City Officials Dispute Failing Financial Grade From Accounting Watchdog

A national watchdog group recently gave the city of Portland a failing grade for financial…

A national watchdog group recently gave the city of Portland a failing grade for financial health, rating the city 71st out of the 75 largest cities in America.

“Portland’s financial problems stem from unfunded retirement obligations that have accumulated over the years,” says the report from the group Truth in Accounting.

The group produces an annual report and always gives Portland low marks.

The city’s budget director, Jessica Kinard, reviewed the latest version and says that the report draws its conclusion on Portland from a fundamental disconnect.

“The report does have a critical flaw in its assessment of Portland: It misunderstands and does not accurately account for a significant and unique funding source for city liabilities, which is a stand-alone levy to support pension costs for sworn police and fire members,” Kinard says. “This is a common misperception of outside evaluators unfamiliar with the city’s structure.”

Most governments set aside money to pay for future pension obligations for their employees. That’s the structure that state and local governments in Oregon use, for instance, making annual payments to the Oregon Public Employees Retirement System. Trustees for the PERS system collect annual payments and invest that money. They use the proceeds to pay out retirement benefits.

In contrast, Portland’s sworn police and firefighters for decades had their own retirement system, which is funded differently. Rather than accumulating reserves over time and investing them, the fund, known as the Fire & Police Disability & Retirement Fund, relies on its own dedicated property tax. The revenue raised for that specific purpose comes in from taxpayers and goes out the door the same year to beneficiaries.

“The city’s pension funding is unique for cities of its size,” Kinard says. “Accounting standards do not take into account the value of future property taxes from the Fire and Police Pension Levy when analyzing funding percentages, therefore unfunded actuarial liabilities are skewed negatively for Portland on paper, leading to misinterpretation of data by Truth in Accounting.”

In other words, the report that gave Portland an “F” takes into account the liabilities FPDR owes to pensioners but does not offset those liabilities with the future property taxes that will pay them.

Kinard says that city finance officials regularly explain the unusual pension structure to the bond ratings agencies whose job it is to assess the creditworthiness of borrowers. The result: Portland has a AAA credit rating, the highest grade agencies give.

The city of Portland continues to be one of the few cities of its size to maintain a AAA credit rating from Moody’s Investor Service, one of the leading national financial analyst firms, Kinard says.