Oakland (Special to ZennieReport.com) – The City of Oakland is facing a giant $175 million budget deficit. The reason for the outcome was the Pandemic-driven downturn in revenue from property taxes. The reality ran counter to a rosy projection of funds from the same source in 2022. But here Oakland is, and can’t afford to cut from the one place anyone would look to first because of its sheer size: the Oakland Police Budget.
The Oakland Police Budget is roughly $360 million, in size, with the exact figure being $360, 894,797 – or about 1/3rd of the City of Oakland’s expenditures. While one might have the idea of taking the entire $175 million from that chunk, think again. That idea would result in a ramping up of crime in Oakland, and at a level which would take another $250 million to fix by this blogger’s hypothesis. (Remember, that’s getting back to the previous baseline, then cleaning up the damage from the increased activity.)
So, unless you’re end game is to make Oakland one giant television set for “Oakland Gang Wars: 2024”, it would be a good idea to drop that consideration. But there is another way, and it continues a trend that started nationwide during the Pandemic: deficit financing with debt.
Deficit financing with debt creates “a longer-term budgetary liability to pay for immediate, short-term operating costs”, according to Matt Fabian and Lisa Washburn with Municipal Market Analytics (MMA), a research and consulting firm that specializes in the U.S. municipal bond market. Their research work discussed in the article “State and Local Governments Relied on Debt for Budgetary Help In 2020” at PewTrusts.org, January 28, 2021, uncovered that generally risky, but commonly employed practice.
“State and local governments faced severe 2020 and 2021 budget crises because of the COVID-19 pandemic. So, they used the municipal bond market to reduce or postpone annual expenses, raise operating capital, and restructure otherwise damaged finances. All of these activities could, collectively, be called deficit financing—that is, paying for government expenses through borrowing,” accoring to Fabian and Washburn.
Pandemic Spurred Need For Debt-Financing Of Deficits
The pair continued “These are not typical uses of the municipal bond market, where an overwhelming majority of financing is for long-term infrastructure projects. But last year, with state and local governments seeking as much as possible to avoid cutting spending, raising taxes, or postponing pension payments, they shifted their emphasis to short-term and temporary solutions. As the pandemic continued and federal stimulus money dried up, they increasingly took on debt for budgetary help.”
Then Fabian and Washburn explained “We analyzed 442 municipal bond issuances over $100 million between August and mid-December of 2020, and we found that at least a quarter—and, because in some cases the ultimate use of the money wasn’t clear, perhaps as many as half—involved some form of deficit financing.”
The consultants also explained that most common form of direct deficit financing was something called “scoop and toss” refinancings. In that case, new bonds are sold to retire old ones and a “meaningful portion” of debt service payments are delayed. Fabian and Washburn say “it’s not exactly the same as what a homeowner might do with a “cash-out” refinancing of a mortgage, but the result is the same in that it frees up cash on hand.”
The other consideration is will such a strategy damage the City of Oakland’s credit rating. The results of Fabian and Washburn’s research says not necessarily, but depending on the City of Oakland’s total balance sheet, such a scenario is possible.
A Possible Oakland Budget Alternative For A Smaller Shortfall
Oakland Mayor Sheng Thao wound up consolidating departments as part of a successful effort to close a $360 million budget deficit. So, while the City of Oakland faces yet another shortfall, the good news is that it’s less than half the size of the previous one. That arguably puts Debt-Based Deficit Financing front and center as a realistic strategy.
But the Thao Administration should not stop there. It’s time to implement a large-scale, public private development that officially reforms the Oakland Coliseum Complex for the 21st Century. That would include a much-needed tax increment financing zone (and allow the City to “trap” 100 percent of its property tax revenue, rather than retain 20 percent of it), and a stadium authority to steer facility development.