Comments(PART OF AN ON-GOING SERIES) On July 6, 2017, I sent Mayor Eric Garcetti a memo that stated, in part, “While it is difficult to predict, I would not be surprised to see a 10-12% increase in the City’s contribution rate (to LACERS) between now and 2021.
A 10-12% increase based on the current payroll… would amount to approximately a $200-$240 million annual increase in the near term.”
LACERS receives funds in three way: contributions (payments) from the City (thanks to the taxpayers), contributions from City employees, and investment returns.
The City’s annual contribution to LACERS is calculated by multiplying the payroll the City adopts during its budget process for employees covered by LACERS times the necessary percentage of pay (as calculated by LACERS actuary).
In the early 2000s, the City’s contribution to LACERS was well under $100 million per year. This year, the City’s contribution is $676.7 million! Yes, $676.7 million – up well over 600%!
Let’s take a quick look at the factors impacting that huge increase in the City’s contributions to LACERS:
As noted above, the City’s annual contribution to LACERS is calculated by multiplying the payroll times the necessary percentage of pay. The City’s payroll for employees covered by LACERS has almost doubled since the early 2000s. All other things being equal, that alone would have caused almost a doubling of the City’s contribution to LACERS.
The other component, the percentage of pay as calculated by LACERS actuary, has increased dramatically – mainly due to LACERS investment return experience and assumption changes adopted by the LACERS Board (more on this later in the series).
- LACERS investment return experience has been mixed since 2000, with some excellent years such as +18.6% (2004); +19.5% (2007); and +22.6% (2011), but has had some down years as well including -4.8% (2002); -5.8% (2008); and -19.5% (2009). Because LACERS assumes it will make 7.25% per year, on average, any year it earns less than that puts some pressure on the City’s contribution.
LACERS actual investment returns over the next five to seven years – pursuant to its own expert consultant – are expected to be below LACERS assumed rate of 7.25%. If this turns out to be true, it will require further increases to the City’s contributions to LACERS.
- Assumption changes include such things as lowering the assumed rate of investment return; recognizing fewer employees are leaving the workforce than anticipated; and retirees are living longer than expected. It is important to ensure that the assumptions are reasonable to help assure the proper funding of LACERS and that today’s taxpayers are not pushing the costs of today’s services on future taxpayers (this is referred to as intergenerational equity).
The LACERS Board reviews these assumptions approximately every three years and the resulting outcome on the City’s contribution to LACERS is seldom good news for the City.
While the City experienced record revenues in recent years, it did little to help improve LACERS funding status and continued to have a structural budget deficit (outflows exceeding inflows) during that time. Now that the economy has soured and City tax revenues are drying up, in part due to Covid-19, it is going to be even more difficult for the City to pay its annual contribution to LACERS.
So, about that cautionary note in my memo to Mayor Garcetti, in 2017, LACERS received $554 million from the City. This year, LACERS received $676.7 million – an increase of only $122.7 million. Of course, the near-term increase in the City’s contribution was, in part, minimized due to the Mayor’s appointees to the LACERS Board voting against the recommendations of its own expert actuary and its staff (more on this later in the series).
(Tom served at LACERS for approximately sixteen years, the last seven of those years as the General Manager of the pension system. He retired in 2018. Tom can be reached at [email protected].)
Previous series articles:
< The Truth About LACERS – Necessary Conversations>
< The Truth About LACERS – The LACERS Board – Part 1of 2>
-CW
