As part of Mayor Garcetti’s agenda for fiscal responsibility, the Board of Administration of the Los Angeles Employees Retirement System (“LACERS”) took the long term view when it approved lowering the investment rate assumption to 7.5% from 7.75%. This action will require our cash strapped City, facing a budget deficit of $165 million next year, to pony up an additional $50 million to this seriously underfunded pension plan.
LACERS is one of the City’s two pension plans, serving 24,000 civilian employees and providing benefits to 18,000 retirees and their beneficiaries. Unfortunately, this pension plan is underfunded by $5.4 billion (less than 70% funded) as its assets of $11.9 billion do not cover its obligations of $17.3 billion to current and future retirees. This deficit would increase to at least $8.5 billion (less than 60% funded) if a more realistic investment rate assumption was used.
Fortunately for the City, tax revenues for the year ended June 30, 2014 were higher than anticipated while spending was lower, thereby allowing the City to increase the Reserve Fund by over $100 million before any transfers. In addition, revenues for the current fiscal year are expected to grow, allowing the City to absorb this added pension expense without increasing the projected deficit.
Alternatively, the City can opt to phase in this added expense over a three year period. However, this alternative is not recommended as it will require modestly higher payments over the phase in timeframe.
Overall, for the fiscal year beginning July 1, 2015, the City’s contributions to its two pension plans are expected to be almost $1.2 billion, representing a staggering 23% of the City’s General Fund. Over a ten year period, the City’s pension contributions have increased by $500 million, forcing the City to reduce its services, including the proper repair and maintenance of our streets and sidewalks.
At the same time that the Garcetti administration was prioritizing increased contributions to our seriously underfunded pension plans, the leaders of the City’s civilian unions were clamoring for additional wage increases. However, the City has not planned any pay raises as these very same unions enjoyed a 25% increase in salaries since 2007. This is in addition annual step up raises of 5.5% for five years, cost of living adjustments, Cadillac healthcare plans at little or no cost, and a very generous defined benefit pension plan that is the envy of the private sector.
The union leaders even enlisted the help of its pals on the City Council, including Paul Koretz, a member of the Executive Employee Relations Committee that oversees the City’s labor relations and bargaining strategy. However, according the City Charter, the City Council is unable to assert jurisdiction over the actions of LACERS Board.
The City’s pension plans have benefitted from a strong market over the last three years, including last year’s return in excess of 16%, more than double the investment rate assumption of 7.75%. This will reduce the unfunded pension liability of both pension funds by an estimated $1.5 to $2 billion.
To its great credit, the City has been funding its Other Post-Retirement Employment Benefits (read retiree healthcare) for at least 25 years. Los Angeles County, on the other hand, has a $25 billion unfunded liability (0% funded) and funds the ever increasing cost of this generous benefit on a pay-as-you-go basis.
Mayor Garcetti and his administration need to develop a twenty year plan to eliminate the unfunded pension liability of LACERS and the Fire and Police Pension Plans. This debt like liability is north of $15 billion based on the investment rate assumption of 6%, a rate that is higher than the one used in corporate pension plans.
A step in the right direction would be for Garcetti and the Herb Wesson led City Council to follow the recommendation of Mickey Kantor’s LA 2020 Commission to establish a “Commission for Retirement Security” that would be “tasked with making concrete recommendations on how to achieve equilibrium on retirement costs by 2020” within 120 days of its formation.
Unfortunately, this recommendation that would increase the transparency of the City’s underfunded pensions and labor costs has not seen the light of day because the City Council is controlled by the campaign financing union leaders.
If the City Council is unwilling to endorse transparency, it is up to Mayor Garcetti to establish his own commission to provide us with the necessary information so that we will be able to make informed decisions, especially when we go to the polls to elect our Council Members and vote on any ballot measures to increase our taxes.
Cross-posted at City Watch LA.