Dirty Deeds Impact the Fire and Police Pension Plans
- 09 Mar 2012
- Written by Jack Humphreville
LA WATCHDOG - This summer, the active members of the Fire and Police Pension Plans (the “Pension Plans”) were granted a three year 7% cost of living increase.
This very generous bump was predicated on an average savings of $66 million a year over the next three years based on freezing health subsidy increases for those members who retire after June 30, 2011.
However, the actual savings were sliced to $30 million a year during the contract negotiations with the campaign funding Police Protective League and United Firefighters. And this 55% reduction in savings was blessed by the super secretive Executive Employee Relations Committee, controlled, despite blatant conflicts of interest, by the profligate trio of Mayor Villaraigosa, former City Council President Eric Garcetti, and Councilman Dennis Zine, the then Chair of the Personnel Committee.
And in return for this gift of over $100 million over the next three years, it is no wonder why the Police Protective League endorsed former motorcycle cop Dennis Zine in his bid to be our next Controller.
To add insult to injury, the Mayor and our Elected Elite did not even identify any sources of revenue or spending cuts to fund this $36 million a year shortfall despite the fact that the City was facing a cumulative budget deficit of more than $900 million over the next four years. And this budget hole does not even include adequate funding for our deteriorating streets or short changed pension plans.
But this is not the only “dirty deed” (a term coined by Steve Lopez of The Los Angeles Times in describing LA’s corrupt political culture) involving the Pension Plans that are underfunded by $4.8 billion, a staggering amount that is 3.6 times the annual payroll.
Last month, the Commissioners of the Board of the Fire and Police Pensions, a majority of which are appointed by The Mayor Who Broke LA, approved a lower contribution that “saved” the City $27 million over the previously projected contribution. But this “savings” was based not only on an excellent 22% return on its portfolio last year and increased contributions of 2% of payroll by many active members, but by gaming the system with a reduction of the medical trend inflation rate and with a three year phase in of new actuarial assumptions.
But these two “dirty deeds” are just a continuation of the phony baloney actuarial accounting gimmicks that the pliant Commissioners and City Hall have used to understate the unfunded liability, which, in turn, lowers the City’s Annual Required Contribution, “saving” the City money at the expense of the Pension Plans.
When the assets of the Pension Plans are valued at market, as is the case with the Washington’s Pension Benefit Guaranty Corporation and Corporate America, the unfunded pension liability is $4.8 billion, implying a funded ratio of 75%. However, when using the “smoothing” methodology that allows the Pension Plans to amortize their losses over seven years, the liability decreases to less than $4 billion, implying a funded ratio of almost 80%.
By lowering the unfunded liability by over $800 million, the City’s Annual Required Contribution is lowered by $50 million to $80 million.
The most irresponsible scam is the use of an unsustainable Investment Rate Assumption of 7.75%. This lowers the unfunded liability by almost $1 billion compared to a more realistic Investment Rate Assumption of 7.25%, a rate that is being considered by CalPERS, the state’s major pension plan. This gamesmanship results in a “savings” of $60 million to $100 million a year.
[Note: Wilshire Associates, a well known and respected pension consultant, recommends a rate of 6.5% while the country bumpkin from Omaha, Warren Buffet, suggests 6%.]
But while the City is “saving” between $100 million and $200 million a year, and the Pension Plans are 25% underfunded, the members of the Pension Plans are doing just fine according to the Actuarial Valuation of June 30, 2011.
The average compensation for each active member of the Pension Plans now exceeds $100,000, a 22% increase since July 1, 2005, the day Villaraigosa was sworn into office.
The average benefit for a retired member is approaching $58,000 a year, an increase of 26%.
And the average total future benefit for the 25,883 active and retired members is now approaching “trust fund” levels of $750,000, an increase of 33%.
Despite all these pension “savings,” the City is still projecting a budget deficit of $220 million for the fiscal year beginning July 1, 2012, in large part because of the increase in employee compensation, medical benefits, and pension contributions.
Once again, the dirty deeds associated with the manipulation of Pension Plans shows why all collective bargaining negotiations with the campaign funding union leadership must be conducted in an open and transparent manner, subject to the review of all Angelenos and the media, and not behind closed doors where the self serving members of the EERC will pick our pockets to please the union bosses.
And it is also obvious to even the most casual observer that the City needs a “Live Within Its Means” charter amendment to enforce a level of financial discipline that is necessary to preserve the very solvency of the City.
Vol 10 Issue 20
Pub: Mar 9, 2012