AN ONGOING SERIES-“You can pay me now, or you can pay me later.” -- from FRAM oil filter advertisements.
“You can pay now or pay more later” – a former LACERS actuary referring to the problem of delaying necessary payments to the pension system.
LACERS’ net liability (how much its liabilities exceed its assets) is approximately $6.5 billion. This includes a net pension liability of $5.98 billion and a net OPEB (Other Post-Employment Benefits – primarily retiree health care) liability of $522.2 million.
In 2001, LACERS had a negative unfunded liability (and that’s a good thing!) By 2010, the unfunded liability was about $3.6 billion. Now it is $6.5 billion.
The amount of LACERS net liability matters to residents of Los Angeles because it impacts the City budget. Each year, the City pays LACERS a contribution for what is essentially one year of pension costs plus a slice of the net liability. The larger the net liability, the larger the annual payment to LACERS and the less money available for City services. LACERS received $676.7 million as its annual contribution from the City for the current fiscal year.
Some commentators attempt to minimize the net pension liabilities equating them with home mortgages, in that only a portion of the liability is due to be paid each year. However, I would be concerned about any “mortgage” that has increased as fast as LACERS liabilities have.
Perhaps more disconcerting than the increase in LACERS net liability is the fact that neither LACERS nor the City have much control over the factors causing the increases. By far, the two largest factors in the liability increase are investment experience (returns) less than expected and necessary actuarial changes regarding economic and demographic assumptions (more on these later in the series).
LACERS can and does adopt asset allocations to maximize risk-adjusted returns, but it does not control the stock market and the macro economy. The City does have some control over how many employees to hire, what it pays them, and the benefits – including retirement benefits – it provides to them. But, again, what LACERS and the City can control regarding net pension liabilities is quite limited and what they have little or no control over is huge!
The City politicians should do a better job of controlling the factors over which they have some influence and should acknowledge that there are very significant factors they and LACERS don’t control – factors which may cause further huge increases in LACERS net liability and resulting City contributions to LACERS. They should also refrain from pressuring the LACERS Board to make what amount to unwise actuarial decisions regarding those factors (more on that later in the series).
You might think that the City politicians would be concerned about LACERS’ net liability and even more concerned that neither the City nor LACERS have much control over factors causing the increases in the net liability; however, the opposite seems to be true. In 2017, LACERS hosted a Symposium to talk about the City’s pension issues. Despite the fact that the Symposium was considered a success by many of the stakeholders who attended, we had a hard time getting the staff of elected officials to attend and to stay for the entire event. It seems that the City’s politicians don’t want to know or accept the truth about LACERS. If they accepted the truth, they might have to do something about it. It seems they would prefer to hope that the issue doesn’t explode until they have left for another office. This is a great disservice to the residents of Los Angeles and its employees who have been promised a pension someday.
While at LACERS, I was sometimes asked whether the pension fund was sustainable. My answer was that question was better directed to the City as the plan sponsor because it is a matter of whether the City can continue to pay its full annual contributions to LACERS. If the City can pay them, LACERS is sustainable. If the City cannot continue to pay the increasing annual contributions, there is a very different answer to that question.
Previous series articles:
(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].