LA WATCHDOG--In 2014, the LA 2020 Commission recommended the establishment of a commission to address the “ballooning” costs related to the City’s two underfunded pension plans, the Los Angeles City Employees’ Retirement System (“LACERS”) and the Los Angeles Fire and Police Pensions (“LAFPP”).
The Neighborhood Council Budget Advocates have also followed up on the LA 2020 Commission’s recommendation in its annual White Papers, calling for the creation of a “pension commission to review and analyze the City’s pension and other post-retirement employment benefit plans and develop recommendations to eliminate the unfunded liability over time.”
And for the last two years, Mayor Eric Garcetti has said that he would create a Pension Commission. But this appears to be just another empty promise because of the opposition of the public sector unions trumps transparency and any pension reform.
However, given the unfunded pension liabilities of over $12 billion, a funded ratio of only 77%, and ever increasing annual required contributions to the two pension funds that will soon devour 25% of the General Fund, it is time for the Mayor, City Council President Nury Martinez, and Personnel Committee Chair Paul Koretz to come clean with Angelenos about the unsustainable economics of LACERS and LAFPP and how the ever increasing pension contributions are crowding out basic services such as road repair and public safety.
During the past year, the unfunded pension liability of LACERS and LAFPP increased by almost $3.7 billion to $12.1 billion. The funded ratio decreased from 82% to 77%. Underlying the increases in these debt-like liabilities were the returns on investment of 1.9% and 2.8%, respectively, that were below the investment rate assumption of 7.25% and, to a lesser extent, changes in various assumptions, including lowering the investment rate assumption to a still optimistic 7%.
According to the City Administrative Officer, the City’s annual required contribution to the two pension funds will increase by $127 million (almost 10%) to approximately $1.45 billion, an amount that consumes more than 20% of the General Fund budget. And over the next five years, the increase in pension contributions will exceed the growth in revenues, so much so that contributions are expected to reach almost 25% of the General Fund. And this assumes that the returns on pension fund investments are 7%, an optimistic assumption.
The unfunded liability of $12.1 billion and the annual required contribution of $1.45 billion are actually understated because they rely on the overly optimistic investment rate assumption of 7%. If the rate were lowered to a still optimistic 6%, a rate suggested by Berkshire Hathaway’s Warren Buffett, considered to be the best investor of our times, the unfunded liability would increase to $19.4 billion, the funded ratio would decrease to 68%, and the annual required contribution would increase to almost $2 billion.
While it is easy to be confused by all the numbers and assumptions surrounding pension funds, the plain simple fact is that the City’s two pension plans are not sustainable. They demand reform. The first step is the establishment of an independent Pension Commission to review and analyze the City’s two pension plans and to develop recommendations to eliminate the unfunded liability over time and to lessen the burden on the General Fund. This may involve hard choices, including the elimination of the California Rule and the creation of defined contribution plans, changes that will be opposed by the leaders of the City’s unions.
But without reform, the next generations of Angelenos are screwed.
(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee and is the Budget and DWP representative for the Greater Wilshire Neighborhood Council. He is a Neighborhood Council Budget Advocate. He can be reached at: firstname.lastname@example.org.)