The Truth About LACERS – The $2.7 Billion Question -- Part 2

• Since June 30, 2001, the investments of the Los Angeles City Employees’ Retirement System (LACERS) have made $2.7 billion less than anticipated to fund retirement benefits (not including retiree health benefits).
• The LACERS Board recognized the declining investment return expectation by lowering the assumed rate of investment return from 8.00% to 7.25% since 2011.
• Despite expert advice from the board’s handpicked actuarial expert, Segal, the LACERS board twice has declined to lower the expected rate of investment return to 7.00%.
• Recently, the LACERS Board received a report from another actuary, Cheiron. That report agreed with Segal’s recommendation to reduce the investment return assumption to 7.00%.
• CalPERS, CalSTRS, and the Los Angeles Fire and Police Pensions (among others) have adopted 7.00% investment return assumptions.

In the near future, the LACERS Board will have another – although belated – chance to get it right.  Here are past arguments against lowering the assumed rate of investment return:

• LACERS has never earned less than an 8.00% return over long periods of time.
• No one really knows what investment returns will be like in the coming years.
• The timing for the City budget is bad.

Let’s examine these arguments:

• LACERS has never earned less than an 8.00% return over long periods of time.

This is true as far back as LACERS investment return information goes (1983). However, the investment return assumption is a forward-looking assumption, not a backward-looking assumption. Therefore, very little time should be spent looking at historic rates of return and the focus of the conversation should be on forward-looking capital market assumptions – which don’t look good.  

• No one really knows what investment returns will be like in the coming years.

This also is true.  If someone could consistently predict investment returns, they likely would be sitting on a beach with a drink in their hand!  However, LACERS’ investment consultant provides the Board with short-term capital market assumptions and its actuary provides some aggregated longer-term assumptions.  Certainly, the shorter-term assumptions have been below LACERS current 7.25% assumed rate of return.  This alone should be of concern given LACERS 73.1% funded status.  So, while no one knows for sure what the investment markets will bring, the LACERS Board does have experts providing it with some of the best available information on future investment return expectations. 

• The timing for the City budget is bad.

Apparently, the budget timing is always bad!  It was bad during the Great Recession.  Apparently, the timing also was bad during the eleven-year bull run following the Great Recession, during which the City received record revenues.  The timing must have been bad as the City and others continued to oppose lowering the assumed rate of investment return despite the record revenues.  Now, with the City facing declining revenues and LACERS continuing to face decreasing funding ratios, the City may well resist again, but it is running out of time to address this issue.

Here is why the LACERS Board should help solve the $2.7 billion question – or at least help ensure it doesn’t get much worse:

• Increasing pension liabilities threaten not only the retirements of current LACERS members, but also the retirement benefits for which future generations of City employees may be eligible.
• Continuing to kick the can down the road on this problem will ensure that, not just our children, but also our grandchildren will be paying to resolve the funding liability created during our lifetimes and based on City services we received. Also, the longer the increased payments to LACERS are deferred, the more expensive the bill our grandchildren will be paying.
• While fiscal year 2020-21 is looking bad from a budgetary standpoint, the contribution impacts from a decrease to LACERS investment return assumption would not go into effect until fiscal year 2021-22 – so the City has time to plan for the increased contributions.

The LACERS Board needs to get it right this time.  The Board has two strikes against it as it twice failed to act on this issue previously.  A third strike would be bad for City employees and City residents.  It would also game over for any perception that the LACERS Board was properly performing its legally-mandated fiduciary duty.

(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].)

-cw