In 1997, then-city officials in Oakland, California had a great idea that would take them off the hook for 15 years of pension contributions for some of its public-employee pension plans. City leaders issued a 15-year bond at a low interest rate, and invested the proceeds to potentially earn a higher rate, using the earnings to pay annual fund contributions.
Now sources say, the investments were poorly managed, and only earned an average of 4 percent annually, instead of the 8 percent that officials expected. Instead of helping its finances, the city owes $46 million that comes due on July 1.
An actuarial study commissioned by City Auditor Courtney Ruby determined that the city lost more than $250 million by issuing the bonds rather than paying the contributions as they became due.
To make matters worse, in addition to the pension bond disaster, the city is also facing a $40 million deficit on its $400 million general fund budget.
While some officials, including Councilman and finance chair Ignacio De La Fuente and City Attorney John Russo, want to rein in spending to make ends meet, others in City Hall prefer to simply issue another bond, and push the problem off for another five years.
According to the San Francisco Chronicle:
Issuing a new pension bond with another five-year holiday could have severe consequences for the future, according to Ruby.
Even if the city gets a 7 percent return on pension fund investments during a five-year holiday, the city would have to pay out $42 million to $28 million a year from the General Fund between 2017 and 2023, according to Ruby’s report. In the last years of paying back the pension bond’s obligations from 2024 to 2026 – half a century after the last eligible employee would have been hired – the city would have to pay more than $150 million per year from the General Fund.
The bonds are tied to a specific city pension plan for police and firefighters with unusually generous provisions – even by today’s standards. It provides that a retiree’s benefits are not tied to their salary when they retired, but to a salary as if they were retiring today.
For example, a police captain who retired in 1975 would receive 68 percent of the pay of a currently employed police captain in 2011- holiday pay and shift adjustments included. Currently, 1125 retirees and beneficiaries are participants in the plan.
Mayor Jean Quan is said to be favoring a plan that would have the city pay only $5 million per year into the plan for the next five years, and then increase payments when its finances are in better shape. However, Russo thinks the figure should be $20 million per year.
“People say, we should be paying this when times are better, but the problem is that when times are better, nobody pays this down,” he said. “If they roll this over again, there is no scenario I can see where they’ll be able to pay this back in 2024.”