LA WATCHDOG - As a result of a return of over 32% on its investment portfolio, the Los Angeles Fire and Police Pension Plans (“LAFPP”) are 109% funded as of June 30, 2021, resulting in a surplus of $2.5 billion based on the market value of its investments.
This contrasts with the previous years unfunded pension liability of $3.9 billion (86% funded), a swing of $6.4 billion.
While LAFPP is 109% funded, its $2.9 billion plan for Other Post-Retirement Employment Benefits (retiree health benefits) (“OPEB”) is only 76% funded, resulting in an unfunded liability of $900 million. Fortunately, the $28 billion pension plan is overfunded by $3.4 billion (114% funded).
Another benefit of a fully funded plan is that the City’s Annual Required Contribution to LAFPP for the upcoming fiscal year 2022-23 is projected to be $64 million less than this year’s contribution.
Despite all this great news, LAFPP still has issues that need addressing.
LAFPP is a “mature” pension plan because its 14,160 retired members outnumber its 12,800 active members. This resulted in a negative cash flow as benefits exceeded contributions from the City and employees by $460 million this year. This puts a burden on the investment portfolio which must make up the differential.
As mentioned above, the OPEB plan is underfunded by $900 million. One recommendation is for the City to invest its $64 million of “savings” from the lower Annual Required Contribution in this underfunded OPEB plan. This investment will result in significant long-term savings as it will compound year after year at 7%, the current investment rate assumption.
[Note: We are fortunate that the City has been funding its OPEB plans since the late 1980s, unlike the County and State whose retiree medical plans are not funded. This has put these two governmental entities on a very expensive pay-as-you-go plan because healthcare premiums are escalating faster than revenues.]
Another suggestion is to follow the lead of the Los Angeles City Retirement System which has been very successful in limiting increases in health care premiums.
While LAFPP is overfunded by $2.5 billion, this surplus relies on the overly optimistic investment rate assumption of 7%. If LAFPP were to follow the advice of professional investors such as Warren Buffett and use a rate of 6%, the surplus of $2.5 billion would turn into an unfunded pension deficit of $1.3 billion (96% funded), a swing of almost $4 billion.
The recent success of LAFPP was based on an abnormal rate of return. Lower rates of return could add billions to the unfunded liability as was the case in 2009 when the funding ratio dipped to 65% from 103% in 2007. The City Council and the Mayor should follow up on the recommendation of the LA 2020 Commission and establish a pension review commission to review and analyze the City’s two pension plans and to develop recommendations to reform the pension plans and eliminate the any unfunded pension liability.
Yes, it is great news that LA Fire and Police Pension Plans are fully funded. At least for now.
(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: [email protected].)