- Written by Jack Humphreville
13 Dec 2011
LA WATCHDOG - The Los Angeles City Employees Retirement System has an early Christmas present for the City Hall.
On Tuesday, LACERS Board of Administration more than likely will recommend that the City’s 2012-13 contribution to LACERS be 24.14% of payroll, down from the current rate of 25.23%. This lower contribution rate will result in a “savings” of around $15 million compared to previous year.
This “savings” has a significant impact on the next year’s General Fund Budget Outlook. In the June numbers, the City was projecting an increase of $48 million in its LACERS contribution. But with the $15 million decrease, the combined swing is $63 million, a significant “savings.”
LACERS’ management also had a spectacular year as its portfolio had a rate of return of over 21%.
But there are lots of moving pieces to play mischief with in this complex puzzle.
The major factor underlying this “savings” is the 42% lower contribution rate for retiree healthcare, decreasing from 7.2% to 4.2% of payroll. Driving a significant portion of this 3% “savings” is the increase in contributions by about two-thirds of LACERS’ active members.
This decrease was offset in part by the 11% increase in pension expense, from 18% to 20% of payroll, primarily driven by the 23%, $45 million increase related to the amortization of the unfunded pension liability.
There were also other factors that lowered the contribution rate, including new demographic assumptions, changes in health benefit assumptions, and the five year phase-in of the impact of lowering Investment Return Assumption from 8% to 7.75%. The aggregate impact has not been clearly disclosed, but may be in the range of 4% to 5% or $70-$90 million.
Of course, the City continues to rely on other questionable accounting policies to lower its contribution: the amortization of the E-RIP Off over 15 years as opposed to the recommended five years, “smoothing” portfolio losses over seven years, and the 15 year amortization of the unfunded pension liability.
As a result of the 21% return on its portfolio, LACERS unfunded pension liability based on the market value of its assets was lowered by 20%, from $5.9 billion (60.5% funded) to $4.7 billion (69.4% funded).
However, if LACERS used a more realistic and conservative Investment Rate Assumption of 6.5% (as opposed to the unsustainable 7.75% currently used), the unfunded pension liability would increase to an estimated $6.6 billion (62% funded).
Underlying the growth in the unfunded pension liability is the 40% growth in total future benefits over the past six years, offset in part by a 28% increase in its assets. Total annual benefits paid to retirees and other beneficiaries have grown 53% during the Villaraigosa era. This growth in benefits has outstripped the very handsome 24% increase in average compensation which now exceeds $72,000 a year.
While LACERS is providing some early Christmas cheer, it is not cause for celebration. The City’s current budget is already $72 million in the hole and next year’s budget gap is projected to be in the range of $200 million to $250 million. And over the next four years, the total budget gap is estimated to be in the range of $900 million, primarily as a result of $750 million increase in personnel costs (compensation, pensions, medical benefits, and workers compensation).
As it is, the City’s budget is very complicated, with many moving parts that are constantly under pressure by the Occupiers of City Hall: the Elected Elite and their special interest cronies that are looking to feather their own nests at the expense of hard working Angelenos.
So what you hear from the Mayor and City Hall may not be what you get, whether it is pensions, streets, housing, or the budget.
That is why we need a Financial Control Board that will require City Hall to develop and adhere to a realistic Five Year Operational and Financial Plan, one that requires a truly balanced budget and adequate funding for our deteriorating infrastructure and our two seriously underfunded pension plans.
Tags: Jack Humphreville, pensions, LACERS, City Budget, budget deficit, General Fund, Mayor Villaraigosa
Vol 9 Issue 99
Pub: Dec 13, 2011