Oakland Attorney Takes Stand vs. POBs

SAN FRANCISCO — Oakland’s city attorney has taken a public stand against a plan by the city to sell bonds so it can continue to skip making payments toward growing public-safety pension liabilities.

City attorney John Russo said in an editorial last week that Oakland needs to address its pension liability problem rather than postponing such action by selling pension obligation bonds, a return to a strategy the city invented 25 years ago.

“Taxpayers in the 2050s shouldn’t have to pay for police who patrolled Oakland’s streets in the 1950s,” Russo said in a blog post on the Bay Citizen local news website. “It is time for Oakland’s leadership to level with the public, start paying — not deferring — our bills.”

Russo’s public comments come as city staff is working on a proposal for the City Council to seek another five- to seven-year break from paying its police and fire employee retirement-system pension liabilities. The plan includes the issuance of around $225 million of pension obligation bonds.

The proposal — which would further extend the pension payment “holiday” that is set expire in June when some of the city’s past POBs mature — will likely head to the council for consideration before the end of February.

Russo noted that he was on the City Council in 1997 and voted in the minority against the plan to sell POBs to extend a previous furlough from paying the ­retirement system liabilities.

In 1997, Oakland issued $436 million of taxable pension obligation bonds to pay unfunded liabilities for the public safety system.

The city also issued about $200 million of taxable POBs in 2001. The 1997 bonds will hit final maturity this year and the 2001 bonds mature from 2011 to 2022.

Oakland has $282 million of POBs and $224 million of general obligation bonds outstanding, according to the city’s finance and management agency.

Both of the pension obligation bond issues came after the city set the precedent for pension bonds when it issued them in 1985 with the help of Orrick, Herrington & Sutcliffe LLP as bond counsel.

Oakland’s police and fire employee unfunded liabilities are up to an estimated $494 million as of July after pension-fund investment losses due to the economic downturn.

 “The problem is that the bills for the old police and fire pensions are now due, and we can’t afford to pay — at least not without making serious and dramatic cuts in city services that taxpayers rely on today,” Russo said. 

The city attorney said Oakland property owners have paid hundreds of dollars in taxes every year to subsidize the pension payments in the form of taxes that are used to secure the bonds.

Russo cited a recent report by city auditor Courtney Ruby that showed Oakland has lost a quarter of a billion dollars on investments made with proceeds from its 1997 POBs.

The independent report by consultants Aon Hewitt, commissioned by the city’s auditor, said the proposed new POB sale would relieve short-term costs but only delay “massive” future public-safety pension obligations.

After 2017, the city would have to fund more than $100 million per year through 2024 and then $240 million per year until 2026, leaving $950 million in total required contributions.

The report also noted that the city would have saved $250 million if it had not issued the POBs in 1997.

David Hitchcock, a senior director at Standard & Poor’s, said municipalities run the risk with POBs of their investment return rates falling below the interest rates on their bonds.

“There are pluses and minuses” to POBs, he said. “[It] depends on the return on what you invest in compared to your bond rate, and also if there are changes in future actuarial rate of return or not.” 

“And to the extent that [POBs are] structured to provide near-term budget relief, it might just be postponing hard choices that have to be made in terms of solving a structural deficit.”

For reprint and licensing requests for this article, click here.
Bankruptcy California
MORE FROM BOND BUYER