LA WATCHDOG-The Los Angeles City Employees’ Retirement System (“LACERS”) had a banner year, earning 14.1% on its investment portfolio. This compares favorably to the 12.5% return for the CalPERS (the California Public Employees’ Retirement System) as well as the endowments of Harvard (11.3%) and Yale (12.5%).
LACERS continued on a roll in the first quarter (July, August and September) as it enjoyed a return on its investment portfolio of over 5%, reflecting the continuing hefty increases in the stock market.
As a result of the investment portfolio earning more than the assumed investment rate of 7.75%, LACERS was able to reduce its unfunded pension liability by over $700 million.
But LACERS is still a big time problem child as its unfunded pension liability of $5.4 billion represents an unhealthy funded ratio of less than 70%.
Furthermore, next year the City will need to increase its contribution to LACERS by 10% to over $400 million, representing 8.3% of the General Fund budget. Of this amount, over two-thirds will be used to amortize the $5.4 billion shortfall.
Underlying the explosion in LACERS unfunded pension liability is the 56% expansion in future benefits for active and retired members over the last eight years. This was fueled by a 30% increase in the average compensation for the City’s civilian workforce to almost $76,000 a year.
In three years, the City’s contributions to LACERS and the Fire and Police Pension Plans are projected to increase by 25% to $1.2 billion, representing a mind boggling 23% of the General Fund budget. Needless to say, this $250 million increase will result in significant cut backs in public safety and core services unless significant reforms are embraced by Mayor Garcetti and the Herb Wesson led City Council.
Unfortunately, the City is playing games that mask the extent of its unfunded pension liabilities and lower its annual contributions (a “savings” no doubt) to its two pension funds.
Some are minor, such as the five year phase-in of new actuarial assumptions, resulting in “savings” in the range of $10 to $20 million a year.
Others such as extending the “smoothing” period for investment portfolio losses from five to seven years in 2009 resulted in significant “savings” for the City after the stock market tanked in 2007 and 2008. But now that the market has rebounded and the gap between the market and actuarial values of the assets has narrowed from a loss of $2.8 billion in 2009 to a loss of only $82 million today, the City is once again considering amending the smoothing policy to eliminate the volatility of its previous policy.
But the real skunk at the garden party is the City’s reliance on an overly optimistic investment rate assumption of 7.75%. This results in a significant reduction in the unfunded pension liability and the City’s annual required contribution to LACERS and Fire and Police Pension Plans.
If the City used a rate of return on its portfolio of 6% as recommended by Warren Buffett of Berkshire Hathaway fame and close to the rate recommended by the major rating agencies, the City’s unfunded pension liability would increase by $8 to $10 billion, implying a funded ration of less than 60%. This would require the City to pony up an additional $400 to $500 million a year.
These estimates may be disputed by City Hall and the leadership of the unions that represent the City’s workers. However, they will more than likely be confirmed by the ratings agencies and the accounting profession, both of whom have finally put on their big boy pants and recognized the seriousness of the impact of unfunded pension liabilities on local governments, including the bankrupt cities of Detroit, San Bernardino, Stockton, and Vallejo.
As part of its Back to Basics program, the City should do a transparent and comprehensive plan that details the funding status of the City’s two pension plans and outlines the steps that would be necessary to achieve 100% funding within 15 years. This is a requirement under The Pension Reform Act of 2014, the common sense ballot measure that has been proposed by Chuck Reed, the Democratic mayor of San Jose.
Mayor Garcetti and the Herb Wesson led City Council should also step up to the plate and endorse The Pension Reform Act of 2014 because it will give the City a bargaining chip with which it can negotiate pension reform with the campaign funding union leadership.
Without meaningful pension reform that reduces the $20 billion of unfunded liabilities and its devastating impact on the City’s budget, LA will be forced to take drastic actions that will adversely impact public safety, core services, and its work force, including massive layoffs and the outsourcing of its operations.
Eric, it is Back to Basics.
(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
CityWatch
Vol 11 Issue 92
Pub: Nov 15, 2013