategies.
The investment returns are critical because taxpayers are on the hook for the difference if the pension funds fail to meet their performance targets.
“The last 12 months were a challenging period for all investors,” chief investment officer Joe Dear said about the stock market’s performance amid the ongoing European debt crisis and slow global economic growth.
The fund was most impacted by a 7 percent drop in returns on global equities. Half the pension’s assets are in public equities, Dear said.
The fund, known as CalPERS, runs a $234 billion pension system for more than 1.6 million state employees, school employees and local government workers.
The preliminary returns reported Monday were even lower than the state’s pension fund for teachers, which earned just 1.8 percent from investments over the past year.
Dave Hitchcock, director of state and local government ratings at Standard & Poor’s in New York, said the fund’s low returns were symptomatic of the entire financial industry.
“We’re in an age of lower global returns than what we saw 10 years ago,” Hitchcock said.
Local government officials expressed disappointment with the return. They said it should underscore the need for pension reform.
Dwight Stenbakken, deputy executive director of the League of California Cities, said the current system relies too heavily on earnings. When stocks, bonds, real estate and other pension investments don’t reach targets, the difference has to be made up by taxpayers.
“We are going to be experiencing this problem for a long time to come,” Stenbakken said.
When Council approved borrowing +200Mill more to dump into the maw of the ancient PFRS pension system, one of the council members remarked that she didn’t want to make economic predictions.
That’s exactly what the council will be doing by borrowing at 4.65% to fund PFRS temporarily. They are betting that over the next 13 years the PFRS will earn more than the 4.65% plus the million of bond issuance fees; and they are betting that in four years when we have to start paying big principal payments that our tax base has grown to where it was during the real estate boom.
This week CALPERS announced that it earned a skinny 1% for the fiscal year just ended.
A non-partisan group headed by ex Treaury Secretary Paul Voulker and Richard Ravitch ex NYS lt. govenor, released their report on state and local govt finances. They do economic projections and they don’t look “too hot” as Pat Kernighan might say.
http://www.statebudgetcrisis.org/wpcms/wp-content/images/Report-of-the-State-Budget-Crisis-Task-Force-Summary.pdf
A NY Times article today headlined:
In Report on States’ Finances, a Grim Long-Term Forecast
Len, thanks for continuing to raise awareness on this. PFRS has a long and sad history with this city.
This economy is no time to be adding new debts that depend on 2007-era growth numbers in the coming years. I’d be happy to make a side bet against any return to that kind of growth.
I don’t understand why Oakland residents aren’t primarily interested in basic services such as parks, police, lighting, etc. I’ve been here for almost 15 years and watched money get wasted on well-meaning but poorly monitored social programs.
Measure Y was the saddest, as the promised police levels have not been maintained but the tax keeps getting collected.
How bad does it have to get before we collectively prioritize boring but important basic services over principled but ineffective programs?
Ron,
Based on reading the vague, feel good “platforms” of the various City Council candidates, I’d say we will have to hit Chapter 9 before anything changes here.
All of them are hoping to get the support of the muni unions and the currently funded non profits, and most of them hope to get re-elected or go on to higher office.
There simply is not enough waste and overpaid upper managers to cut to pay for the absurdly high retirement promises and some of the highest muni wages in the country. The combo is not doable and never was unless you believed the various bubbles would last forever.
City staff will blow as much smoke as requested by Council and Mayor to justify the ostrich attitude of our officials toward our 2.5Bill unfunded obligations. They don’t even have the courtesy to point out that the Mayor’s own 2.5Bill number is absurdly optimistic about CALPERS being fully funded. Considering CALPERS using a 7.5% rate of return to calculate its funding, and it only made 1% this past year, don’t believe city officials who tell you cautiously or not that they see the light at the end of the tunnel.
Sitting thru a few recent council meetings, one gets the impression that our council members are clueless about the volatility of the stock market and are still under the impression that our fiscal problems are just temporary.
Amazing that they don’t even hire experts who will speak the truth to them but prefer staff toadies.
When well run, tightly managed cities like San Jose acknowlege serious doubts about avoiding Chapter 9 and unlike Oakland they are seriously tackling retirement costs, then you know Oakland officials are whistling in the dark.
They only hope the bond market doesn’t figure that out before they borrow the next +200Mill to triple down their bet on the stock market based on bad data and non-existent risk analysis.
Some residents are working on educating the underwriters about those issues that are unique to Oakland. If necessary, a law suit will be filed.
At least two council members used the adjective “dire” to describe our financial system. They justified the pension bonds as a way to buy time with the hope and prayer that we’ll “grow our way out of our problem”.
Unfortunately for the residents, we can’t just borrow our way out of the money problems and hope they’ll fix themselves because our crime problem is inextricably tied to our fiscal problems.
When a city like ours continues to evade making the unpleasant choices between paying unsustainable retirement pension and medical benefits vs paying for enough cops and effective anti violence programs, libraries, and parks/rec we’ll never make our city attractive enough to employers and residents to grow our way out of an organic vegetable raised bed.
Len Raphael, Temescal
The tragedy here is similar to what elected officials did in other cities and states: they promised retirement pensions and benefits to employees who bargained in good faith. The employees built their lives around those promises.
Now voters have to tell their politicians to tell the employees that we never could afford those promises and certainly can’t now.
In Oakland you explain that choice to people and they’ll tell you that’s impossible, why would politicians do something so stupid? Or their must be hundred million of wasted money sitting in special funds or going to fat cat managers or to patronage non profits.
The answers are not what voters want to hear. The special funds were raided to pay for unsustainable salaries and pensions and other benefits.
There is waste, but not tens of millions.
Most of the non profit grants are questionable in terms of effectiveness, but most residents agree that we need social programs in addition to more cops, parks and rec.
Basically, Oakland is not a wealthy town with a healthy business tax base but it pays its employees as if it were, and made promises it could not honor. Shame on the politicians and shame on us for letting them do that.
B is for bankruptcy: this is the first time any of our elected officials has publicly used the word in a context other than saying it will never happen here.
SF Chron quotes Oakland City Councilwoman Libby Schaaf, formerly an attorney for the Port of Oakland represents Quan’s former district in Montclair.
“I’m terrified that the city of Oakland will someday need to declare bankruptcy,” said Schaaf. “It (referring to the pension bond sales) creates a false sense of security that our finances are in order while our pension obligations mount and the debt balloon payment becomes due, starting in 2024.”
http://www.sfgate.com/bayarea/article/Oakland-s-financial-time-bomb-pensions-3743946.php
Len Raphael, 4922 Desmond
Luckily for Wall Street, there’s a sucker born every minute. Oakland City Council is right up there.
NYT’s article today about Stockton:
“Alicia H. Munnell, director of the Center for Retirement Research at Boston College, looked at outcomes for nearly 3,000 pension obligation bonds issued from 1986 to 2009 and found that most were in the red. “Only those bonds issued a very long time ago and those issued during dramatic stock downturns have produced a positive return,” Ms. Munnell wrote with colleagues Thad Calabrese, Ashby Monk and Jean-Pierre Aubry. “All others are in the red.” Only one in five of the pension obligation bonds issued since 1992 has matured, so the results could change in the future.”
http://www.nytimes.com/2012/09/04/business/how-a-plan-to-help-stockton-calif-pay-pensions-backfired.html?_r=1&emc=eta1
Len Raphael, CPA
Candidate for Oakland City Council District 1
http://www.LensForChange.com
facebook.com\LensForChange
@lensforchange
(510) 788-2700
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