The Pension Follies of the Mayor Who Broke LA
- 28 Oct 2011
- Written by Jack Humphreville
LA WATCHDOG - Mayor Antonio Villaraigosa, by failing to adequately address the unrealistic 8% Investment Rate Assumption for the 40% underfunded Los Angeles City Employees Retirement System, is making another boneheaded decision that reflects the unwillingness of Villaraigosa and the Garcetti-led City Council to make hardnosed, long term rational operational and financial budget balancing decisions for fear of alienating the City’s self-serving, campaign funding union bosses.
And once again, this short sighted, politically motivated decision regarding LACERS will penalize the wallets of the next generation of Angelenos, even if the economy improves.
Shortsightedness at City Hall is such an everyday occurrence that our Elected Elite now commonly refer to it as “kicking the can down the road.”
In this particular case, involving LACERS and its $5.9 billion unfunded pension liability, the actuary once again recommended that the Investment Rate Assumption be lowered from 8% to 7.75%, the same rate used by the Fire and Police Pension Plans that is “only” 32% underfunded.
But the decision to lower the Investment Rate Assumption is nothing new. On numerous occasions since July 1, 2005, the day Villaraigosa became the Mayor of Los Angeles, many knowledgeable professionals have recommended lowering the rate to 7.5%, a rate that is considered too high by the likes of Warren Buffett of Berkshire Hathaway fame and fortune.
This proposed change would result in an additional cost to the City of about $25 million, or less than 0.4% of the City’s $6.9 billion budget, and result in the loss of 400 jobs, implying an average compensation package of $62,500.
As it is, the projected budget deficit for the fiscal year beginning July 1, 2011 is in excess of $250 million according to the comments of Miguel Santana, the City Administrative Officer, on Air Talk, the KPCC morning show hosted by Larry Mantle, an increase of 28% from the June estimated budget shortfall of $196 million.
According to Santana, this bump of $25 million in pension costs will only “increase the crisis the City is facing.”
When it appeared that the seven person LACERS Board of Administration was going to approve the 7.75% rate, the Mayor summarily canned one of his four nominees, Board President Roberta Conroy, a retired financial executive, hoping to influence the vote of the remaining six members.
The mayor’s brute intimidation tactics were successful. While the six person Board approved the 7.75% Investment Rate Assumption, at the same time it wimped out and agreed to a five year phase-in period. Thus, the annual hit to the City’s budget will be about $5 million, not the $25 million that was anticipated.
But is this any way to run a pension plan with $9 billion in assets, especially when it is underfunded by almost $6 billion?
It has been over six years since Villaraigosa was sworn in as Mayor of Los Angeles and we still do not have a comprehensive plan on how to adequately fund our two major pension plans.
And it has been over two years (July 1, 2009) since Wendy Greuel, the self proclaimed “independent fiscal watchdog for the people of Los Angeles,” pledged that her “first order of business as City Controller will be to undertake a comprehensive analysis of the financial health of the City, complete with revenue projections and cost estimates, including our looming pension obligations.”
To the contrary, in fiscal 2010, the Mayor, the Controller, and the City Council raided LACERS by dumping $355 million of liabilities on the pension plan in connection with the Early Retirement Incentive Program whereby 2,400 senior City employees received about $150,000 each in increased pension benefits.
While it is unlikely that we will be able to teach this old dog of a mayor any new tricks on fiscal responsibility, we must demand that each candidate for Mayor and Controller present the public with a detailed four year operational and financial plan on how they intend to balance the budget, focus on core services, fund the pension plans, and repair and maintain our infrastructure. And each candidate must also be prepared to defend his/her plan and the underlying assumptions in a public forum.
And in reviewing the City’s two pension plans, the candidates must address the phase-in of a more realistic Investment Rate Assumption and the need to adopt realistic policies designed to eliminate the $11.7 billion unfunded liability of LACERS and the Fire and Police Pension Plans overtime, no matter how painful these policies and programs might be.
We need real solutions to save the City and its two pension plans from insolvency, not more hot air and intimidation that have been the trademark and legacy of The Mayor Who Broke LA.
Vol 9 Issue 86
Pub: Oct 28, 2011