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Wed, May

This Recession Was Inevitable - LA’s Response Doesn’t Have to Be

LOS ANGELES

THE TRUTH ABOUT LACERS-We didn’t know if it would happen in 2020.

Perhaps, it would be 2021. But after many years with a good economy and an eleven-year bull run in the investment markets, a recession was inevitable. 

Prior to the Great Recession, LACERS was 90.1% funded. That means it had 90.1% of the funds necessary to pay the future anticipated benefits to its members. Now, as we face this new recession, LACERS starts out at only 73.1% funded. That’s right – it is 17% worse funded than before the Great Recession and has just 73 cents out of every dollar of anticipated future benefit payments. 

During and shortly after the Great Recession, the City asked LACERS for some things that were beneficial to the City in the short run, but not beneficial to LACERS like: 

  • Allowing the City to repay LACERS for the Early Retirement Incentive Program (ERIP) over a very long period of time; 
  • Asking LACERS to re-amortize its unfunded liability over a very long period of time (this is similar to refinancing your house with a new 30-year mortgage); and 
  • Asking LACERS to defer the impact of other rate increases to the City’s annual contribution. 

All these requests delayed funds coming from the City to LACERS and meant LACERS did not have those funds on hand to invest and receive investment returns for a number of years. These delays account for some of the reason why LACERS is funded at just 73.1%. Who knows what the current recession will mean to LACERS? If it has a similar impact as the Great Recession, LACERS funding status could near the point of a death spiral. 

After years of record revenues, hopefully the City will treat this recession differently and not ask LACERS for anything that will harm the not-so-well-funded pension system. 

You might be wondering why you should care about the funded level of City employee pensions and the City’s contribution to LACERS. Here is why you should care: 

  • The City is legally required to make benefit payments to its retirees. As we saw with Stockton and Vallejo, even bankruptcy won’t necessarily get the City off the hook for retirement benefit payments. The City would be better off having those payments come from a well-funded pension fund rather than straight out of the City coffers and without the benefit of investment returns. 
  • The City and its residents should be concerned about the City’s credit rating. Higher pension liabilities could decrease the City’s credit rating and increase its cost to borrow money. 
  • Because of LACERS large unfunded liability, today’s residents are not fully paying for the services they currently are receiving. Residents are passing some of those costs along to their children and, perhaps, their grandchildren. This is known as intergenerational inequity and intergenerational theft. 
  • If the Mayor and Council push LACERS for payment delays similar to those following the Great Recession, it means the City didn’t plan very well during its many years with a good economy and record revenues. Yes, the COVID-19 pandemic is presenting big challenges, but ideally isn’t that the type of thing for which your elected officials should be planning? 

Certainly, the City’s elected officials will have many challenging decisions to make in the months and years ahead. But, while this recession was inevitable, hopefully the City’s response to its pension systems does not have to be.

 

(Tom Moutes served at LACERS for approximately sixteen years, the last seven of those years as the General Manager of the pension system. He retired in 2018. Tom can be reached at [email protected].) Prepped for CityWatch by Linda Abrams.

 

 

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