Oakland Mulls Bankruptcy

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 |  About: Nuveen Municipal Advantage Fund (NMA)
by: Kurt Brouwer

The state of municipal finance in California has been abysmal for some time now (see California City On Verge Of Bankruptcy). Public borrowing, various gimmicks and a strong economy kept things going — until now. This piece from SF Gate (San Francisco Chronicle) spells out the issues being faced by Oakland [emphasis added]:

Budget Woes Have Oakland Mulling Bankruptcy (SF Gate, June 9, 2009, Chip Johnson)

Even though city officials would prefer to avoid a public conversation, behind closed doors the Oakland City Council has discussed filing for bankruptcy protection in the midst of a $100 million budget deficit.

“We have asked the (bankruptcy) question because we wanted to know the impact,” said District 5 council member Ignacio De La Fuente. “In closed session, the question has been asked, and an answer was given.” He would not elaborate.

“It’s a possibility,” he acknowledged. “Things are that bad.”

…Consider the city’s cash position: Out of next year’s general fund of approximately $415 million, police costs are estimated at $212 million, fire protection service $103 million and $41 million in debt service payments. That leaves about $60 million to pay for everything else, from library services to recreation centers to public works.

And that calculation doesn’t include $50 million more in deferred debt service in a budget proposal presented to the council last month by Mayor Ron Dellums.

…For the City Council, which is expected to present more budget options next week, it is the end of the line.

It is faced with three choices: drastic pay reductions across the board, including police and fire services; massive layoffs; or bankruptcy.

It has been a great run for municipal employees in Oakland and across the state, who have been the beneficiaries of one of the most generous civil service systems in the nation.

...Add to the economic mix the union labor contracts in Oakland, which have provided city employees with high wages, good benefits and generous pension plans, and the problem is clear.

Barring a substantial cash transfusion in federal aid, the Oakland Police Department will lose close to 200 officers next fall unless Dellums, who’s in Washington, D.C., this week, succeeds in securing more than $60 million over the next three years.

A federal grant in any amount would help maintain the minimum requirement of 739 sworn officers.

Any Oakland resident will gladly tell you that the possible loss of 200 police officers on the streets of this city is a bone-chilling thought.

…Adding further woes to the budget, the police officers have negotiated a 4 percent pay raise scheduled to kick in July 1.

Given the city’s economic limits, De La Fuente said the city can’t honor the pay raise and maintain the force at its current size.

“We’re required to give them the (salary) increase, but it will require us to do other things within the budget to achieve the savings we need,” he said.

For years, politicians have granted pay, benefit and pension increases to municipal workers without regard to the long-term consequences (see The Pension Time Bomb).

Also, deficits in prior years were papered over with bond measures that now must be paid back, with interest (see Local Governments Downgraded by Moody’s).

And, the state of California has its own severe budgetary problems, with a double-digit billion dollar deficit. So, the city can’t count on help from that source (see California Tax Revolt 2.0).

And, as you saw in the article, the only solution the Oakland mayor could come up with is to go hat in hand to the Federal government. Given the massive deficits we see on the Federal level, if I were an Oakland official, I would not count on Washington for much in the way of long-term support.

Eventually, all the stopgap measures and wishful thinking will end and the city will have to learn to live within its means. Unfortunately, getting to that point will be painful.