LA WATCHDOG-The 18% investment gains reported by the California Public Employees Retirement System (“CalPERS”) for the year end June 30, 2014 bodes well for the City’s two seriously underfunded pension plans and its projected budget deficit.
But one year of fat returns on its pension plans does not even begin to solve the City’s financial mess as our City is burdened with a cumulative budget deficit of $425 million over the next three years and more than $30 billion of long term liabilities (unfunded pension liabilities; deferred maintenance on our streets, sidewalks, and the rest of our infrastructure; and long term debt).
If the investment gains for the City’s two pension plans approach the returns achieved by CalPERS, then the unfunded pension liability will most likely decrease from $10 billion (74% funded) to $8 billion, representing a funded ratio approaching 80%.
In the real world, however, the City would be required to use a more realistic investment return assumption which would result in an unfunded pension liability of more than $15 billion (65% funded).
The impact the City’s Annual Required Contribution to its two pension plans is much more complicated as there are so many moving pieces that even financially sophisticated analysts have a hard time understanding what the hell is going on.
Next year, the City’s pension contribution is projected to balloon to over $1.1 billion, an $80 million, 8% increase. This expense will consume almost 22% of the General Fund budget.
However, this increase may be mitigated since the unfunded pension liability has been lowered by $2 billion, meaning that the annual payments to amortize this huge liability will be less than expected. This is the result of the actual 18% rate of return exceeding the investment return assumption of 7.75%.
The annual contribution will also be lowered as the pension funds resort to an accounting gimmick by reverting to a six year “smoothing layer.” This will allow the pension plans to avoid the recognition of an estimated $450 million in accrued losses next year.
On the other hand, annual contributions will be increased as the pension funds lower their investment return assumption to 7.5% from 7.75%. According to the City Administrative Officer, this change will increase the annual contribution by $80 million.
There are also a number of other assumptions that are thrown into the black box, including, but certainly not limited to, mortality rates, the rate of inflation, salary increases, and retirement patterns.
Pension accounting and the process for determining the annual pension contribution is very complicated, subject to manipulation, and is not transparent to the voters and even the City Council.
Rather than treating us like mushrooms (in the dark and covered with manure), the City Council would be wise to follow up on the recommendation of Mickey Kantor’s LA 2020 Commission to establish a “Commission for Retirement Security” that would “review the City’s retirement obligations in order to promote an accurate understanding of the facts.”
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This politically appointed, well-funded commission and their experts would have full access to City records. It would submit a report within 120 days on its findings and with recommendations on how to achieve “equilibrium on retirement costs by 2020.”
This report would delve into the workings of the City’s pension plans, why pension contributions have increased by more than four times over the last decade, and the reasoning for its recommendations.
But this commission must also provide us with a Pension for Dummies version that allows voters and our elected officials to have a better understanding of the City’s two pension plans, how the City managed to incur a $15 billion unfunded pension liability, and how the City intends to fully fund its two pension plans over the next twenty years.
Otherwise, the City Council will not begin the process of earning the trust, confidence, and respect of the voters.
(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee, The Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and a Neighborhood Council Budget Advocate. Humphreville is the publisher of the Recycler Classifieds -- www.recycler.com. He can be reached at: [email protected]. Hear Jack every Tuesday morning at 6:20 on McIntyre in the Morning, KABC Radio 790.)
-cw
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