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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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The city finds it is no easy task to fight what is arguably the world’s most powerful financial corporation

A finance committee meeting of the Oakland City Council today grappled with the interest rate swap that has drained tens of millions of tax dollars over the last five years. A update from the city’s administrator about efforts to terminate the deal contained a harsh message most observers saw coming: Goldman Sachs, the city’s counterparty, absolutely refuses to terminate the swap at zero cost to the city, in spite of Oakland’s threat to cut the bank off from future business.

The swap in question was agreed to in 1997 as part of a larger bond deal in which Goldman Sachs underwrote $187 million in variable rate debt to keep the under-funded Police and Fire Retirement System pension fund solvent. The swap was intended to convert the variable rate on the bonds into a synthetic fixed rate of 5.67%.

But the swap with Goldman Sachs had an ulterior purpose also, one that virtually all the city’s elected officials have refused to own up to, and which has gone totally unreported in the press, except for this single article. This ulterior purpose was to free up $15 million to pay down debt on the Raiders Coliseum which had exploded in the city’s face after a disastrous business plan designed to lure the team back from Los Angeles. Later in 2003 the City Council again used the swap to create ‘free’ money to patch a budget hole. Council members amended the swap’s terms, switching the benchmark rate used to calculate Oakland’s payments to Goldman Sachs from SIFMA to LIBOR, a change that re-valued the swap $5.97 million in the bank’s favor. That revaluation was designed to produce an payment of the same sum from Goldman to the city. Oakland used the money to subsidize the Forest City Uptown real estate deal.

Using the swap to free up dollars to subsidize private business ventures like sports teams and real estate developers was a clear violation of the city’s swap and debt policies which it adopted in later years. Even so, the swap was mostly working as it was supposed to with respect to the variable rate bonds it hedged, and these half-too-clever schemes weren’t responsible for what happened next. In 2008 the financial crisis caused the federal government to drop central bank rates to virtually zero. LIBOR, which was already being manipulated downward by the banks that set that rate, followed fast by dropping below 1%. Oakland’s swap turned into a toxic asset overnight, draining millions of tax dollars during what has been arguably the city’s worst budget crisis in history.

The payment schedule for Oakland’s interest rate swap with Goldman Sachs: Assuming LIBOR stays below 1%, Goldman’s obligation to pay Oakland 65% of the 1-month LIBOR rate of a given notional amount in each year until 2021 means that the bank is obligated to pay Oakland virtually nothing. Meanwhile, the city pays 5.6775% of the same notional amount. The operative rate is the net rate produced by subtracting the lower rate from the higher rate. So if LIBOR doesn’t move over the next 9 years, Oakland will be stuck paying upwards of 5% on the decreasing notional amount as determined in the swap contract and summarized in the above table. (Source: “Comprehensive Annual Financial Report,” City of Oakland, FY July 1, 2010 – June 30, 2011, p. 75)

In the Summer of 2012 Oakland’s City Council was spurred to action by the Coalition to Stop Goldman Sachs, a grassroots collection of activists who pointed out the injustice of Goldman’s federal bailout while the bank continued to collect money from the city on a swap deal turned sour by political decisions, and also by the illegal conspiracy of banks that set LIBOR.

Oakland’s elected officials, aware that their constituents were demanding strong action, drew a line in the sand and demanded that the bank terminate the swap at zero cost to the city (it has been valued around $14-16 million in current dollars). If the bank refused, a resolution passed by the full council states that the city will debar the bank from future business, an option already vetted by the City Attorney Barbara Parker.

Goldman Sachs now appears to be calling what the bank thinks is a bluff by city officials. Goldman, which supposedly assigned senior level staff to negotiate with the city, has offered to terminate the swap, but is demanding that Oakland pay fair market value. Oakland’s assistant city administrator for finance, Scott Johnson, delivered a report to City Council members today offering three options:

1. The city can stick with the swap till 2021, making the contractual payments which are pegged at 5.6775% minus 65% of LIBOR, which currently amounts a net rate of 5.54% of $68.9 million. That’s about $3.8 million dollars this year, and similarly calculated, but smaller amounts in future years.

2. The city can issue two promissory notes (essentially obligations to pay a fixed debt) due over the next two years, totaling about $14.7 million dollars to Goldman Sachs. The $14.7 million is the current market value of the swap, about the same amount the yearly payments described above in option 1 would total out to by 2021 (discounted of course to current dollars). Goldman may or may not have offered to take a few hundred thousand off the termination payments through a promissory note, either by not charging interest on the notes, and/or knocking some value off the swap’s termination price, but the city’s administrator was only able to report vague offers made by the bank’s employees to consider doing this. Goldman has offered no firm promise to reduce the termination price.

3. Under the third option presented by the city administrator, the city can continue to negotiate with Goldman Sachs, exploring other means of ending the swap, but it was made clear that Goldman Sachs considers the deal sacred, and the bank will not agree to a termination without some kind of lucrative gain.

