LA pension plan to save money is now costly

Los Angeles voters were told in 2001 that a pension increase package for police and firefighters would save the city $196 million a year — topping a better known but equally faulty CalPERS forecast that only said a state pension hike would not raise costs.

The voter-approved pension increase in Los Angeles was among the factors mentioned when the city council was told earlier this month that soaring pension and retiree health costs could eat up a third of the city’s general fund by 2015.

An irony is that a leading advocate of the pension increase in 2001, then-Mayor Richard Riordan, warned in a Wall Street Journal article last May that Los Angeles is “likely” to declare bankruptcy by 2014, mainly because of out-of-control retiree costs.

The pension increase for Los Angeles police and firefighters was a move to match benefits offered by other government employers, a round of increases that began when CalPERS sponsored legislation, SB 400 in 1999, that raised pensions for state workers.

“The major change started at the state of California with the CHP (California Highway Patrol), and then there was a trickle effect which happened across the board among local jurisdictions to sort of meet that new threshold,” Miguel Santana, chief administration officer, told the council (Aug. 3).

Keeping pace was one of the reasons for the pension increase given by Riordan and others who signed the ballot argument for the measure on the June 2001 ballot, apparently so uncontroversial that no opposition argument was submitted.

“The City’s Fire and Police Pension System used to offer benefits at least equal to those of other public safety agencies in California, but now the City lags behind,” said the ballot argument. “Charter Amendment A will make city benefits comparable again, allowing us to compete for and retain the best firefighters and police officers.”

The giant California Public Employees Retirement System (covering state workers and 3,000 local governments and school districts, but not most major cities like Los Angeles) told the Legislature SB 400 would not raise state costs for a decade.

CalPERS said the new benefits could be paid for with investment earnings, which had been providing about 75 percent of the system’s revenue, dwarfing the annual contributions from employers and employees.

But earnings fell far short of the forecast, particularly after a historic stock market crash two years ago. Now state and local governments face sharply increasing pension contributions and questions about whether current benefits are “sustainable.”

The trendsetting California Highway Patrol union has agreed to lower pension benefits, but only for new hires. Once a worker is vested in a public pension, it’s regarded as a contract that can’t be cut without providing something of equal value.

Santana told the council “the much-touted pension reform at the state level,” agreements with the CHP and five other unions, will only provide short-term relief. He said increased worker pension contributions had to be offset by a later pay increase of equal or “like” value.

“So at the end of the day it pretty much is a wash,” said Santana.

Pension increases such as SB 400 are approved with little or no discussion of the risk to taxpayers, say critics, even though some argue that pensions guaranteed current government employees are California’s biggest debt.

Stanford graduate students, echoing work done by other financial economist academics, have estimated that the three state pension funds have a combined debt of about $500 billion, far greater than the reported $55 billion pension debt.

The academics use a lower forecast of investment earnings based on risk-free bonds, rather than the 7.5 to 8 percent annual earnings assumed by CalPERS, the California State Teachers Retirement System and the UC Retirement system.

In his article last May warning of bankruptcy, Riordan said the “fiscal woes” of Los Angles can be traced to a growing city workforce and “the myth of that 8 percent” earnings forecast.

The ballot pamphlet argument in 2001 for the Los Angeles pension measure does not mention the risk to taxpayers if revenue forecasts fall short. Instead, the measure was presented as a way for the city to save money.

“An actuarial study shows that the City should save $196 million in the first five years,” said the ballot argument. “After that, additional cost savings are expected to continue for another five to ten years.”

The savings would come from merging four separate funds in the Los Angeles Fire and Police Pension System, tiers one through four, into a single fund, allowing surpluses in one fund to be used to cover liabilities in another.

At the same time, the measure would offer current police and firefighters a new fifth tier with higher benefits: a minimum of 50 percent of final pay at age 50 after 20 years of service, with a maximum of 90 percent after 33 years.

The city council was told this month that contributions to the Fire and Police system for pensions and retiree health were 3.7 percent of the general fund in 2001, 8.67 percent this year and could be 19 percent in 2015, more than $900 million.

Santana said the ballot measure approved by voters in 2001 made a “dramatic” increase in pension payments for police and firefighters, who retire at an average age of 51.

“If you are a retiree in Tier 4 your average retiree benefit when you retire is $45,324,” said Santana. “If you are a retiree at Tier 5, which the majority of our sworn personnel are, the average benefit is $83,004.”

The council was told that a separate system for non-sworn employees, which unlike Police and Fire gets significant special funds, could have pension and retiree health costs in 2015 amounting to about 17 percent of the general fund.

“This is obviously unsustainable,” said Councilman Bill Rosendahl, who asked for the pension report showing that retirement costs could take a third of the general fund. “We can’t pay pensions at the expense of basic services, correct?”

“For every dollar that you pay into your pension systems,” replied Santana, “you are not paying into libraries, parks and a variety of other services that we provide as a city.”

In addition to the 2001 ballot measure, said Santana, other retirement cost drivers are health care (up an average of 10 percent annually), longer life spans, a recent early retirement program and big investment losses in the stock market crash.

He said the administration is talking to unions and considering a new tier of benefits, mainly for new hires. Among the changes being considered are extended retirement ages, a lower formula, a benefit cap, more employee contributions, inflation adjustments, and a lower retiree health subsidy.

The goal is to have the actuarial work for a new plan completed by the end of September, Santana said, and then to put a cost-cutting retirement plan for police and firefighters before voters in March.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 17 Aug 10

2 Responses to “LA pension plan to save money is now costly”

  1. Tough Love Says:

    Quoting … “The trendsetting California Highway Patrol union has agreed to lower pension benefits, but only for new hires. Once a worker is vested in a public pension, it’s regarded as a contract that can’t be cut without providing something of equal value.”

    Well, …Dear California Highway Patrol Officers:

    This WILL have to change (meaning BIG reductions) … or, keep your head in the sand, and many of you will likely get nothing back but your own contributions.

    When the money is gone, its GONE …. and those taxpayers WITH money won’t pay, they’ll just leave California.

  2. john moore Says:

    You say contractual pensions cannot be reduced without something of equal value. That is true,if the statute,or,charter amendment that authorized the benefit, is not changed. However,if the statutory basis for the benefit is changed to reduce the benefit,the benefit can be reduced constitutionally. I note that Chap 11 in bankruptcy allows pension benefits of retirees to be reduced,and/or eliminated(see General Motors Chap 11),so there is no question that reducing pension benefits is constitutional if done by statute,or,charter amendment. Also, Chap 9 incorporates most of Chap 11 into it,so arguably in a Chap 9,pension benefits could be altered. Vallejo did not request pension relief(for political reasons,not legal)in its’ Chap 9.

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