Tuesday, May 24, 2011

John Russo - City Of Oakland Debt Plans Point To Bankruptcy



Originally, this blogger was planning to run Part Three of this video recap last Wednesday, but frankly elected to stretch out the content production opportunity. The video is over 38 minutes long, and only a handful of people will watch the whole presentation at once.

But for those who do, the video interview with John Russo has a lot of information, and that it's being both referred to by some media types, and ignored by others is a clear example of how personal issues, jealously, and prejudice can block the efficient reporting of a story.

Articles referencing this video should be on the front page of both the San Francisco Chronicle and The Oakland Tribune, but that's not the case.

Just telling the truth.

Ask yourself why. Then ask yourself why print media's losing out to blogs, video, and even some Twitter accounts for ad dollars.

But I digress, though I could go on for a book-length diatribe on that issue.

Where We Left Off:

The last blog post on the Russo interview concluded with this paragraph:

Russo says that Oakland's problems in public safety and finance are "gripping the city," and he's totally opposed to the debt-based solutions being considered. And he said "The directions that the government is moving now are morally...not..uhm... They are, I think, morally questionable, and I could no longer serve, ethically, as City Attorney..." Russo, struggling to find the right words, said.

That's essentially why John left the City of Oakland. He says that while the issues of public safety and finance are "gripping" Oakland, and while he disagrees with the direction of policy and the ethical standing of the decision makers, he felt he could not work in a way he described as "ethical."

Russo says that there are "contracting" and "budgetary" issues that have been in the news and that lay out his complaints, in long form. He points to the battle over the production of weed, and some Oakland elected officials who apparently wanted to push forward in defiance of the Federal Government. And he points to the issues surrounding the police and fire retirement system.

That was where he started to think about getting another job.

Russo says the police and fire retirement system is such that it was closed to new members 35 years ago. Not that everyone was retired 35 years ago, it meant any police or fire fighters hired after 1976 will go into the big state pension system - PERS, as it's called.

But anyone who was hired before '76 was in the Police And Fire Retirement System, or what John calls "PFRS." "The public has been paying, for thirty years, a special tax override that was supposed to cover pee-fers, Russo explained. "That (revenue) has either been inadequate or not placed into the system, and the system in under-funded."

As to where that money went if it was not, to quote John, "placed into the system," Russo says "You'd have to look." When I asked if that was legal to do, Russo said "I can't comment."

But he's not saying the money was stolen. Got that.

John continues: "In 1997, the city (of Oakland) voted on a split vote, where I voted 'no', to issue bonds for 15 years that would pay the city's annual pee-fers contribution. (And) basically on the idea that we will borrow money and we'll pay the stock market, then we'll make more money in the stock market than the interest we're paying on the bonds, we win, and get 15 years where the City's General Fund isn't called upon for pee-fers."

It didn't work out at all, because of the two stock market crashes.

But in retrospect, I remember that episode in the City of Oakland's history, because the bond issue was a large business deal for a number of investment banks, and I was then-Oakland Mayor Elihu Harris' Economic Advisor, when Russo was on the Oakland City Council.

What happened was that the city's then treasurer, Jan Mazyck, was then pushing a proposal by Goldman Sachs that I did not favor and advised the Mayor not to support. And for two reasons: first, after building a system dynamics model of the proposed swap-option to evaluate Goldman's proposal, I wasn't convinced that the swap-option derivative would be enough to protect Oakland in the case of a crash, and I preferred the selection of a minority investment banking firm to handle the deal, rather than Goldman, and in an entirely different way that offered better protection with redevelopment revenue as a "backing."

Elihu listened to me, and voted against the deal.

Eventually, the Council - but not Russo, Mayor Harris, and Councilmember's Dick Spees and Nancy Nadel from Districts Four and Three, respectively, selected Goldman to handle the deal and do the derivative financing system they proposed.

Back to Russo.

"It turns out, according to the (current) City Auditor (Courtney Ruby), that that decision cost the City (of Oakland) a quarter of a billion dollars," Russo continued. "The reason I wrote about it, is the city's 15 year payment holiday is up, next year. And what is the City's solution to that, according to the Mayor and the city staff? Float more debt. Use more debt, so use another credit card, to pay the interest on the second credit card, that was paying the interest on the first credit card. There's only one ending for that pyramid of debt, and it's bankruptcy. There's no other way out of it.

So what they're proposing is another five to seven year holiday, which is great because we don't have to pay the bill. Another five to seven years, we'll just push it off, push it off to the next generation, really."

Russo says that even if the City of Oakland makes a seven percent return, the City would still end up onwing $141 milllion in each year 2024, 2025, and 2026 - a total of $423 million.

The General Fund of Oakland will have to pay $141 million a year by that time. "It will break the bank," Russo says. It's also far beyond the revenue-producing capacity of the City of Oakland, given the population size and level of assessed value of property now, and into the future.

In this what Russo calls "paroxism of irresponsiblity," he claims we have the Oaklanders of the 2050s paying for people who worked for the City of Oakland in the 1950s.

A big mess, getting messier.

Russo House Cleaning

Before I end this segment of the blog posts on the Russo video interview, there's a small controversy that John did not attend City Council meetings and that he's in violation of the City Charter. He's not.

The City Charter does says that if the City Attorney misses ten meetings without being excused, he or she is in violation of the Charter, but the City Charter lacks a definition of what a meeting is. Plus, the second of the City Charter on the Police and Fire Retirement Board, which the City Attorney sits on, allows the City Attorney to send a representative.

So why doesn't that apply to the City Council? Well, by practice, it does. As not only Russo, but Jayne Williams before him, regularly appointed a representative for Oakland City Council meetings.

Also, we next look at Oakland Sports and we look at the observation that Russo bought his way into his job as Alameda's City Manager.

Stay tuned.

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