FINAL Performance Audit City of Oakland Financial Condition for FY 2012-13, 2019-20

From the Oakland City Auditor’s Report:

Dear Mayor Schaaf, Council President Bas, Members of the City Council, City Administrator Reiskin,
and Oakland Residents:

The attached audit report provides information on the City of Oakland’s financial activities for fiscal
years (FY) 2012-13 through 2019-20. This is the second year we have produced this report. Last
year, the report provided a baseline on the City’s financial health prior to the COVID-19 pandemic.
Initially, the impetus for this report was twofold: to provide the public and leadership with an easily
digestible account of the City’s financial health and to assist decision makers in visualizing the City’s
course, consider options, and adjust and improve the City’s long-term financial condition. The
COVID pandemic has highlighted the vulnerabilities in the City’s finances. This report now also
serves to assess the fiscal impacts of the pandemic. To illustrate the impacts, we included a section
on Government Funds, which focuses on the City’s near-term financial condition.

Prior to the COVID pandemic, Oakland’s financial health was relatively stable. Based on our financial
analysis through FY 2018-19, revenues had increased, debt was down, and the City’s liquidity and
credit ratings were strong. Additionally, the City was working to address the increase in benefits and
pensions costs for public employees. The COVID pandemic has impacted some of these gains. While
this report begins to articulate the impacts of the pandemic, the long-term consequences are yet to
be known. In FY 2019-20, overall revenues increased slightly, and expenses related to government
activities decreased slightly. The reverse was true for the City’s General Purpose Fund, where
expenditures outpaced revenues resulting in a negative change of $69 million in one year. This
appears to be attributed to a decrease in revenues due to the pandemic, coupled with an increase

Honorable Mayor, Honorable City Council, City Administrator, and Residents of Oakland
City of Oakland’s Financial Condition for Fiscal Years 2012-13 through 2019-2020

in public safety costs. The General Purpose Fund is the City’s discretionary fund and it is used to
fund all or part of most city services.

In FY 2019-20, the City’s business license taxes, real estate transfer taxes, transient occupancy taxes,
parking taxes, sales and use taxes, and charges for services declined by $46.9 million from the
previous fiscal year. Moreover, five of these same six revenue categories are also tracking behind in
the first six months of FY 2020-21 compared to the first six months of FY 2019-20. In total, these
revenue categories declined by $55.7 million, or 25.6 percent, from the first six months of the
previous fiscal year.

The City’s funded ratios for its three pension funds remained relatively constant from last year while
the City’s Other Post Employment Benefit (OPEB) liabilities decreased significantly from $841 million
in FY 2018-19 to $599 million in FY 2019-20, a 40 percent decrease. This $242 million decrease is
mainly due to changes in actuarial assumptions regarding the discount rate and future benefits to be
paid.

City officials need to focus more attention on the City’s General Fund reserves, which declined in FY
2019-20. As of June 30, 2020, the City’s General Fund reserves totaled $55 million, or $90 million
less than the Government Finance Officer Association’s (GFOA) recommends. Last year’s report also
noted the City reserves were less than the GFOA recommends.

As stated in the previous year’s report, the City does not produce an annual city-wide capital asset
report. Without quantifying these costs in one place, the City cannot begin to adequately determine
the future monies it needs to address the City’s future infrastructure obligations.

Throughout the report, we have compared Oakland’s financial indicators to those of California cities
with similar population size and government services provided. It is important to note that for
almost all financial indicators, Oakland does not rank favorably in comparison to these cities. The
City would benefit from reviewing these cities’ past financial decisions and how they develop their
respective budgets to inform Oakland’s future.

A key message of this report is the City must balance both its long-term financial picture with its
short-term budgetary needs. The decline in revenues, coupled with the General Purpose Fund
expenditures outpacing revenues, are clear signs the City’s budget should be approached cautiously.
We are unclear of the on-going impacts of the COVID pandemic and the City faces significant
pension and OPEB liabilities in addition to unknown costs to maintain its assets. This should be a
time for implementing financial strategies to shore up finances, build up our reserves and reduce
our liabilities so the City can provide essential services in the future.
Respectfully submitted,

COURTNEY A. RUBY, CPA, CFE
City Auditor