Skip to main content
Home Working together to build your tomorrow

I was shocked, shocked to learn that Oakland's retirement plan for police and firefighters hired before 1976 was now, according to Mayor Jean Quan, "about half a billion dollars short."

The root of the problem -- actually there are several roots -- stems from the promise, back in 1951, that the retirement benefit would be 68 percent of whatever today's employees are receiving in salary for the same jobs. Right off the bat, that strikes me as being a little imprecise.

Surprisingly, it would have been an agreed-upon way before public employees were allowed to collectively bargain. Oakland, with its gifts to public employees, not to mention an I. Magnin's store, must have been a paradise back then.

There are now 1,125 former employees who are receiving these benefits. I wonder who actually determines how someone's job 20 or 30 years ago compares with a job description in today's city bureaucracy.

Step one would be to carefully review every recipient of pension money to make sure that no mistakes have been made in deciding whether or not their original job description has somehow crept upward through the ranks and the salary scale.

While we're at it, let's check to review anyone who claimed that they were disabled when they retired. An absolute disgrace in this state is the extent to which employees often fabricate disabilities with the help of corrupt medical practitioners so that their federal and state retirement benefits will be tax free for the rest of their lives.

Meager earnings

Meanwhile, the retirement fund is reported to have been earning about 4 percent per year, and all the original expectations were that it would earn 8 percent. Actuarial science is admittedly complicated, but the general theory is that you predict the amount of outgoing cash into the future is to base it on average life-spans of retirees.

In the meantime, you expect a reasonable return on the money you have. Money compounding at 7.2 percent per year doubles every 10 years. What you have to pay out takes place over a long period of time, so the compounding of existing assets can go a long way toward funding future obligations.

Because it's not a perpetual-motion machine, you do have to pay something into the fund every year. Under normal circumstances, the ongoing cost of funding the plan sounds like it was as high as $45 million per year -- especially in years when the earnings were only 4 percent.

Back in 1997, Oakland decided to borrow the money to fund those annual payouts at a cost of what was probably 4 percent interest on municipal bonds it issued.

The idea was that the 8 percent they earned on the money in the retirement plan would cause it to double, so paying back the bonds would be easy. The city would still have the other half of the money in the retirement plan, and it would avoid having to make as large an annual contribution.

Wrong calculations

What city officials failed to recognize was that the original calculation of the contribution already assumed that the existing money would be earning between 6 and 8 percent. To earn enough extra to have the plan pay off its debt would have been a total return of, say, 10 to 12 percent.

Back in 1997, this might not have sounded as absurd as it does today. Through the 20-year period of the 1980s and 1990s, the stock market averaged 16 percent per year. A mix of stocks and bonds would have easily left decision-makers believing that everything would work out. Add to this the "IBG" factor (as in "I'll be gone") and you can see how the city winds up with the mess they have today.

Then, let's find out who has been managing this pension money and what they have been charging for the service.

Orange County is not the only government that has been ripped off by the financial service industry. An average return of 4 percent is about 4 percent below what could have been a reasonable expectation of 8 percent over the past 15 years from a 50/50 mix of stocks and bonds.

Maybe the answer is to consider suing the advisers. It worked for Orange County and may be Oakland's only hope.

Get weekly articles delivered to your inbox!

* indicates required