The Beginning Of The End For Oakland

Today, Chip Johnson became the first journalist to put the reality of Oakland's financial situation in print. Chip says the city might need to file for bankruptcy, and I agree.

Bankruptcy is an unpopular option, and several other bloggers including V Smoothe have pointed out that it wouldn't accomplish much because the city is not locked into long-term contracts with public employees. So, the argument goes, they can simply negotiate contracts which dig the city out of its fiscal morass.

To give you a little more information on the roots of the problem, police and fire services comprise something like 75 percent of the city's budget.

Oakland cops and firefighters receive pay and benefits that put them among the highest paid public employees in the country, if not the world. Kind of a funny state of affairs, when you think about it. I mean, Oakland isn't Bel Air or La Jolla.

Much of East Oakland is a burnt out shell -- a fact which makes it hard to justify high pay and benefits on the basis of cost of living.

Oakland's budget shortfall is not a passing phenomenon. It's a consequence of lower property tax revenues, and that's not going to change anytime soon, as the housing crash is probably only halfway through, and no reasonable observer is even beginning to talk about rising house prices.

Oakland has also studiously avoided adding to its high-value housing stock in recent years, opting instead to build condos -- a terrible choice in a housing bubble, since they historically experience terrible boom and bust cycles. Add to this the city's obsession with so-called "affordable" housing and the property tax picture looks pretty grim.

Sales tax doesn't look much better. Oakland's unemployment rate is through the roof, and the wealthier citizens head to Contra Costa and Emeryville to do any real shopping. As with housing, city government has ensured we have no high-quality retail anywhere in the city.

But the real problem isn't on the revenue side. It's the spending side, and Oakland's police and fire unions are the villains. The city's leaders are all either on the union payrolls or have drunk so much Leftist Kool-Aid that they support anything the unions want without even receiving any kickbacks.

Overtime is out of control. Pensions are preposterous. Police and fire employees make enough money to place them in the top tiers of Oakland household income. All this for a job that requires no college degree.So, why not just follow V Smoothe's advice and take a hard line in upcoming negotiations with the union?

The basic answer is reminiscent of what happened with the city's school district. Our leaders simply can't/won't do that.

Frankly, I doubt that they even understand the financial impacts of the contracts they approve. They certainly don't understand the impacts of the pension agreements. They look at those the same way the federal government thinks about Social Security -- it's someone else's problem.

Put another way, rational contracting requires that both parties understand the details of what they are agreeing to. In this case, you can think of the Oakland city government as similar to AIG, which agreed to absolutely insane contracts in insuring mortgage-backed securities.

Sure, AIG had the ability to negotiate each contract up front, but the organization was so incompetent and fraud-ridden that it was unable to do so without causing crippling harm to its shareholders.

Oakland is exactly the same.

We need a bankruptcy judge to come in not because we can't numerically make ends meet but because our leaders will not accomplish that without some kind of adult supervision. And, we're at the point now where if they sign another police and fire contract without making things reasonable, our city budget really will completely crumble.

Without bankruptcy, I can tell you exactly what will happen. Police and fire will get exactly what they want, including some sort of bogus band-aid deal to fake out the federal government into giving us a grant to plug the gap for a couple years. Never mind that that grant won't cover the pension obligations which the city doesn't even understand.

Then, the city will cut other services -- things like parks and roads -- because the unions supporting those things haven't greased the politicians sufficiently.

Finally, as the police and fire expenditures approach 100 percent of revenue, the city will be forced into bankruptcy under far more onerous terms.

My advice is to bite the bullet now and enter bankruptcy to reorganize the city's finances. Use the bankruptcy judge as a resource to instill rationality into the city's budget situation. Also, use bankruptcy as a hammer to push through police and fire pay and benefits more in line with those seen nationwide.

Doing so will probably require something like a 35 percent across-the-board pay cut and a return to a pension formula based on 2-and-60 instead of 3-and-90. For those keeping score, that would mean they receive 60 percent of their highest salary in retirement instead of 90 percent. Which is completely, totally, reasonable and fair.

Alternately, police and fire could have their pensions moved into private accounts like 401(k)s, just like employees in the private sector. And, they could be required to contribute to their own retirement costs.

All across California, police and fire (and the infamous prison guard union) are going to have to face these kind of cuts. It's just a matter of time, because the deals they've extorted by paying off politicians are completely untenable.

Here, Oakland has an opportunity to be one of the first cities to push for this. The first step is bankruptcy.