Exposing the Pension Elephant … and Other Shenanigans

LA WATCHDOG  -The Mayor and his buddies at City Hall just cannot keep their grubby mitts off the $10 billion in stocks and bonds that the 40% underfunded Los Angeles City Employee Retirement System (“LACERS”) has set aside to fund the retirement of its 43,500 active and retired members.

One of the most egregious stunts was the October 2009 Early Retirement Incentive Program (“E-RIP Off”) where the City offered 2,400 senior employees five years of service to retire early. This was an integral part of the City to balance its out of control budget and prevent significant layoffs and furloughs of junior employees.

But the E-RIP Off was phenomenally expensive, creating an instant $355 million liability for $5.9 billion underfunded LACERS. This will require over $600 million in additional contributions over the next 15 years. And once again, we have a backend loaded deal with the initial payment of $30 million increasing to $53 million in the last year.

Incidentally, the $355 million expense does not include at least $36 million that was needed to fund other related buyout expenses and nor does it include the millions that were needed to process this surge in retirements.

However, despite claims by the Mayor Villaraigosa and Council President Eric Garcetti that the E-RIP Off was cost neutral to LACERS, only an estimated 40% of this $355 million hit was offset by the additional employee contribution equal to 1% of payroll.

But we should feel fortunate as the secretive Executive Employee Relations Committee, led by members Villaraigosa, Garcetti, and Zine, initially proposed no employee contribution.  But that giveaway was upset by City Administrative Officer Miguel Santana when he correctly recommended a 2% contribution, turning himself into the union’s human piñata.

The City also decided to amortize the $355 million liability over 15 years instead of the five years recommended by LACERS then General Manager Sally Choi, resulting in a “savings” of an estimated $40 million a year to the General Fund, again at the expense of LACERS.

As a side note, in a brilliant piece of financial chicanery, the $200 million net liability created by the E-RIP Off appears to be offset for the most part by the unloading of $178 million of pension liabilities on the Department of Water and Power Employees Retirement Plan. This occurred in connection with the dumping of 1,600 City employees on DWP.  

City Hall is also promoting other schemes to lower its annual contributions to the seriously underfunded LACERS.  

On June 30, 2010, the LACERS board, a majority of which is appointed by the Mayor, increased the “smoothing” period from five to seven years, allowing the pension plan to defer the recognition of a larger portion of its investment losses.  By pumping up the value of the assets, the City once again is able to achieve additional “savings’ at the expense of LACERS financial viability.

But the “smoothing” games are the result the unwillingness of LACERS to value its assets based on actual market value. Instead, LACERS relies on outdated accounting principles that mask the fact that the actual values of the assets are $2 billion lower than the actuarial carrying values.  

If these accounting policies were used in Corporate America, the bosses would be wearing orange jump suits while working on the chain gang.  

Last month, LACERS approved the lowering of the Investment Rate Assumption, from 8% to 7.75%, based, however, on the controversial condition that the impact be amortized over a five year period.  This “saved” the City $24 million in the first year, again at the expense of LACERS.  

In a few weeks, LACERS’ actuarial report for the year ending June 30, 2011 will be released. More than likely, there will be a marked improvement because of the increase in the stock and bond markets and the impact of higher employee contributions covering post retirement medical benefits.

But those gains would be more than offset if LACERS relied on a more realistic Investment Rate Assumption in the range of 6% to 6.5% as recommended by Warren Buffett and Wilshire Associates. This would increase the unfunded liability by $2 to $3 billion.

Unfortunately, the Mayor, who has the right to appoint a majority of the Board of Administration, has politicized investment and management decisions, advancing his political agenda to the detriment of the fiduciary responsibilities of Board members and LACERS employees.

Sally Choi, the former GM who championed the five year amortization period against the wishes of the Coalition of City Unions, is no longer employed by the City.

And Roberta Conroy, a well respected financial executive, was forced out as President of the Board of Administration because she would have voted to lower the Investment Rate Assumption, thereby forcing the City to increase its payment to LACERS.

Our City’s pension plans are much too important to be left in the hands of our Elected Elite. They require a long term perspective to insure their economic viability. But those that Occupy City Hall are more concerned about tomorrow’s campaign contributions from the municipal unions and their buddies.

As we all know, the City’s finances are a mess.  The CAO’s Second Financial Status Report projects a $72 million budget deficit for the current fiscal year.  This, more than likely, will cause next year’s budget hole to increase beyond the expected $250 million.  And the cumulative deficit over the next four years is in the range of $1 billion, in large part because of the mind blowing $750 million increase in personnel costs.

And these deficits do not take into consideration the repair and maintenance of our lunar cratered streets and the rest of our crumbling infrastructure.  Nor does it address our seriously underfunded pension plans.

Over the last six years, the Mayor and the Garcetti led City Council have not addressed the City’s structural deficit nor have they even developed a long term operational and financial plan for the City and its core services.  Rather, they have elected to “kick the can down the road,” refusing to make the hard decisions that are necessary to preserve the City’s economic viability. It is death by a thousand cuts.  

Rather than rely on all the hot air from City Hall, we need a Financial Control Board that will require the City to develop a five year operational and financial plan that includes a balanced budget and addresses the repair and maintenance of our deteriorating infrastructure and the funding of the City’s two major pension plans that are underfunded by $11.7 billion.

The Financial Control Board would be also charged with insuring that the multiyear budgets developed by the Mayor and the City Council are consistent with the City’s long term financial plan, and, if necessary, enforcing that requirement.

2012 will be the year that we must demand structural change.  And with the Mayor’s race heating up, what better time to demand that change.

(Jack Humphreville writes LA Watchdog for CityWatch He is the President of the DWP Advocacy Committee and the Ratepayer Advocate for the Greater Wilshire Neighborhood Council. Humphreville is the publisher of the Recycler -- www.recycler.com. He can be reached at:   lajack@gmail.com )


Vol 9 Issue 98
Pub: Dec 9, 2011