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Gone Fishin’! Reflecting on LA’s Pension Crisis

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LEANING RIGHT - Bernie Madoff ran a $50  Billion Ponzi (Pyramid) Scheme. If Madoff hadn’t faced $7 billion in redemptions, this Ponzi scheme might not have been discovered.

What’s astonishing is that he got away with it for so long with nobody discovering it. What his four family members in Ascot knew is a puzzle that everyone wants answered, but one thing is certain: It’s virtually impossible to have returns like Madoff reported, and it should have been a major warning signal. 

This pales in comparison with the schemes that most cities in the US are running. A report by the Pew Charitable Trusts found that 61 U.S. cities had a collective gap of more than $217 billion in looming pension and health obligations that they will owe to retiring workers in coming years. The shortfall was $99 billion for pensions and $118 billion for healthcare and related benefits. 

The study examined the most populous city in each state as well as municipalities with more than 500,000 residents. The data are for 2009, the most recent year for which statistics were available.

These differ from the Madoff scheme in that what is astonishing is that everybody knows that they exist but we just keep tolerating them. It is “business as usual.” 

A relative bright spot was Los Angeles, whose pension is 89% funded. Collectively, the cities had enough money for about 74% of the pension money they need. 

The report found that 37 cities were less than 80% funded. The worst – Charlotte, N.C. – was only 24% funded. 

Los Angeles has set aside only 55% of the money it will need to pay retiree healthcare costs in coming years, but that was the best among the cities surveyed. More than half of the cities had not saved a dime for retiree health costs. 

San Francisco’s pension is 97% funded, but it has saved less than 1% of what it will owe in healthcare costs, the survey found. San Diego’s pension is 66% funded, but it has put away only 3% for healthcare. 

This is contributing to the mounting crisis that Los Angeles is facing because former Mayor Antonio Villaraigosa and other officials did not begin to address the systemic, structural issues putting the city on the fast track to economic upheaval. The situation is similar to that in other California cities such as Stockton and Vallejo.   

Much ado was made about the city’s projected $238 million budget shortfall  for fiscal year 2012-2013 and the mayor’s proposal to cut jobs and tinker around the edges of pension reform. But the picture is much grimmer than a single year’s budget shortfall. 

The tsunami of unfunded pension liabilities and health benefits is about to hit the shoreline for Los Angeles. And if Stanford University’s estimates are correct, Los Angeles is facing roughly $27 billion in unfunded pension liabilities. For a city whose annual budget is in the $7 billion range this year, that figure is daunting. 

Budget gaps are no rarity for the City of Angels in recent years. It seems like an annual tradition. In fiscal year 2011-2012, the city projected a budget shortfall of over $400 million. For 2010-11’s fiscal year, the tune was the same, as was 2009-10, and so on. 

LA’s chief administrative officer, Miguel Santana, noted that the budget shortfall is likely to be much greater by 2014-15. “Every year it gets worse,” he said. 

The chain of events is always the same. City officials announced a budget shortfall and the mayor tried to bandage it with gimmicks that failed to address the underlying causes. 

Citing Villaraigosa’s approach to last year’s budget shortfall, former City Controller Wendy Greuel said that ”kicking the can down the road is not a solution when we can anticipate a growing structural deficit in future years.” She was referring specifically to a plan Villaraigosa outlined to borrow money to solve part of the deficit. But her summation applies to the inept budgeting approach of the city for years. 

Former Los Angeles Mayor Richard Riordan predicted increased hardships and eventual bankruptcy if drastic action wasn’t taken by city officials. In an editorial he penned in the Wall Street Journal  in 2010, he wrote, “Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy.” 

What has rapidly perpetuated financial woes for the city is that payouts for retirement benefits have increased in recent years, thus crowding out services the city provides. A Stanford Institute for Economic Policy Research found that, for the city of Los Angeles, “Pension costs increased from 8.5 percent of total city expenditures in 1999 to 13.7 percent in 2011.” For fiscal year 2011-12, estimated pension costs look to have climbed to “15.4 percent of city expenditures.” 

Stanford’s study also estimated that each of the city’s three independent pension funds is unfunded by billions of dollars: the city of Los Angeles Fire and Police Pension System is $9.25 billion unfunded; the Los Angeles City Employees’ Retirement System is $11.32 billion unfunded; and the city of Los Angeles Water and Power Employees’ Retirement System is $6.59 billion unfunded. 

But here is the kicker: The growth in pension spending by the city “outpaced that of spending on public protection, which grew at 5.2 percent, on health and sanitation (3.6 percent), and on recreation and cultural services (5.8 percent), and it occurred while spending on public assistance programs fell by an average of 3.0 percent per year.” 

If the trend continues, the city will be little more than a professional retirement payment and processing service. 

Economic downturn aside, interminable spending fueled by powerful unions has pushed Los Angeles to the brink of bankruptcy. As Riordan argues, unions basically control the Los Angeles City Council. 

For example, “A compensation package negotiated in 2007 irresponsibly guaranteed many city workers more than 25 percent in pay hikes over five years,” according to a Los Angeles Times editorial.   

And as the city continues its downward spiral, “most employees represented by the Coalition of Los Angeles City Unions are scheduled for 11 percent increases in compensation over the coming two years,” the Times reported. 

One of the ideas for offsetting some of this year’s budget shortfall was to ask city workers to forego raises. But the union bosses balked at the idea claiming that city employees had sacrificed enough in recent years. 

As for pension benefits, some city employees are able to retire with up to 100 percent of their salaries, a benefit virtually unheard of in the private sector. 

Many of these city workers have started their careers in their 20s and retire in their 40s and 50s with a nice pension after zero contribution on their part. 

It will be interesting to follow the approach that the new mayor Eric Garcetti takes on this issue. Next week we will examine recommended remedies. 

In the meantime Madoff is marveling at the moxie of the Los Angeles City Council and the unions, and the rape of the tax-payer. He has the rest of his life to figure out what he should have done to keep from getting caught. 

While he is doing this the retired Los Angeles pensioners, along with the former mayor and city controller, are enjoying their new fishing reels and looking forward to living longer than anyone would have imagined possible just a few years ago. “Getting caught” does not enter their mind.

 

(Kay Martin is an author and a CityWatch contributor. His new book, Along for the Ride, is now available.)

-cw

 

 

 

 

CityWatch

Vol 11 Issue 67

Pub: Aug 20, 2013