LA’s Pension Shenanigans: Stealing from Our Kids

LA WATCHDOG--On August 24, Mayor Eric Garcetti issued a press release where he touted that the City and union leaders for the police and firefighters “reached an agreement to make the Deferred Option Retirement Plan (“DROP”) more effective and less susceptible to abuse.”  

While many abuses that were outlined in articles by Jack Dolan of the Los Angeles Times will be curtailed or eliminated, this agreement cannot be characterized as reform because DROP participants are still able to “double dip,” collecting both their salaries and pensions for up to five years. 

As for reform, Mayor Garcetti and City Council President Herb Wesson have continued to kick the pension can down our lunar cratered streets.  They have refused to address the City’s most significant financial issue, the $15 billion unfunded pension liability of the City’s two pension plans, the Los Angeles City Employees’ Retirement System and the Fire and Police Pension Plans.  Together, these two pension plans with $36 billion of assets and $51 billion of future obligations are only 70% funded.  In a bull market, the funded ratio should be well north of 100% so the pension plans can weather a down market. 

Over the last dozen years, the annual required contributions to the City’s two underfunded pension plans has increased three-fold to $1.2 billion, devouring 20% of the General Fund Budget, up from less than 10% in 2005.  This has crowded out basic services such as the repair and maintenance of our streets, sidewalks, and parks; service to the homeless; and public safety. 

Annual required contributions are expected to increase faster than revenues, putting pressure on the City’s ability to fund core services.  And this has led the Mayor and the City Council to discuss the need to increase our taxes to fund the generous defined benefit pension plans.  

And this does not consider that the pension contributions are understated by more than $500 million a year because the City relies on the overly optimistic investment rate assumption of 7.25% compared to a more reasonable assumption of 6.25%. 

As for the DROP, this plan “has not and never has been cost neutral” according to a February 2016 report by the former City Administrative Officer, Miguel Santana.  Rather, this program has cost the underfunded Fire and Police Pension Plans $1.7 billion since its inception in 2001. 

Unfortunately, Garcetti and Wesson have refused, despite repeated requests, to release the 2016 Santana report that called for the elimination of this cash draining plan.  

So much for transparency. 

Also, in August, the LACERS Board of Administration neglected its fiduciary duty to its 44,000 active and retired members and voted not to follow the recommendation of its actuary to lower the investment rate assumption to 7% from its currently overly optimistic rate of 7.25%.  But this was not surprising as a majority of the Board is appointed by Mayor Garcetti who was more interested in “saving” the City $20 million despite the City’s record revenues of almost $10 billion. 

Garcetti has also made a habit of appointing Commissioners who have no experience or expertise in how to manage a pension fund with tens of billions in assets.  For example, in June, Garcetti appointed an owner of a small, mid-Wilshire advertising firm who does not have any relevant experience other than her political connections to Garcetti.  

But this lack of experience is true for the other three Garcetti appointments who act as if their primary responsibility is to the Mayor and his budget team, not the members of LACERS. 

Kicking the pension can down our lunar cratered streets is nothing new.  Garcetti and Wesson have ignored the recommendation of the LA 2020 Commission to establish a short-term commission to review and analyze the City’s two pension plans so that Angelenos and the clueless City Council will have a better understanding of the two underfunded pension plans. 

By underfunding the City’s two pension plans by at least $500 million a year, Garcetti and Wesson are promoting Intergenerational Theft, dumping today’s obligations on the Millennials and their children.  

And to think that in November, these two fiscally irresponsible, can kicking politicians want us to approve Charter Amendment B that would allow the City to establish a bank under their control. 

 

(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.)

-cw