Ominous Financial Report Points to Funding Shortfalls

City Council Chooses to Ignore Warnings in Favor of $650 Million in New Spending

2022 has been a challenging year financially. The combination of decades high inflation combined with a 20% decline in the value of investments has resulted in widespread pain. The latest cause for alarm is the city’s retirement fund that reported a -6.1% return for the 21-22 fiscal year. The city was banking on a +6.8% return meaning the net gap is 12.9%. Some suggest “the market will rebound,” but even if it bounces back, this piece describes the difficulties in making up for investment losses.

Rather than heed these warnings and adopt a precautionary fiscal stance, City Council is proposing residents take on $1.2 billion in new debt amounting to nearly $10,000 in additional spending per resident.

Why Inflation and Pension Liabilities Matter

City Council could not have chosen a worse moment to embark on the largest borrowing spree in the city’s history. Two factors, inflation and pension labilities, create enormous risk for city’s residents who will be asked to foot the bill. Inflation is already driving up the cost of borrowing today as the city issues new bonds for subsidized housing, school construction and infrastructure repairs. Perhaps more consequential are the findings of the California State Auditor and Government Financial Officers Association. The State Auditor ranked Berkeley among the worst in the state for pension cost risk (giving the city a score of 0).

The State Auditor Warns of the Risk of Future Costs

The Financial Officers Association explains how this pension risk can impact the cost of the proposed $1.2 billion in new debt.

Debt and pension burdens are measures of the financial leverage of a community. The more leveraged a tax base is, the more difficult it is to service existing debt and to afford additional debt, and the greater the likelihood there will be difficulties funding debt service. …accrued net pension obligations could divert revenues out of future budgets and lead to funding shortfalls. The City’s score here is equivalent to a “Ba” bond rating (the second worst rating).

Source: A Risk-Based Analysis and Stress Test of Long-Term Debt Affordability for the City of Berkeley

In other words, Berkeley’s growing pension gap could impact the city's “credit” (bond) rating, driving up borrowing costs for current and future bond measures. Rather than take precautionary steps (like more modest borrowing and earmarking new revenues to shore up the city’s pension fund) City Council wants you to approve up to $650 million in new spending.