Berkeley is about $570 million in debt because it failed to properly fund its employee retirement programs. Next door in Oakland, the shortfall is $2.2 billion. It's like a huge credit card balance that must be paid, draining funds that should go for needed city services.
In both cities, the shortfall works out to about $5,000 for each city resident. While Berkeley and Oakland are among the worst in the East Bay, they are not unique. Indeed, local governments statewide have cut staffing and reduced services because of declining revenues and increasing debt obligations.
San Bernardino and Stockton recently followed Vallejo's march to bankruptcy court. While most municipalities will avoid that ignominious path, they nevertheless face very rough roads ahead.
That was reinforced last week as Moody's Investors Service cut the rating on pension obligation bonds of eight California cities and placed the debt of 30 under review for downgrade.
Oakland and Berkeley are on the list, along with Martinez, San Leandro and Danville. The latter is particularly noteworthy because Danville has no traditional pension program. In other words, while retirement costs are a key driver in many cities, they're not the only problem.
"California cities operate under more rigid revenue-raising constraints than cities in many other parts of the country," says Eric Hoffmann, Moody's senior vice president in charge of its California local government ratings team.
"Combined with steeply rising costs, these constraints mean that these cities will likely recover more slowly than their peers nationally, even if the state's economic recovery tracks the nation's."
We can't emphasize that last point enough. Those who think this problem will disappear as the economy recovers are kidding themselves. California local governments face many tough years ahead. They must acknowledge that now and prepare for the long haul.
Yet, as we conducted interviews over the past month for city council and mayoral election endorsements in 26 East Bay cities, we noticed stunning misunderstanding of the problem. The majority of incumbents and challengers do not know basic information about their budgets and one of the biggest cost drivers, escalating benefit costs.
One week before Moody's announced its review of his city's debt, Berkeley Mayor Tom Bates unsuccessfully sought our endorsement for re-election by touting the city's bond rating. He tried to gloss over the city's unfunded obligations.
Similarly, District 3 incumbent Councilman Max Anderson dismissed the shortfall. "For us to focus so obsessively on it ... is maybe a little bit diversionary," he told us. "We have bigger fish to fry than the debt."
In San Leandro, District 2 incumbent Ursula Reed lacked basic understanding of her city's shortfall and the way pensions are funded.
In Oakland, District 5 candidate Noel Gallo fantasized that improved economic development would solve the problem. And District 7 incumbent Larry Reid naively declared that "we've turned the corner on this economy and I think we're going to be OK."
If only that were true. Denial and ignorance are not solutions.