Op-ed: Berkeley bonds and the New Guinea cargo cult

Berkeley is approaching a major, although only dimly visible, financial crisis. To pile another $100 million of debt onto this grim situation without first reforming basic budgeting and policy practices would be irresponsible.

During World War II, the occasional crashes of military cargo planes overflying New Guinea led to an outbreak of an anthropological phenomenon known as cargo cultism. Specifically, some of the isolated tribes of mountainous New Guinea developed a practice of attempting to lure more of the cargo planes to “land” by constructing alluring artifacts such as bamboo facsimile aircraft and even runways in the jungle. As with many human social activities, cargo cults developed a political overlay. That is, local leaders used the promise of increasing cargo crashes in exchange for the ceding of political power to themselves .And herein lies the link to the Berkeley bond financing process.

In essence a cargo cult is essentially a scam based on a false promise to produce a result in exchange for power and/or prestige. Yes often the process begins as a delusion but almost always it deteriorates into scam. And yes, often the payoff of power is masked by claims of virtue but in most cases, peel away the advertising and you will find the hypocrisy.

Let me illustrate by first reprising a little history of issues for both the City of Berkeley and its affiliate BUSD.

For BUSD, the promise (or is it bait) has been the welfare and most importantly the safety of the children, certainly an unassailably virtuous goal. More specifically BUSD has used the opaque and emotionally fraught issue of seismic safety to raise hundreds of millions of dollars. Here is the list of BUSD bond measures sold largely as seismic safety measures:

  • 1992 Measure A – $158 million
  • 2000 Measure AA – $116 million
  • 2010  Measure I   -$210 million

For those of you counting, that is a total of $484 million. As an aside, I note that in the political campaign to pass these measures the BUSD neglected to note that the state had provided at least an additional $26 million of funding for the schools. Also I exclude from this comment the related bond measures BB and H.

This staggering sum suggests the rather complex question as to whether perhaps it was worth it. A short answer is that we do not know. I say this because BUSD itself says it does not know. Specifically, as a provision of Proposition 39 imposing financial accountability standards on school bond measures, BUSD is required to file with the state audited certification of bond expenditures. To date BUSD has not complied with this state mandate so we cannot say just where the money went.

But what about Measures A and AA – surely they solved the problem they said they would. Again we do not know how the funds were spent. This is not an empty claim but rather the direct statement of BUSD in response to a FOIA request for information on the use of funds. Indeed a state agency has certified that BUSD financial records are in such disarray as to be useless. Specifically the state Financial Crisis Management Team (FICMAT) twice cited BUSD for grossly inadequate financial accounting.

So what you say. After all, this was all done for the good cause of seismically safe schools. Unfortunately this is an example of the childish reasoning that attaches to cargo cult scams. There are very real and devastating costs attached to this scam, including:

  • the opportunity costs of diverting potentially hundreds of millions of dollars from other higher priority uses (both within the schools and elsewhere in the community)
  • political costs i.e. the lack of transparency and indeed cynicism shown by BUSD in manipulating the political process to raise funds for non-authorized purposes undermines the entire political culture.
  • and we still do not know to what extent the schools are actually seismically safe even after this massive expenditure

But surely the city is not a bond cult?

Okay okay perhaps BUSD shows tinges of cult-like behavior but certainly the City is above all that. Unfortunately, in terms of manipulating bond financing process the City is if anything more abusive but perhaps also more sophisticated.

Again to illustrate, consider just one City bond measure – Measure S. Here again we see the ever useful seismic scare as a tactic to pass a bond measure. Measure S was a bond measure with the banner of retrofitting the Civic Center so that at last the City administration could safely assemble. Actually Measure S had three unrelated provisions totaling about $52 million:

  • $30 million for Civic Center retrofit using a fixed base approach
  • $15 million for Main Library retrofit
  • $7 million for miscellany including Strawberry Creek daylighting and the arts district.

As an aside note that this mixing of completely unrelated projects (called piggy backing in the trade) is an obnoxious tactic in itself.

What was the actual dispersal of Measure S funds? The Civic Center was retrofitted for about $50 million using other funds and with a completely different structural method (base isolation instead of fixed-based retrofit). The vast majority of the $15 million allocated to Library retrofit was used for a new extension of the Main Library. The $7 million seems to have simply disappeared in other miscellany.

Again so what you say – after all good things were accomplished. Again I say at what costs? Vast amounts of money were spent with no accountability and with huge opportunity costs to other worthy uses.

By the way Measure S is just one of the seismic scare based bond scams. A whole series of bond measures related to Library seismic safety was also passed.

Yes but now the cult is dead and we have a new day – right?

Sadly no. The newest cult venture is Measure T.  Here the value proposition, instead of seismic safety, is the deteriorating infrastructure that needs immediate attention. Just as with seismic safety, infrastructure renewal is on its face a virtuous proposition. After all who could deny the need for excellent infrastructure? But just as with Measure A or Measure S a significant portion of Measure T funds will be diverted to fund an agenda other than infrastructure repair. Likely a significant amount will be diverted to prop up a severely deteriorating City financial condition through diversion of what should be capital investment to fund operating costs. This has been the past practice for both the City and the Library for every bond measure in memory. That this diversion of Measure T funds will occur is now confirmed by the City Plan for Measure T just published on the City Public Works web page. Take a look and decide for yourself.

But we need infrastructure renewal so what should we do?

The first step to restoring fiscal health for Berkeley is to restore the integrity of both the budgeting process and the bond financing mechanism. To do that requires at least the following steps:

  1. Reform the budget process by implementing both a separate PPB and capital budget for Berkeley and a new financial reporting system. Every well run city in the US has both a Program/Planning  type budget (PPB) with a separate capital budget. Berkeley’s budget system is a flow of funds system first implemented as part of the 1920’s anti-corruption movement. It is totally inadequate to running a modern city. Although the city will tell you that it has a capital budget this is so deceptive as to amount to a lie. A true separate capital budget system would have separate capital accounts and systems capable of tracking costs related to all capital programs over time. Currently Berkeley is incapable of effectively tracking costs over time for any of its capital programs. Thus Berkeley cannot effectively and efficiently measure capital programs on important performance metrics such as over or under budget.
  2. Completely reconstruct the entire financial reporting systems of the City. Currently the financial reporting  and operations management systems (including cost accounting, purchasing, management database systems for operations etc.) are based on computer systems obsolete in the 1970s. Undertaking major capital programs with this decrepit system is inviting massive inefficiency and perhaps worse.
  3. Develop protocols for a modern capital programs management approach based on modern bid management  (erg Vickery auctions) and a design/build/construct approach used by every (and I mean every) major European state.

Why such draconian recommendations?

Like many other municipalities, Berkeley is approaching a major, although only dimly visible, financial crisis. The framework for this crisis is now emerging for Berkeley and consists of several ineluctable facts including:

  • massive unfunded pension and health care liabilities. For Berkeley by its own estimate, which is undoubtedly low, these exceed $500 million.
  • massive infrastructure investment requirements largely the result of virtually criminal practices of deferring infrastructure maintenance. A minimum impending infrastructure investment requirements is also on the order of $500 million
  • deteriorating demographics of the dominant tax payer base
  • bad position in the economic/business cycle i.e. we are caught in an era of financial repression and at the end of the economic cycle.

To pile another $100 million of debt onto this grim situation without first reforming basic budgeting and policy practices would be irresponsible.

Delay any Measure T appropriations until proper protections are in place.

Robert Krumme is a structural engineer and researcher specializing in aseismic design, founder of the award winning Seismic Technical Advisory Panel, and former member of various Berkeley commissions, including the Public Works Commission.