The Truth About LACERS – Where Do We Go from Here?

– Los Angeles 2020 Commission report A Time for Action, April 2014.

The work has been done and the benefits earned. Let’s make sure taxpayers know what their services cost and that government has enough money to pay for those costs when they come due. – former First Deputy Mayor Austin Beutner, October 2017.

I believe that very honest and frank conversations are needed to allow LACERS to continue to provide meaningful retirement benefits to City employees over the long-term. The longer it takes the City to engage in these conversations, the more it risks its ability to provide adequate services to its residents or meaningful retirement benefits to its employees, as those benefits may well create more of a financial burden for the City than it cares to, or possibly, can afford. – from the first article in this series: The Truth About LACERS – Necessary Conversations, March 2020.

Through the last several articles I detailed some of the challenges facing the Los Angeles City Employees’ Retirement System or LACERS and its plan sponsor, the City of Los Angeles. The purpose of this article is to recommend specific steps that will help ensure the City can continue to provide meaningful retirement benefits to its employees and services to its residents over the long-term. ere are those recommendations:

Mayor and City Council

Start paying attention to this issue!

Explicitly and openly take pension costs into consideration when doing the few things regarding pensions that you actually control:

Determining how many employees to hire; and
The pay and benefits – including retirement benefits – to provide them.

Understand that you don’t control the things – like the macroeconomy, the stock market, interest rates, and demographic changes – that have had the largest impacts on LACERS costs and funding.

Because there is so much regarding the pension funds you don’t control, ensure that stochastic modeling of LACERS is performed at least every two years (while the funding is inadequate) to ensue you understand the likelihood of bad overall outcomes (think death spiral) for LACERS and, therefore, the City.

Discuss how to return LACERS to a more sustainable funded status. During and shortly after the Great Recession, you were quick to ask LACERS for relief and impose costs on LACERS for the Early Retirement Incentive Program, yet since that time, you have done very little to ensure the ongoing viability of LACERS. In fact, in my opinion, politicians have appeared to interfere with LACERS receiving sufficient funding.

If you are unable to ensure the ongoing viability of LACERS under its current benefit structure, consider a lower tier of benefits (Tier 4) for new employees. At this point, you may still be able to put together an adequate defined benefit plan or a hybrid defined benefit/defined contribution plan. If you wait much longer, LACERS funded status and the City’s finances may dictate that the only solution will be a defined contribution plan, leaving the City unable to compete for talented employees – so act now!

Leave the following decisions solely to the fiduciaries on the LACERS Board:

Determining the investment rate of return assumption;
Deciding the best investments for LACERS; and
Determining whether any particular divestment should take place.

These are decision that should be based on the best available investment information, not politics.

City Council

Do a better job of vetting proposed pension Board Members. Make sure they bring some experience, skills and/or knowledge to the table that will help LACERS and help the City deal with its pension issues. Don’t just rubberstamp the Mayor’s appointees or you will own the problem of Board Members having inadequate experience, skills and/or knowledge just as much as the Mayor does.

Mayor

Appoint well-qualified pension board members every time. The futures of the City employees and City finances depend on it.

Announce you are no longer keeping pre-signed letters of “resignation” on file for pension board members. The Board Members cannot properly perform their legal duties with axes over their heads.

Only remove pension Board Members for cause and publicly state the reasons for their dismissal.

City Controller

Use some of the funds from the mandated 5-year management audits of the pension systems for stochastic modeling of the potential future outcomes of the pension systems and publicly report your findings.

Continue to use your position to bring attention to the pension issues the City is facing.

City Unions

Anticipate! With the economy turning bad and the City, County, and State finances tanking at the same time, the City, County, and State retirement systems will start to require even higher contributions. If the recession is long and deep, it may be difficult for LACERS to ever recover under its current benefit structure. I’m not an attorney, but I believe if there is enough financial distress on jurisdictions throughout the State, the State Supreme Court may bow to public policy and allow retirement benefit changes not just to new employees, but to existing employees too – thus ending the “California Rule” which has not allowed such cutbacks.

Support common sense changes to LACERS economic assumptions as recommended by LACERS actuary to protect future retirees. Do not try to stop the changes or delay them through public comments to the LACERS Board or any other means.

Support any necessary changes to the pension benefits of future employees so the City is not ultimately in a situation where draconian pension benefit changes – like defined contribution only – will have to happen.

LACERS Board

Do your job, keeping your legal fiduciary duty to your members in mind at all times. It doesn’t matter how you got on the Board, once there your duty is not to politicians or others – it is only to your members.

Repeat fiduciary training annually so that all of you are reminded of your duty to the LACERS members.

Listen more to your staff and expert consultants. You certainly can use your own minds, but only while keeping your fiduciary duty in mind. Go with the facts, not what you wish were the facts.

Don’t just rely on deterministic modeling when reviewing actuarial information. Deterministic modeling always has a happy ending, but not necessarily a real-world ending. Have stochastically modeled, data-driven conversations regarding the sustainability of LACERS at least every two years while the funding remains poor.

LACERS Members

When discussing important issues, the LACERS Board may hear from the City Administrative Officer, some politicians, and/or the unions, but the Board seldom hears from its members. You need to make sure your best interests are represented. Don’t just trust that the right things are going to happen – it doesn’t always work out that way.

Stay informed and weigh in on the issues being discussed at LACERS – this is about your future! If you feel you don’t have enough expertise or information to weigh in via public comments, check the following resources: the Retired Los Angeles City Employees, Inc. (RLACEI) and Jack Humphreville’s articles in CityWatch.

or contact me.

City of Los Angeles Residents

Pay attention! If the candidates for City office are not talking about the City’s pension issues and their impacts on the City’s budget and services, ask them. If they don’t address these issues, don’t vote for them!

Currently, the City’s pension issues take up such a large and growing percentage of the City’s budget that the City’s budget issues will not be resolved without some movement on the pension front.

In 2001, LACERS was 100.4% funded. Before the Great Recession, LACERS was 90.1% funded. Now, after an eleven-year bull run in the markets and entering our next recession, LACERS is just 73.1% funded. LACERS funding situation and the City’s financial situation are linked, and both could grow worse very quickly.

There have been warnings that the City needs to do more to fund its pensions for at least six years. It was six years ago that the Los Angeles 2020 Commission completed its work. Unfortunately, the 2020 Commission’s final report A Time for Action never received a council or committee hearing. Other warnings also have gone unheeded.

The time for the City to take action was six years ago when the Los Angeles 2020 Commission report was released. Having not heeded the pension recommendations in that report, the City’s elected officials have let precious time slip away. Hopefully, for the sake of the City’s residents and the City’s employees, the elected officials won’t waste any more time. Get the Necessary Conversations started now!

It is crucial that these conversations start right away. Delaying will only find both the not well-funded LACERS and the structural deficit prone City in worse financial condition and with fewer choices, especially when the inevitable recession hits. – from the first article in this series: The Truth About LACERS – Necessary Conversations, March 19, 2020

Previous series articles:

The Truth About LACERS – Political Actuarial Games

The Truth About LACERS – The Net Liabilities

The Truth About LACERS - The LACERS Board - Part 2

The Truth About LACERS – Necessary Conversations

The Truth About LACERS – The LACERS’ Board, What Happened?

This Recession Was Inevitable - LA’s Response Doesn’t Have to Be

(Tom Moutes 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].) Prepped for CityWatch by Linda Abrams.

-cw

Tags: CalPERS, truth