SAN FRANCISCO — Oakland is eying a controversial plan to sell bonds to help extend a “holiday” from paying growing public-safety pension liabilities, a return to a strategy the city invented 25 years ago.

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 employees retirement-system pension liabilities. The plan includes issuing around $225 million of pension obligation bonds, according to Joseph Yew, Oakland’s treasurer and finance director.

“We will have to start making payments into the system unless we negotiate another holiday with the PFERS system, and the pension obligation bonds could be a part of that,” Yew said in an interview. “There is a lot of concern about the city’s ability to fund these huge pension liabilities.”

Yew said the proposal will likely head to council for consideration by February. He said the alternative to the POB plan may be to do nothing and that Yew said may violate the city’s charter.

The proposal would further extend a pension payment furlough put in place more than a decade ago that would expire in June.

In 1997, Oakland issued $436 million of taxable POBs 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 in 1985 with the help of Orrick, Herrington & ­Sutcliffe LLP as bond counsel.

Despite the long history, the pension payment holiday plan has already come under scrutiny.

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

If provided the holiday until 2017 the city would then 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.

“The city must develop and ­successfully implement a ­comprehensive, long-term plan for pension ­obligations. If not, this will just be the city kicking the can down the road,” Oakland auditor Courtney Ruby said in a statement when the report was ­released.

Yew said the auditor’s report simply painted a picture of what could happen and didn’t incorporate a broader look at the market.

“The auditor’s report doesn’t have any ideas,” he said.

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

The city also contributes to the California Public Employees Retirement System and the Oakland Municipal Employees Retirement System.

The city’s fiscal 2010 budget projected an $83 million budget shortfall, according to Moody’s Investors Service.

Moody’s rates Oakland Aa2, Fitch Ratings rates it AA-minus and ­Standard & Poor’s rates the credit AA-minus.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.