Oakland's financial time bomb: pensions

Oakland pensioner Bob Muszar talks about funding retirement benefits at Oakland city hall in Oakland, Calif., on Thursday, July 12, 2012. Oakland pensioner Bob Muszar talks about funding retirement benefits at Oakland city hall in Oakland, Calif., on Thursday, July 12, 2012. Photo: Liz Hafalia, The Chronicle Photo: Liz Hafalia, The Chronicle Image 1 of / 5 Caption Close Oakland's financial time bomb: pensions 1 / 5 Back to Gallery

It was 1976 when the city of Oakland realized it had a major problem on its hands: A pension created 25 years earlier to benefit police officers, firefighters and their widows was proving too costly to afford.

So the city closed the plan to new employees and later passed a parcel tax to pay for the pension. Yet today, that pension remains the source of one of Oakland's biggest headaches.

It's a generous plan that awards its retirees and widows - who now number 1,086 - raises to match up to two-thirds of the pay of the current-day workforce. But the city's costs ballooned because it never adequately contributed to the pension fund, relied on borrowing for years to give itself holidays from pension payments and watched investments go south. The result of the borrowing is that the pension, known as the Police and Fire Retirement System, has cost Oakland taxpayers hundreds of millions of dollars more than it should have. In 2010, City Auditor Courtney Ruby found Oakland spent $250 million more on the pension than it would have if the city had simply paid into the pension - and that was just for one of its bond deals.

Last month, the majority of the Oakland City Council, at the urging of Mayor Jean Quan's administration, voted to borrow money once again to cover the pension bill - $210 million in new pension bonds that will cost another $105 million in interest over the next 14 years. But the loan will allow the city to avoid paying for the pension from its general fund for four years. If the city hadn't borrowed the money, it would have been forced to take $38.5 million from its roughly $400 million general fund to pay for the pension this year. Such a move would have required deep cuts to city services, which already have taken a hit due to the slumping economy, state budget cuts and redevelopment shutdown.

Wipe out parks, libraries

"If we had to pay this money this year and the next couple of years, the cuts would imperil our Police Department as well as completely wipe out our libraries and parks," said Councilwoman Pat Kernighan. "In a few years, we're going to be in a better position to make the payments."

In four years, other city debts will retire, making it easier to make the annual payments, said Scott Johnson, a deputy city administrator. But Councilwoman Libby Schaaf, who voted against the bonds last month, criticized the idea of paying $105 million in interest to avoid a $38.5 million payment into the pension fund this year.

"Pensions are supposed to be paid for while the person is working," said Schaaf. "Obviously, we failed terrifically in doing that."

The bond sale relieves fiscal pressure now, but Schaaf said it creates pressure in the future. In the last three years of bond payments, starting in 2024, the city will have to pay $161 million in bond and interest payments on top of the $123 million it will owe for the pension itself.

"I'm terrified that the city of Oakland will someday need to declare bankruptcy," said Schaaf. "It 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."

$70 million in 2010

The pension, which has only one member still employed, doles out benefits to retirees and widows that range from average monthly payments of $3,908 to $5,478. In 2010, those benefits totaled $70 million.

The new bond will increase the pension's funding from 38 percent to 70 percent with future contributions and bond debt payments by the cash-strapped city expected to be nearly $656 million.

By all indications, the city never had a plan to pay for the Police and Fire Retirement System when it was started in 1951.

It had a $38 million hole from the beginning, said Bob Muszar, a retired Oakland police captain and president of the Retired Oakland Police Officers Association. Muszar has spent years researching the pension. He said that by the 1970s, the pension's shortfall had grown to over $200 million.

So the city, police and firefighters agreed to close the pension to newcomers, which voters approved.

In 1981, the City Council approved a parcel tax, which costs taxpayers about $447 a year on a $283,900 home, the city's median value.

But that wasn't enough. In 1985, the city issued $222 million in bonds to cover pension costs. In the following years, the city refinanced those bonds, issued hundreds of millions in new bonds, and refinanced those bonds.

Then in 1998, the city once again refinanced bonds and also entered into a complicated interest-rate swap with Goldman Sachs that now costs the city $4 million a year and expires in 2021. "The more creative they got, it's almost like they started digging a hole and they got deeper and deeper," said Muszar, who feels retirees have been scapegoated for the city's mismanagement of the pension.

Let the voters decide

Jonathan Holtzman, an attorney who has advised cities about pensions, said cities often kick tough decisions on pensions down the road to future administrations. He thinks voters might be better suited to make decisions on pensions than politicians.

"There's a mismatch between the length of a pension's obligation and the term of a politician," he said.

While the city struggles with how to pay the old pension, one Oakland councilman, Ignacio De La Fuente, says the pension is too generous. He points out that retirees receive compensation for holiday pay and shift pay of the current labor force. Yet, when city workers took pay cuts to deal with the recent budget crises, retirees didn't see a change in their benefits, De La Fuente said.

The City Council this year sued the board that manages the pension fund, alleging that retirees' benefits should have been cut when current officers got pay cuts. "All of it is outrageous," said De La Fuente, who voted against issuing the latest bonds.

A sense of betrayal

Retirees and widows, meanwhile, say the city needs to keep the promise it made to them.

Nita Balousek, 55, said her husband, Phil, was an Oakland police officer for 27 years before he retired in 1995. He died in 2010. But, she said, "it gave him great peace knowing that the work he did for the city of Oakland" would continue to provide for her.

Now Nita Balousek feels a sense of betrayal. The city's lawsuit and the city's seemingly tenuous grasp on its finances have her fearful that someday it might file for bankruptcy - and the pension might be lost forever.

"I feel on edge," she said. "I'm deferring making any financial decisions."