Racial Transfers of Wealth Via Under-Funded Municipal Pensions

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OPD “mug shots” displayed during a department reunion held in Reno, Nevada in 2005. Many of the shots are of officers employed in the 1970s and 1980s, hired before the PFRS pension system was closed to new members. OPD’s cops from that era were mostly white men.

I’ve been working on an article over the last two weeks about Oakland’s much talked about, but little understood Police and Fire Retirement System (PFRS).

Fiscal conservatives constantly cry that the sky is falling, that the PFRS obligation to Oakland’s retired public safety employees will bankrupt the city, especially because of the massive issuance of pension obligation bonds used by Oakland to finance legally required contributions since 1997. These conservative commentators are mistaken, I think. The underfunding of the PFRS is certainly a problem, but not for the reasons they say.

I’m interested in re-framing the discussion about PFRS, away from the anti-tax, anti-government rhetoric that has so far monopolized things, and toward what I see as the real problem with PFRS: Oakland has a billion dollar obligation to 1,000 retired cops and fire employees who served between 1951-1976, virtually all of whom are white and elderly. Oakland’s police department (and fire dept.) was characterized by overt racist exclusion of non-whites from employment during this era, thus the lucrative benefits of the PFRS pension were made accessible to white city employees. This select club of men (and yes a few women and a handful of Black, Latino, and Asian members) now predominantly live in retirement enclaves outside the city of Oakland. These communities have much different demographics than Oakland, being much whiter, more affluent, suburban and rural, but they benefit from the pension payments that go to the PFRS members who live and shop within their jurisdictions and tax districts.

The PFRS obligation therefore amounts to a $1 billion obligation of Oakland, which today is 2/3 non-white and half below the age of 36. To meet these obligations Oakland’s leaders have put the city into serious debt, and in some prior years even paid millions out of its general fund budget, dollars that could have been spent on services for the city’s residents, or salaries of current employees. This legacy municipal pension obligation is therefore a massive inter-racial and inter-generational transfer of wealth. Here’s the abstract of the article. I’ll post a full draft version with references soon.

In 1976 the city of Oakland, California closed its existing municipal pension funds to new members. New city employers were thereafter covered by the rapidly growing California Public Employees Retirement System. The Police and Fire Retirement System (PFRS), by far Oakland’s largest pension, remained an obligation of the city, however. It’s thousands of vested members retired over the next several decades drawing benefits tied to the salaries of current members of the police and fire departments.

Between roughly 1950 and the present, de-industrialization, white flight, and the tax rebellion decimated Oakland’s fiscal capacity, causing the city’s services to decline dramatically in quality and availability. Beginning in the 1970s the PFRS endowment began to fall short of accrued actuarial liabilities. To meet its legally imposed debt to the pension, the city was forced to pay into the retirement fund out of its general budget, further harming current city residents by imposing austere budgets and cuts during economic downturns.

In 1985 Oakland issued the first ever pension obligation bonds (POBs) to forward-fund the system through a complicated tax arbitrage strategy. The federal government quickly closed this loophole, but POBs remained a favored strategy for the city to finance its legacy pension obligations because they provided contributions “holidays” and were supposed to reduce the overall financial burden on the city caused by its retired cops and firefighters. Subsequent recessions in equities markets further eroded the value of the PFRS system in relation to its growing obligations to retired police and fire employees. By the 2000s a significant chunk of Oakland’s tax-override funds were used to pay retired police and fire benefits, even while the city was forced further to cut much needed services, social welfare spending, and economic development programs.

Because of institutionally racist policies, and demographic shifts after World War II, the majority of the retired city employees benefitting from the PFRS fund are elderly white men who live outside of Oakland, while Oakland’s population has become majority non-white, young, and low-income. The PFRS obligation of Oakland now amounts to a large racial and inter-generational transfer of wealth from the city’s current residents to a very small suburban and rural group of former employees.

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