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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