Assistant city administrator Scott Johnson also reported that Oakland might have already incurred as much as $100,000 in expenses paid to outside counsel, most likely the BLX Group, a company hired to advise the city about how to terminate the swap.

Members of the finance committee were not pleased with the report. Council member Patricia Kernighan made it clear that the report lacked any details or hard numbers to inform any decisions.

Council member Desley Brooks was visibly annoyed by the staff recommendations, noting that the report, and three options presented by the city administrator, contradicted what the council had directed staff to do back in July when they passed the original resolution calling for the swap’s termination. That resolution called on Goldman to cancel the swap at no cost to the city, and if the bank refused the city would move ahead with debarment. “We need to stop doing business with Goldman Sachs. We have a debarment process,” said Brooks.

Council member Ignacio De La Fuente went the furthest, saying he felt the city should try to find a way to simply stop making the swap payments, in addition to ceasing other business with the bank. “We have to call them on this,” said De La Fuente. “I think we should stop paying.”

Brooks focused the discussion back on the council’s original position saying “the only thing to discuss is how to move forward with some campaign to build pressure against them to terminate the swap. We need to initiate the debarment process.”

Kernighan, who wasn’t initially very interested in the swap issue, made her irritation with the bank known, adding, “Goldman Sachs clearly is not taking this very seriously. If that’s the way they’re going to be, well then fine, we just wont do business with them anymore.” She also expressed concern that negotiations with the bank over the swap were already becoming too costly for the city.

Members of the Coalition to Stop Goldman Sachs told the council members during the public comment period that they supported taking a firm stand against the bank. Beth Kean, a member of ACCE and the Coalition summed up what the council members themselves seemed to be thinking: “Goldman Sachs is basically telling us to go stick it.”

Maurice Peaslee, another member of the Coalition, surmised that Goldman’s offer to cancel the swap in two years time through the use of promissory notes could just be another attempt to outmaneuver Oakland. “If interest rates go up in the future, then the value of the swap goes down. Goldman Sachs is probably betting that interest rates are going to go up in the future.”

“If we agree to a payment of say $12 million now,” Peaslee explained, “but LIBOR goes up, the value of the swap should only be $8 million.” In other words, Goldman’s offer could just be yet another effort to squeeze extra dollars from the city. A promissory note would create an obligation for Oakland to make a set of $7 million payments within two years, whereas sticking with the swap has the possibility that the total cost to the city could actually drop as LIBOR rises.

“Apparently we are not sending a strong enough message,” said Joe Keffer, an organizer with SEIU 1021, and also a member of the Coalition. “We’ve got to make it clear their days are numbered.”

When it comes to business with Oakland, members of the finance committee seemed to agree. The finance committee directed staff to move head with the process for debarring the bank from future business, something that must go through the council’s rules committee and then be voted on by the whole council. It’s likely this won’t happen until early next year when several new council members take office.

“Keep out of our fucking way, liberal pussies” – A flyer posted in OPD’s headquarters building.

It’s been almost ten years since a federal judge ordered the Oakland Police Department to make sweeping changes intended to address the department’s many failings, including a pattern and practice of violating the civil rights of Oakland residents. For every step forward that OPD has taken, it seems they have taken two steps back. What’s the deal?

Intent on understanding why OPD seems immune to reform, Ali Winston and I have begun researching a series of articles to delve into the deeply ingrained institutional and structural issues at the root of Oakland’s police problem. (You can read a piece about OPD’s costly legal settlements here, and our latest piece addressing OPD recruitment and residency patterns here). Talking with community members as well as policy experts, one of the most striking problems with OPD we’ve identified concerns the composition of the department’s street cops. It’s a well known fact among Oaklanders that the city’s police mostly don’t live in the city. Using this as a point of departure to analyze police-community relations we have gathered some data that deserves a wider analysis than our own. We’re inviting comments on this blog.

What follows here is a presentation of some data that we hope leads to a broader discussion about the political-economy of police and law enforcement in the Bay Area.

What do we mean by a political-economy of police and law enforcement? Over the last decade there have been numerous excellent studies of the prison-industrial complex, especially here in California where prisons have rapidly grown in their budgets, employment, and numbers of persons incarcerated. With the growth of prisons into a major branch of the state, an entire industry of small and large corporations that profit from contracting with prisons has been created, replete with trade associations, lobbyists, and powerful employee unions. Finally, a pro-prisons political constituency comprised of the local, mostly rural, cities and counties where carceral facilities have become major employers, and local tax revenue generators, has completed the complex. It’s a powerful political machine, now a significant sector of California’s economy that through its redistribution of resources to lock up hundreds of thousands of mostly men of color produces obvious winners and losers.

Surprisingly, police departments have been subject to much less study along these lines, even though  policing consumes more public revenues than prisons, and in spite of the ubiquitous presence of police in every city.

