Will We Have a Pension Tax?
- 25 Feb 2014
- Written by Jack Humphreville
LA WATCHDOG-“A Time for Truth,” the January report issued by Mickey Kantor’s LA 2020 Commission, indicated the City was shortchanging its two underfunded pension plans by at least $400 million a year because of its reliance on the overly optimistic investment rate assumption of 7.75%.
But this $400 million that financial wizards at City Hall have the nerve to call a “savings” may be significantly understated.
According to the City, its two pension plans are underfunded by $10 billion, meaning they are only 74% funded.
If a more realistic investment rate assumption of 6% is used, the unfunded liability soars to at least $17.5 billion, representing a funded ratio of only 60%. This raises questions as to the plans’ long term sustainability and their ability to honor their pension obligations to our City’s employees.
If the City were to amortize this debt-like liability of $17.5 billion over the next 15 years, the annual payment would be about $1.6 billion, $1 billion more than the current amount allocated for amortizing the $10 billion unfunded liability. This massive differential implies that the City is once again “cooking the books” by relying on an unreasonably long 30 year amortization for a considerable portion of this liability.
Lowering the investment rate assumption to a Warren Buffett recommended 6% will also increase the “normal cost” or annual payment by a guesstimated $100 million.
Overall, this implies an underfunding of over $1 billion a year, or 20% of the General Fund budget.
In reality, no one knows what the hell is going, especially the citizens of Los Angeles who are footing the bill for the City Council’s gross mismanagement of LA’s pension plans and finances.
As one of its recommendations, the LA 2020 Commission should endorse the Pension Stabilization Plan (See Plan below) contained in San Jose Mayor Chuck Reed’s proposed ballot measure, the Pension Reform Act of 2014. This would require all California “government agencies with pension plans whose funding levels fall below 80% to publish a report each year detailing the funding status of the plan and outlining specific actions that would allow the plan to achieve 100% funding” in 15 years. See below for more details.
The LA 2020 Commission should also recommend that the Pension Stabilization Plan use three investment rate assumptions: its current overly optimistic rate of 7.75%, the Warren Buffett recommended rate of 6%, and a variable rate, one which decreases from 7.75% to 6% over the 15 year period.
Any thorough review of the City’s pension mess must also take into consideration the recommendations of the Little Hoover Commission. It concluded that underfunded pension plans cannot solve their ever increasing need for cash contributions without addressing the FUTURE benefits of existing employees. Recommended actions include increasing the retirement age, higher employee contributions, lower cost of living adjustments, and the elimination of spiking.
Unfortunately, pension reform has not been a topic of discussion for the Budget and Finance Committee chaired by Paul Krekorian since it might upset the campaign funding leadership of the City’s unions.
Rather, it appears that City Hall is relying on the not so deep and already strained pockets of the DWP Ratepayers, businesses, homeowners, and the voters to fund this gap.
The DWP will be proposing a $1 billion increase in our water and power rates over the next four years. By 2018, this will result in a $160 million annual transfer of the Ratepayers’ hard earned money to City Hall through the payment of the opaque (and questionably legal) 8% Transfer Tax and the 10% City Utility Tax.
In November, the City is planning to hold our streets and sidewalks hostage to a $7 billion ransom/tax to fund the repair of our streets and sidewalks that have been shortchanged to fund the $1.5 billion increase in salaries, benefits, and pension contributions for our City employees.
And finally, several members of the City Council and their staff have seriously discussed – naturally behind closed doors and definitely not for attribution - a $400 million a year Pension Tax for the 2016 ballot that would increase our real estate taxes by yet another 10%.
Before the City even considers any tax increases, whether it is to ransom our streets and sidewalks or to fund its pension plans, the City Council and the Mayor must earn our trust and confidence.
This would involve making tough decisions, whether it is pension reform, benchmarking the City’s compensation arrangements and the efficiency of its far flung operations, implementing the recommendations of Mickey Kantor’s LA 2020 Commission, and placing on the ballot a Live Within Its Means charter amendment so that the voters of City of Los Angeles will have the opportunity to determine the City’s financial destiny.
Until then, forget about it.
PENSION REFORM ACT OF 2014
Pension Stabilization Plan for Underfunded Plans
(1) For any pension or retiree healthcare plan with assets equaling less than 80 percent of the plan’s liabilities, as calculated by the plan’s actuary using generally accepted accounting principles, the government employer shall prepare a stabilization report.
(2) The stabilization report shall specify actions designed to achieve 100 percent funding of the plan within 15 years while preserving basic government services. The stabilization report shall identify
(i) the benefits to be modified, if any,
(ii) the additional costs to be incurred by employees, if any,
(iii) the additional costs to be incurred by the government employer, if any,
(iv) the specific funding sources to be used to pay for such additional costs,
(v) the investment return rates needed to be achieved to obtain such funding level, as well as information regarding the historical rates of return earned by the applicable plan, and
(vi) the impact of any existing pension obligation bonds issued by the government employer, and any additional actions that may be needed to pay off such bonds
(3) The stabilization report shall be published for public review within 180 days of receiving an actuarial valuation from the retirement plan administrator on the funding status of the pension or retiree healthcare plan.
(4) The government employer shall hold a public hearing to receive public input and formally accept the stabilization report within 270 days of receiving an actuarial valuation from the retirement plan administrator on the funding status of the plan. Nothing in this subsection shall require the government employer to adopt or implement any actions specified in the stabilization report.
(5) Each year thereafter the government employer shall follow the process established in this Section until the pension or retiree healthcare plan’s actuary reports that the pension or retiree healthcare plan is at least 100 percent funded.
Vol 12 Issue 16
Pub: Feb 25, 2014