Bombshell report that warned of Oakland facing bankruptcy is deleted, replaced

With the election complete and Oakland’s financial crisis continuing to worsen, city officials took a drastic step last week, warning in a bombshell report that the city on the verge of bankruptcy.

But later that day — after officials had cautioned against further irresponsible spending to “avoid the Chapter 9 process,” the legal exercise following a bankruptcy declaration — the document had disappeared from the online agenda of an upcoming City Council meeting.

In its place, city officials had published a new report with noticeably softer language, including no references to “Chapter 9” and fewer mentions of “insolvency,” which is the financial state that would lead Oakland to undergo a bankruptcy proceeding.

Both reports, which outline the city’s revenues and expenditures in the first quarter of this fiscal year, were authored by city Finance Director Erin Roseman, with signatures by City Administrator Jestin Johnson dated one week apart — on Nov. 8 and Nov. 15.

On Monday, city officials said an “unapproved draft” of the report “was inadvertently and briefly published,” but the contents were edited “after internal analysis concluded that the Chapter 9 level of decision making was, and remains, premature at this time.”

“However, that analysis does not in any way diminish the urgency of the financial discussion that needs to be held at City Council,” a spokesperson added.

The switcheroo offered a glimpse into how Oakland’s leaders are wrestling with the severity of a historic financial crisis that may now come into full focus as the Nov. 5 election reshapes City Hall.

The structural budget problems are now expected to result in a nearly $115 million negative balance in general purpose funds when the current fiscal year ends in June, and Roseman warned in both reports that balancing the books will require spending cuts across the board, including to the police and fire departments.

“All City policy makers, staff, residents and other stakeholders must seriously grapple with the current financial circumstances,” Roseman wrote in both reports.

“Fecklessness and failure to take dramatic and immediate steps to reduce expenditures will almost certainly result in insolvency,” she added, a line that had been removed in the second report.

In stark terms, Roseman lays out some difficult realities: Oakland has tapped its emergency reserve, which won’t be replenished this year, requiring the city to declare a fiscal emergency.

She warns the city against tapping other funds — while she doesn’t give an example, one would be revenue from impact fees paid by developers for new projects — to plug the gap in the general purpose fund, which pays for most city salaries and daily operations.

Spending reductions are already in effect, part of a contingency budget that became official after a sale of the Coliseum touted by Mayor Sheng Thao hit speed bumps. In addition to a citywide hiring pause, officials have frozen two existing police trainee academies and delayed the start of any new ones.

Four non-sworn police positions are now frozen, as well as five fire-engine crews that employ the equivalent of 60 full-time firefighting personnel.

The city has also slashed over $1.1 million in funding for IT cybersecurity, a move taken less than two years after Oakland was hit with a devastating ransomware attack.

And among other initiatives cut is the “Five After Five” program that allowed restaurant patrons and workers to park after 5 p.m. in a secure 19th Street garage for a $5 flat rate — a recent innovation of the mayor’s that now may be gone for good.

Thao, who has attempted to navigate the structural budget deficit for the last two summers, is expected to leave office next month after the Nov. 5 recall election saw 60% of voters agreeing to remove her in the latest available results.

Much of the revenue shortfall the past two years is from a decline in tax revenue from home sales that stalled after the Federal Reserve raised interest rates to combat inflation.

The city’s overspending is largely being driven by the Oakland Police Department, which is expected to blow through its budget by $51 million this year, much of it on overtime costs.

The other major albatross is the city’s Fire Department, which is projected to go over budget by $34 million.

In a statement Monday, police union President Huy Nguyen declared his officers “won’t accept any cuts until we know the extent of the city’s debt.”

Staffing reductions, so far, are not part of Roseman’s recommendations, and her reports contain no mention of potentially negotiating with the unions to retroactively reduce the sizes of labor contracts — a route taken by city officials during the Great Recession.

Meanwhile, Thao’s efforts to plug part of this year’s deficit with revenue from the Coliseum sale are so far falling flat, with only $5 million already in the city’s accounts and another $105 million not expected to arrive until the end of next May.

Technically, money arriving then could still be used to backfill the worst of the deficit, but Roseman advised against planning for it in harsh terms — language that subsequently was softened in the second published report.

“Staff strongly recommends that decision makers DO NOT includes the Coliseum sale proceeds in any future budget balancing action until after that cash has been received and title of the property transferred,” Roseman wrote.

The second version removes the use of all-caps for the words “do not,” and also fixes a typo in the text. Elsewhere, the new report omits another phrase from Roseman that described planning for Coliseum revenue ahead of time: “budgetarily reckless.”

Shomik Mukherjee is a reporter covering Oakland. Call or text him at 510-905-5495 or email him at shomik@bayareanewsgroup.com.