LA Has a Pension Contribution Crisis, Continued ‘Managerial Ignorance’ Won’t Fix It

LA WATCHDOG

LA WATCHDOG-- “There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs.”  Warren Buffett (photo above), Berkshire Hathaway, 1975. 

 

This ignorance was on full display at Friday’s meeting of the Los Angeles City Council as Paul Koretz, the Chair of the Personnel Committee, and Paul Krekorian, the Chair of the Budget and Finance Committee, sounded off during the consideration of the reappointment of Jaime L. Lee to the Board of the Los Angeles City Employees’ Retirement System (“LACERS”). 

Koretz was worried that the lowering of the investment rate assumption to 7¼% from 7½% was an “overly conservative act” that may result in hundreds of layoffs when the City budget hits tough times.  He also stated that the Board had a fiduciary duty to not only the current and future beneficiaries as stated in the City’s charter, but also to the City’s current employees.   

In May, during the hearings on the City budget, Krekorian was concerned about the impact on the City budget of lowering the investment rate assumption because it would increase the City’s annual contribution by an estimated $100 million.  On Friday, Krekorian was arguing that in the past, the 30 year return on investments had always exceeded the investment rate assumption. He was also critical of the “blogosphere” that compared the City’s pensions to the private sector, stating it was “nonsense” since governments never fail to meet their obligations. 

But the views of these two financial wizards run counter to many pension funds and investment professionals. 

The largest pension plan in the country, CalPERS (California Public Employees Retirement System) expects to earn 6.2% over the next ten years and intends to lower its investment rate assumption to 6½% over time.  

If the City were to earn 6.2%, its unfunded pension liability would soar to an estimated $20 billion, double the $9.6 billion (77% funded) as of June 30, 2016. 

The CalPERS projected rate of return is also consistent with other experts, including Wilshire Associates and Warren Buffett and is higher than the rates anticipated by the nationally recognized bond rating agencies, including Moody’s which pegs the City’s pension liability north of $20 billion (60% funded).  

Over the past decade, pension contributions have eaten the City’s lunch.  

They have tripled to $1.1 billion and are expected to increase by $100 to $125 million over the next three years.  They now consume 20% of the General Fund, up from 10% when Villaraigosa became Mayor.  The unfunded pension liability has increased from $663 million (98% funded) in 2007 to $9.6 billion (77% funded) in 2016.  And increased pension contribution consumed over a third of the $2.1 billion growth in revenues, crowding out basic services such as street repair and permanent supporting housing for the homeless. No wonder the City had to raise taxes to fund its homeless initiative.    

We have a pension crisis, but Koretz, Krekorian, and the rest of our elected officials have their heads in the sand, unwilling to acknowledge the problem and develop realistic solutions to the problem for fear of antagonizing the campaign funding leaders of the City’s public unions who want fat raises for their members. 

They have adopted the policy of why pay for something today if we can get someone else to pay for it tomorrow.  In other words, they have developed a policy of intergenerational theft by sticking it to the next generation of Angelenos. 

Krekorian tells us that the investment returns have exceeded the assumed rates of return over the past 30 years.  But how did we end up with a $9.6 billion unfunded pension liability?  And will the unfunded pension liability be eliminated if the pension funds earn the assumed rate of return?  (Spoiler alert: NO) 

Now would be a good time to follow up on the recommendation of the LA 2020 Commission to establish a Commission on Retirement Security. It would develop detailed information that we all may rely upon, including historical data (how we got into this mess) and projections based on selected investment returns and the impact on the unfunded pension liability and City’s annual required contribution. 

The Commission would also be charged with developing recommendations on how to address the City’s pension crisis, including establishing defined contribution plans for new and existing City employees as recommended by the Little Hoover Commission.  

To quote Warren Buffett again:  "Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them." 

By the way, Jaime Lee’s reappointment to the LACERS board was confirmed by the City Council.

(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee and is the Budget and DWP representative for the Greater Wilshire Neighborhood Council.  He is a Neighborhood Council Budget Advocate.  He can be reached at:  lajack@gmail.com.)

-cow

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