Just as a hidden and exceptionally costly Oakland property tax to pay for city employee pensions winds down after 45 years, officials 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 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 $130 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 crisis 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 public 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 case, both.

The expiring tax

Oakland property owners have paid the current pension tax since 1981 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, $1,575 annually for a home assessed at $1 million, surpasses the levy Oakland residents pay for school construction or for bonds issued by BART, the regional park district or the community 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 1,” obscuring that most of that money has been for shoring up the Police and Fire Retirement System plan, known as PFRS.

The plan was formed in 1951 and quickly ran into deep trouble. By 1976, an actuarial analysis showed 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 public safety workers into the state retirement system. City leaders also obtained voter approval to pay off over 40 years the unfunded pension liability for workers left in PFRS.

The city went back to voters in 1988 and obtained permission to spread out the payments until 2026. But voters were not told when they went to the polls in 1976 and 1988 that they would pay an additional property tax to cover those payments.

In 1981, the city started levying the tax. In 1983, the state Court of Appeal upheld it. In 1985, the Legislature capped the annual tax rate at 0.1575% of a property’s assessed value.

The 0.1575% rate stuck until two years ago, when city leaders began to reduce it because they expect there will be enough money by the 2026 deadline to fully fund the pension system for the roughly 600 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 Public Employees’ Retirement System.

In 2012, the city’s CalPERS shortfall was $742 million. The most recent actuarial analysis, for 2023, shows the shortfall nearly tripled to $2.1 billion. The city’s plan has only 66% of the funds it should have.

The 34% 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 45 years of PFRS tax payments. With the same proposed solution: 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.

Today, 17% of the city’s general fund budget goes toward retirement costs. In five years, that portion will grow to 20%, 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 $185 million, or 42% 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 crisis today.

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 $40 million annually. That would require a tax of roughly $400 per property.

City leaders claim the money will go toward public 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 told you so. “Oakland has traditionally balanced its books by kicking the proverbial can down the road,” I wrote in 2014. “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, told 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 2024), parks (2020) and libraries (2018 and 2022) — only to declare a fiscal emergency and rob the new money to fund existing programs.

Let’s not begrudge city employees their pensions, even though they far surpass those generally found 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, most notably premium-free Kaiser health insurance for them and their families. The city picks up the entire cost. It’s time to change that.

To be sure, most California cities also face pension shortfalls. Local leaders across the state have been warned for decades that CalPERS was overestimating projected investment 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 many local agencies, ignored the warnings. Oakland’s 66% funded level in 2023 was significantly worse than the troubling 71% average for all public agencies in CalPERS.

Unlike many 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 2031 — which is why any new tax should be temporary.

The proposed pension tax must be a bridge out of the budgetary crisis, 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 [email protected].