Oakland’s position within the Bay Area’s police and law enforcement economy is characterized by extraction. Because of decades of white flight, capital flight, and the devastating impact of state tax cuts and disinvestment in public schools, Oakland today is wracked by unemployment, poverty, and suffers from a lack of meaningful social and economic mobility for its flatlands residents, conditions that are synonymous with crime within these same communities.

Due to Oakland’s unique history and current political dynamics, harsh law-and-order approaches are most often advocated as the solution to the city’s crime problem. Parsing out the different constituencies that advocate the ‘more cops’ approach is a task that awaits much further study, but we can generally sketch out a picture of who wins and who loses because of Oakland’s unusually large allocation of city tax dollars to policing.

The short answer is that the surrounding majority white and middle class suburban cities of the East Bay benefit from Oakland’s massive spending on cops via the redistribution of tax dollars from Oakland to other municipalities.

Oakland spends roughly 40 percent of its general fund budget on cops. Police services is the single largest expenditure for the city. Compared to other cities of similar size in California, Oakland’s spending on police is much, much higher. For example, Sacramento spent about 23% of its general fund on cops in the 2011-2012 Fiscal year, this in spite of the fact that Sacramento and Oakland actually have comparable crime rates (Oakland has outpaced Sacramento in violent crime, while Sacramento has had more property crimes than Oakland in recent years, according to the most recent FBI crime statistics).

Oakland’s FY 2012-2013 budget appropriates 40% of the general fund for police services, far and away the largest focus of city government. Few other cities, even those with comparable rates of crime, spend proportionally as much on their police. (Source: “Oakland FY2011-13 Adopted Policy Budget”, p. vii.)

What Oakland obtains from its large commitment of tax dollars to policing is debatable. As the department’s budget has fluctuated over the years crime rates have also fluctuated, but not necessarily in a pattern suggesting a causal link. Oakland does, however, lose considerable tax dollars to surrounding suburban cities in the form of officer salaries. Most of Oakland’s cops don’t live in the city, meaning that their salaries and other compensation are spent on mortgages, consumer purchases, healthcare, and other forms of taxed consumption where they live. Thus, by our rough calculations, based on data provided by OPD and assembled from a database of public employee pay for 2010, at least $126 million left the city in 2010 in the form of officer compensation.

OPD’s highest paid staff, nearly all sworn officers, live outside the city, while the department’s lowest paid staff, including administrative workers, are far more likely to live in Oakland. None of OPD’s command staff live in Oakland. In a sense this means that the local jobs sustained by OPD, which recycle Oakland tax dollars into the city’s economy, are the lowest paid positions, giving the city very little bang for its police bucks.

Most of OPD’s sworn officers live outside the city of Oakland. Civilian staff, whose average pay is much lower, are more evenly split, with about 46 percent residing in Oakland.

We’ve mapped the zip codes and salary figures for Oakland’s current officers so you can browse this geography of extraction – http://batchgeo.com/map/d8366c37bee1c93a831bde353442eca1

Oakland’s retired police officers covered under the Police and Fire Retirement System are another means by which the wealth of the city is extracted to surrounding suburban cities, and distant retirement communities. Last year the PFRS pension paid out about $64 million to its 1,085 beneficiaries. Because only 7 percent of these retired city employees live in Oakland, the city exported almost $60 million in funds originated in property taxes or employee compensation.

The PFRS system is especially important in any analysis of how the Bay Area’s political economy of policing affects Oakland’s communities of color because of its history. PFRS was closed to new employees in 1976. The hiring policies of the Oakland Police Department (and Fire Department) in the two previous decades were explicitly racist, excluding non-whites, a fact that produced a pool of PFRS-eligible retirees who are virtually all white men or their spouses. Oakland’s current residents, who have been indebted by expensive pension obligations bonds used to keep the PFRS pension funded, are mostly non-white, relatively young, and majority women. Most PFRS beneficiaries live in majority white and middle class suburbs of the East Bay, but some live as far away as Arizona and Hawaii. Thus not only is PFRS a transfer of wealth between different municipalities, it is also literally a transfer of wealth along racial and generational lines.

OPD procures goods from a national set of vendors including small businesses and large corporations.

There is also the issue of purchasing. The Oakland Police buy millions of dollars worth of goods and services each year, everything from weapons and gear to computer systems and consultants. Policing Oakland’s communities is a big business for a small pool of specialized vendors. About three-quarters of OPD’s procurement is through companies located outside of Oakland. This means that most of OPD’s purchases generate sales tax revenues in other cities and states. While the single largest share of OPD spending is done with companies located in Oakland, the big non-Oakland winners are Berkeley, New York, San Francisco, Dover (New Hampshire), Hayward, Santa Clara, Culver City, and Pleasant Hill. Click here to view a map of where OPD purchased goods and services in the 2010-2011 fiscal year.

We’ll be writing more about OPD procurement in the near future, among other topics.