Borenstein: This Bay Area city’s half-century of pension taxes provides a cautionary tale

Just as a hidden and exceptionally costly Oakland property tax to pay for city employee pensions winds down after years personnel are planning another levy to offset the cost of retirement benefits The Bay Area city s plight should serve as a cautionary tale for local governments in California most of of which have also failed to set aside sufficient money for their workers retirement payments Oakland s planned new tax would continue its tradition of generational cost-shifting sticking current and future property owners with taxes because of past leaders failure to properly fund pensions It s time to end this fiscal recklessness The city s current financial struggles which include a million annual structural deficit in the general fund are so bad that a new tax might be needed But if it is it should be temporary and far smaller than the existing levy has been And it should be accompanied by larger worker contributions to their generous benefits a long-term financial plan that delivers the services voters were promised when they passed other taxes over the past decade and responsible management of retirement benefits The financial predicament could have been avoided if the city had properly pre-funded its pension plans That means that enough money should have been invested while workers were on the job to cover the pension payments when they retire But that hasn t been happening in Oakland or in much of California One key reason is that inhabitants pension systems have overestimated how much they can earn on investments and consequently underestimated how much local governments need to invest at the onset The resulting shortfall is converted to a debt that local governments must pay off out of existing funds through additional taxes or as in Oakland s event both The expiring tax Oakland property owners have paid the current pension tax since to cover the shortfall in a retirement plan for city firefighters and police officers a plan that was closed to new members nearly a half century ago The tax annually for a home assessed at million surpasses the levy Oakland residents pay for school construction or for bonds issued by BART the regional park district or the area college district Despite the enormous size of the pension levy homeowners would not have known of its existence or amount from looking at their property tax bills That s because the pension tax is wrapped into a tax-bill line item labeled City of Oakland obscuring that majority of that money has been for shoring up the Police and Fire Retirement System plan known as PFRS The plan was formed in and speedily ran into deep trouble By an actuarial analysis presented PFRS was so underfunded that the city would need to spend more than half its annual budget to fix it Instead the city closed PFRS to new employees and sent future constituents safety workers into the state retirement system City leaders also obtained voter approval to pay off over years the unfunded pension liability for workers left in PFRS The city went back to voters in and obtained permission to spread out the payments until But voters were not notified when they went to the polls in and that they would pay an additional property tax to cover those payments In the city started levying the tax In the state Court of Appeal upheld it In the Legislature capped the annual tax rate at of a property s assessed value The rate stuck until two years ago when city leaders began to reduce it because they expect there will be enough money by the deadline to fully fund the pension system for the roughly remaining retired police and firefighters and their surviving spouses The new tax As Oakland property owners paid off the PFRS debt the city accrued a much larger pension shortfall For the past two decades city leaders have ignored the ballooning unfunded liability for Oakland s plans with the California Citizens Employees Retirement System In the city s CalPERS shortfall was million The majority latest actuarial analysis for shows the shortfall nearly tripled to billion The city s plan has only of the funds it should have The shortfall represents the city s failure to properly set aside enough funds for pensions Just like the city should pay for employees other benefits as they work they should cover the cost of pension benefits when they re earned Instead the city has underfunded its CalPERS pensions building up debt that future generations must later cover It s the same scenario that led to the years of PFRS tax payments With the same proposed remedy more taxes to cover fiscal recklessness The shortfall is treated like a giant credit card debt As the liability has grown so too have the annual payments And those payments are now strangling the city s budget In contemporary times of the city s general fund budget goes toward retirement costs In five years that portion will grow to according to a city forecast Far more of that money goes to paying off pension debt than paying for new retirement benefits employees earn each year Payments on the city s CalPERS unfunded liability for the upcoming fiscal year will be million or more than the city s entire general fund structural deficit In other words had the city responsibly funded its pension plans for the past two decades it wouldn t have a fiscal problem in the current era To help cover the Oakland s structural deficit the budget approved by the City Council last week calls for seeking next year a new voter-approved parcel tax to raise about million annually That would require a tax of roughly per property City leaders claim the money will go toward populace safety services Don t be fooled They only need it because of Oakland s retirement debt payments This will be another pension tax City was warned I hate to say it but I narrated you so Oakland has traditionally balanced its books by kicking the proverbial can down the road I wrote in It s time for that to end And then-City Auditor Courtney Ruby warned then that mounting pension debt would threaten the city s solvency Sadly no one listened Then-Mayor Jean Quan campaigning unsuccessfully for reelection described voters there was no need for concern She was wrong Since then city leaders added hundreds of new employees and since the onset of the COVID pandemic relied on one-time funding to balance the books Meanwhile they repeatedly obtained voter approval for taxes for additional city services for police approved by voters in parks and libraries and only to declare a fiscal crisis and rob the new money to fund existing programs Let s not begrudge city employees their pensions even though they far surpass those generally exposed in the private sector The workers were promised those retirement payments But the pensions should have been properly funded even if it meant fewer city workers smaller raises or larger employee pension contributions City workers also continue receiving other very generous benefits largest part notably premium-free Kaiser physical condition insurance for them and their families The city picks up the entire cost It s time to change that To be sure majority of California cities also face pension shortfalls Local leaders across the state have been warned for decades that CalPERS was overestimating projected funding returns and not requiring large enough payments and that their cities should be contributing more And they have been warned that they face steeper future payments to make up for the shortfalls Oakland like multiple local agencies ignored the warnings Oakland s funded level in was significantly worse than the troubling average for all community agencies in CalPERS Unlike various other cities Oakland has not prepared for the mounting payments ahead Fortunately projections show the interest payments on Oakland s retirement debt could flatten out by which is why any new tax should be temporary The proposed pension tax must be a bridge out of the budgetary situation not another four-decade levy on future generations of property owners because Oakland leaders failed to properly plan and pay the city s pension bills Reach Editorial Page Editor Daniel Borenstein at dborenstein bayareanewsgroup com