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So, uh . . . there are some interesting municipal-finance scenes in Oakland, Calif. right now.
Last week, the Bay Area city accidentally published the wrong draft of a fiscal report, which mentioned risk of Chapter 9 bankruptcy. The mistake was later corrected — a version of the report without the bankruptcy mention was published — but not before local newsroom The Oaklandside wrote about it. That prompted City Administrator Jestin Johnson to explain the city found it “premature” to raise the Chapter 9 threat:
To speak to the informational report, an unapproved draft of this report was inadvertently and briefly published on last Friday, containing reference to Chapter 9. The City removed this reference in the approved final draft, after internal analysis concluded that the specific language included in the report was, and remains, premature at this time. However, that analysis does not in any way diminish the urgency of the financial discussion that needs to be held at the City Council.
Sure, OK, urgent financial discussions are still happening.
But . . . the City of Oakland still appears to have the second-highest credit ratings offered by Moody’s and S&P Global. (Aa1 and AA+, respectively.)
Taking ratings firms at their word is always a risky business, to be fair, and it does seem like Oakland’s financial pressures are rising. Local press reports that officials are warning about federal cash spigots turning off. And Johnson, the city administrator, cited freezes on municipal hiring, conferences and training in his statement on the budget snafu.
But it matters where the city started. Their most recently issued 30-year GO bond traded with yields below 3.5 per cent in late October. Presumably the bond market is open if needed.
Is the bond market simply sleeping on the risk of imminent Chapter 9 bankruptcy? There are some clues in the filings. (Short answer: Probably not.)
Here’s the old alarm-bells version:
The results of this First Quarter show that immediate action is necessary to maintain the solvency of the General Purpose Fund and avoid the Chapter 9 process. Revised estimates regarding the City’s fiscal condition at the end of FY 2023-24 show the City has already tapped into its emergency reserve. Given there is no possibility of replenishing the [emergency] reserve this Fiscal Year, following the conclusion of the Audit and publication of Annual Comprehensive Financial Report, the City Council will be required to declare a Fiscal Emergencyper the Consolidated Fiscal Policy (CFP.) Failure to take dramatic and immediate steps to reduce expenditures will almost certainly result in insolvency.
Scary!? Now here’s the new version, with key changes highlighted:
The results of this First Quarter show that immediate action is necessary to maintain the solvency of the General Purpose Fund. Revised estimates regarding the City’s fiscal condition at the end of FY 2023-24 show the General Purpose Fund ended in a negative balance. The GPF negative balance has already obligated and intruded into its emergency reserve. Following the conclusion of the Audit and publication of Annual Comprehensive Financial Report (ACFR), the City Council will be required to take immediate budgetary action to reduce the General Purpose Fund by at minimum the sum of $114.9 million (GPF Deficit) and an additional $27.55 million for a total reduction of $142.45 million to restore the Emergency Reserve OR declare a Fiscal Emergency, per the Consolidated Fiscal Policy (CFP.) These values assume no additional GPF Carryfoward is approved. Dramatic and immediate actions to reduce expenditures are necessary to preserve the solvency of the General Purpose Fund.
If we’re reading the report right, that means the city could also attribute the rest of the shortfall to its General Purpose Fund now that it’s tapped its emergency reserve. It’s tough to find recent information on any unassigned reserves in the fund, but the city’s latest bond documents say that as of June 30 2022, it had roughly $54mn. (So presumably it does exist.)
And if the city is facing severe pressures, why would the city want more attention on that fact? The Oaklandside reports that this is happening as the city negotiates with its unions over the 2025 budget.
Another item of interest: The city agreed to sell its stake in the Coliseum, and has been expecting more than $100mn from the deal. But the developer didn’t make the first payment, which the city attributes to administrative bottlenecks. So the city isn’t including that in its year-end projections. No pro forma statements for this bunch!
Here’s what Oakland administrator Johnson says about the city’s statements on its budget:
For the public’s knowledge, all elected and appointed officials receive Municipal Securities training by an external firm to ensure misstatements and omissions in City documents, as well as public statements from city officials can violate anti-fraud provisions. With that said, the legal guidance we received is to ensure that we do not understate or overstate our financial outlook, and it is imperative that we utilize all available resources, to include outside legal counsel, as well as an external financial expert to validate our financials as we move forward with making long-term financial decisions. In addition, we look forward to continuing to work in partnership with the council, staff and our labor partners.
We must assume this was meant to say officials are trained to prevent misstatements and omissions, right? The city’s next budget may want to include some funding for a good editor.