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06
Tue, Jun

Note to Mayor Bass: Unfunded Pension Liabilities Are Intergenerational Theft

LA WATCHDOG - Despite having $48 billion in assets, the City’s two pension plans are underfunded by almost $9 billion, an obligation that we are dumping on the next generations of Angelenos. And unfortunately, the City has no plan to eliminate this monster liability.  

In 2014, the LA 2020 Commission suggested the establishment of an independent pension commission to analyze and review the City’s two pension plans (the $20 billion Los Angeles City Employees’ Retirement System and the $28 billion Los Angeles Fire and Police Pension Plan) and develop alternatives to fully fund the pension plans and to increase transparency.  Despite numerous assurances from Mayor Garcetti, no pension commission was established. 

Now the ball is in Mayor Bass’ court.  Will she establish an independent pension commission? Will she implement any of its recommendations? Or will she continue to kick the can down the road? 

Compared to other governmental entities, the City’s retirement systems are in reasonably good shape.  Both the retirement plans are 85% funded based on an investment rate assumption of 7%.   

Where the City shines is that its Other Post-Employment Benefit plans (read post-retirement medical plans) are also 85% funded. This compares to the County, State, and many other governments whose OPEB plans have zero or close to zero funding.  [Thanks to former CAO Keith Comrie and CLA Ron Deaton who pushed to fund this obligation in the late 1980’s.]

There are other storm clouds.  

The actuaries, in determining the future obligations of the pension plans, rely on an overly optimistic investment rate assumption of 7%.  If a more realistic, but still optimistic rate of 6% were used, the unfunded liability would increase to almost $17 billion, resulting in a funded ratio of around 75%.  

There is pressure to lower the rate.  CalPERS has an investment rate assumption of 6.8% while the assumption for the pension plan for the Department of Water and Power is 6.5%.  Investment rate assumptions are considerably lower in the private sector. 

In addition, investment returns for the current fiscal year ending on June 30 may well be negative, resulting in a higher unfunded liability.  In the fiscal year that ended on June 30, 2022, the two pension plans had a negative return on investment of around 7.5%, resulting in an increased liability of more than $7 billion.  

Many City Hall insiders and union leaders may object to reforms, including lowering the investment rate assumption, because it may result in increased Annual Required Contributions to the pension plans.  This would mean less money for pet projects, union raises, and other initiatives and programs. 

Will Mayor Bass establish a pension commission to review and analyze the City’s two pension plans and make recommendation on how to eliminate this liability over the next generation of Angelenos?  Or will she follow in the footsteps of Mayor Garcetti and continue to kick the Intergenerational Theft can down the road? 

(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee, the Budget and DWP representative for the Greater Wilshire Neighborhood Council, and a Neighborhood Council Budget Advocate.  He can be reached at:  [email protected].)