Oakland Is at Risk of Financial Insolvency. Is Bankruptcy on the Table?

Oakland is at risk of financial insolvency if it does not significantly slash its spending by the end of the calendar year, a top city official warned this week, raising the stakes of a budget crisis that has threatened major cuts.

The dire warning came at a special City Council meeting on Tuesday, where council members were told that Oakland is looking at a $93 million budget shortfall for the fiscal year that ends in June if the city continues to spend at its current rate.

“We have a significant preexisting structural issue as an organization…. Now is the time that we have to take action to solve it,” City Administrator Jestin Johnson said. “We must take action over the course of the next month and a half to preserve our solvency.”

For a few days, the fiscal crisis raised the specter of bankruptcy after a draft of the city’s latest financial report was erroneously posted Friday, mentioning the Chapter 9 process as a possibility. Oakland officials now say the city is not discussing bankruptcy, and the city has removed the language from its report — and clarified that the discussion is “premature.”

Still, Oakland’s money problems are real and must be addressed quickly. Here’s what that could look like.

Where does Oakland stand?

During the 2023–24 fiscal year, the city overspent by more than $27.5 million and had to dip into emergency reserves to pay its bills. City policy requires that these reserves stay above 7.5% of the city’s general purpose fund. If it isn’t restored by the end of this fiscal year, Oakland will have to declare a fiscal emergency.

According to a resolution adopted in 2023 on the use of one-time revenues to plug budget holes, Oakland defines a fiscal emergency as the “last and most severe stage of a government entity’s financial solvency problems.”

“An unusual, unanticipated and seemingly insurmountable event or hardship of the city, one such as a natural disaster, ‘acts of god’ or war, public emergency or other unforeseen catastrophic event requiring the use of Emergency Reserves to sustain the most basic operations,” the definition continues.

Oakland Finance Director Erin Roseman said the City Council will need to identify roughly $115 million in cuts to balance this year’s budget and replenish the emergency fund.

To avoid an irrecoverable financial state, the council will need to make these decisions before the end of December, according to Johnson.

What’s going on with the Coliseum sale?

Oakland already triggered a contingency budget plan that made some fairly drastic cuts in September after the city amended its deal to sell its share of the Oakland Coliseum. Revenue from that sale to the African American Sports and Entertainment Group was budgeted to fill this year’s shortfall, but now, the funds won’t be available until May at the earliest.

Under the contingency, which Johnson previously described as pulling the “emergency brake” on spending, Oakland has implemented a hiring freeze, delayed a police academy class, halted unfinalized contracts and grant agreements and more.

It has not made the significant public safety cuts included in the contingency plan yet, but Johnson said that since the police and fire departments are the city’s biggest spenders, that will become unavoidable. The Fire Department is expected to exceed its budget by $34 million this fiscal year, and the Police Department is on track to overspend by $52 million.

There is also a question of whether that sale could fall through altogether. AASEG sent the city a first payment of $5 million upon signing the deal in July but has missed originally scheduled payments since.

The revised sale agreement with AASEG pushed back the payment schedule and consolidated it so that the deal would close within the fiscal year, but it also delayed a payment expected in September, triggering the contingency. Under the new schedule, the second payment was due Nov. 7. That $10 million still has not been received by the city.

Oakland said this is because AASEG is also buying the Oakland A’s 50% stake in the Coliseum, which can only be sold with the Alameda County Board of Supervisors’ approval. That body has delayed setting a time to vote on approving the deal, and it is unclear if it will happen before the end of the year. Supervisor David Haubert told ABC 7 News on Nov. 12 that he is pushing for the vote within weeks, not months.

So why are people talking about bankruptcy?

The draft of Oakland’s first-quarter fiscal report that the city posted Friday said the quarter’s spending indicated that immediate action was needed to “avoid the Chapter 9 process,” referring to filing for bankruptcy.

“Failure to take dramatic and immediate steps to reduce expenditures will almost certainly result in insolvency,” it continued.

Though the report was quickly replaced by a new version without mention of Chapter 9, Johnson very clearly told council members on Tuesday that they needed to take swift and strong budget action.

He also noted looming federal changes under the second Donald Trump administration that could hurt Oakland’s budget, including a potential reduction of federal funds for programs like Head Start and Community Development Block Grants, as well as impacts to the local economy and the city’s spending costs if President-elect Trump’s tariff plan is executed.

If Trump carries out planned mass deportations, it could have even more dire consequences, Johnson said.

