- NEWS RELEASE Office of the City Auditor City of Oakland
Analysis shows options presented to City Council appeargenerally sound - yet many critical questions remain unanswered.
OAKLAND, Calif. (May 20, 2011): City Auditor Courtney Ruby released a commissioned report, which found that the models used for the three funding options to finance a one-time contribution for Police and Fire Retirement System (PRFS) presented to City Council on February 22nd by the Finance and Management Agency (FMA), were generally sound but fell short of providing cost and risk in real terms. The independent analysis was conducted by Aon Hewitt (Aon), one of America's leading public pension experts.
"One of the most substantial budget decisions facing the City is whether or not to issue Pension Obligation Bonds (POBs) to fund PFRS. In order to make an informed decision, it is critical that our City leaders receive the most accurate and reliable information available," said Auditor Ruby. "One thing is clear, whether the City Council decides to issue POBs or make current payments from the general fund, the City must adopt a comprehensive, long-term plan for pension obligations while also addressing the City's structural deficit."
Aon's independent analysis confirmed that both Option 2 and 3 would satisfy the plan's funding requirements at FMA's estimated cost if the City Council chooses to borrow money to issue POBs and deposit the proceeds into the PFRS trust in return for a five-year "contribution holiday." If provided this holiday, the City will not need to fund the PFRS pension liability until 2017, at which time the City will need to fund more than $100 million per year through 2026. Oakland has tax override revenues that can be used to offset the required general fund contribution; however, the general fund will still be on the hook for contributions valued at approximately $170 million at a time when the City is struggling to provide basic City services, such as, fire, police, and road repair.
Under Option 1, no new bonds would be issued; however, the City must contribute the actuarially recommended annual cost beginning with a $45.6 million contribution due in fiscal year 2012. While the total present value cost of Option 1 is approximately $220 million, Option 1 does not have the inherent risk associated with Options 2 or 3.
It appears from both Aon and staff's analyses that Option 3 is a sounder fiscal choice than Option 2, given its present value cost of $174 million versus $184 million; however, Auditor Ruby is asking City Council to note that the following remains unanswered:
· Can POBs be realistically issued at FMA's assumed interest rates and repayment terms?
· What is the City's true cost of issuing POBs, including but not limited to staff resources and outside counsel?
· Are there other transaction costs the City should consider?
· How large of a negative spread is the City Council willing to accept if it is determined that there is a difference between the actual cost to the City and anticipated market returns?
In hopes of identifying other ways to reduce the unfunded liability, some councilmembers have inquired as to a potential cash-out program for select plan participants. However, Aon's reports showed that while the size of the plan would decrease if a cash-out program was in place, the funding deficit would remain - diminishing any positive gain from this type of alternative funding strategy.
This momentous decision is now before the City Council as to whether or not the benefits of a five-year contribution holiday are worth the risk.
"I hope this report more clearly informs the City Council's decision making process and promotes greater transparency and accountability in service to Oakland citizens and PFRS members," said Auditor Ruby. "As we face an unprecedented budget crisis, I know Mayor Quan and the City Council are seeking solutions that will not only address our current situation, but will ultimately stabilize our City's financial future. I hope this report assists them in this vital endeavor."
On October 21, 2010, Auditor Ruby issued the first report addressing Oakland's PFRS funding options. For copies of the October 2010 and this update to the report, visit: www.OaklandAuditor.com.
ABOUT OAKLAND CITY AUDITOR RUBY
City Auditor Courtney A. Ruby, CPA, CFE, took office in January 2007 and was reelected November 2, 2010. Earlier audits reviewed the City's hiring practices, public campaign financing, funding for children and youth services, library services fund, emergency medical services and paramedic services funds, Public Works Agency, and the grant management for the Measure Y Violence Prevention Programs. Performance audits of the Fox Theater Renovation Project, American Recovery and Reinvestment Act compliance, Accounts Payable, and Measures M and N are also in progress. In March 2010, an Association of Local Government Auditors peer review team found the Office of the City Auditor met the highest government standards in performance auditing. Visit www.OaklandAuditor.com to learn more about Oakland's Office of the City Auditor.
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