“The economic impacts of a tenth of that action will make the other things I mentioned look small,” he said. “None of that is factored in. There are downside impacts that we have to consider as well.”

Is this precedented?

If Oakland were to file for bankruptcy, it would be the fourth major California city to do so and the third in Northern California. In the throes of the Great Recession, Vallejo filed for bankruptcy in 2008, and Stockton wasn’t far behind in 2012.

Both of those cities have worked their way back to fiscal health, and now Stockton’s budget is larger than Oakland’s. But according to former Stockton Mayor Michael Tubbs, it has been a long road.

“We had to work together and make really hard, painful, difficult decisions that the city is still recovering from,” said Tubbs, who joined the City Council in 2013 and served as mayor while the city was exiting bankruptcy, from 2017 to 2021.

“One thing that’s for certain is that those would be painful cuts, and there will be sort of a baseline level of service delivery that will be very meager,” he continued. “And that is not what the citizens deserve.”

What happens in a municipal bankruptcy?

When a city files for bankruptcy, it has to enter into a settlement agreement with all of its claimants — the people or entities to whom the city owes or pays money. These include bondholders, bargaining units, individuals or companies who have pending litigation with the city and capital market creditors, among others.

A bankruptcy judge must approve all of the settlements as part of the city’s plan of adjustment.

At the same time, Tubbs said, city officials have to make significant budget reductions, which he called “draconian.”

What could get cut?

This includes service reductions pretty much across the board.

“We had to close down libraries, cut parks and recreation programs, we weren’t able to do maintenance,” Tubbs said.

Stockton also had to lay off city staff, including roughly a third of public safety officers, Tubbs said.

“We saw longer response times. We saw a triage situation where officers weren’t able to respond to all crimes and had to really prioritize violent crimes,” he told KQED.

When Vallejo declared bankruptcy, it had to close three of its eight fire stations, according to an interview with then-City Manager Phil Batchelor on NPR’s Talk of the Nation in 2012.

Oaklanders are especially concerned with cuts to the fire and police departments. The city already has a struggling 911 dispatch system, and multiple council members pointed out that a five-alarm fire in the Oakland Hills last month would have been nearly impossible to fight with the contingency budget’s cuts in place.

Other side effects?

Tubbs said bankruptcy also carries a stigma. Fewer businesses want to come into the city, and residents are less trusting of the government — and, therefore, less likely to pass tax measures that would increase its revenue.

In Stockton, he said, “Every time there’s a tax measure, it’s a fight. The tax measure we ran to fund our bankruptcy [recovery] didn’t get 90% of the vote. I think it passed like 53% to 52%. It becomes very difficult to earn back trust.”

Recovery is possible, though. Stockton now has one of the most solvent budgets in the state and has instituted policies that protect it from dipping into dangerous spending again.

Tubbs said the keys are not spending one-time funds on long-term costs — one of the largest criticisms of the Coliseum deal — along with having a reserve equal to a third of the city’s budget and creating a tool that provides a long-range forecast of how new spending would affect cash flow long term.

What will happen in Oakland?

There are lots of unknowns surrounding what the next few make-or-break weeks will look like for Oakland.

At Tuesday’s meeting, Councilmember Rebecca Kaplan set an agenda item for December to consider moving up to $30 million from the city’s self-insurance liability fund to its general purpose fund reserve to patch the leftover deficit and avoid a fiscal emergency. Council President Nikki Fortunato Bas seemed to show support for the move, but Councilmember Dan Kalb said he wouldn’t feel comfortable moving a full $30 million for that purpose.

There will also be big leadership changes before the end of the year. After Mayor Sheng Thao was recalled by voters this month, Bas is set to take over as interim mayor until a special election is held. This could be thrown into question, though, since she is awaiting final results in a race for the Alameda County Board of Supervisors that is still too close to call.

If she is elected supervisor, she could theoretically serve as interim mayor for a few weeks, but once sworn onto the board in January, the city will have to appoint a different interim leader at this critical time.

Still, Oakland officials and Tubbs expressed that there’s still time for the city to back off of its fiscal cliff — if it navigates the situation urgently and carefully.

“Oakland is too important of a city for California to be left bankrupt,” Tubbs said. “We have to get this right in Oakland…. It’s a place of culture. It’s a place of activism. It’s a place where justice is found. It’s a place of creativity. It’s a place of diversity. It’s a place that is so important, particularly at this moment. So we have to make sure that it works.”