LA Pension Reform: The Mayor’s Optical Illusion

At a well attended Wednesday morning press conference at City Hall, Mayor Antonio Villaraigosa, with support from City Council President Herb Wesson and four other members of the City Council, touted his Retirement Security Plan for new civilian employees as “the next step of putting Los Angeles back toward a more sustainable, long term fiscal path.”

This “common sense” plan will save the City between $30 million to $70 million over the next five years, $169 million to $309 million over the next ten years, and about $4 billion over the next thirty years.

While there are serious shortcomings to this plan, including the use of the overly optimistic investment rate assumption of 7.75%, there are some common sense reforms.

These include increasing the retirement age to 65 from the current level of 55; lowering the retirement factor to 2% per year, a 7.4% decrease from the current 2.16%; lowering the maximum retirement allowance to 75% of an employee’s final compensation as determined by a three year average that avoids “spiking;” capping the cost of living adjustment at 2%; limiting the purchase of service credit (“airtime”) to four years at full cost; and limiting retiree healthcare, survivor and disability benefits.

The most intriguing and creative aspect of the Tier II proposal is how the employees’ contributions are structured in a manner where the costs and risks are shared by both the employees and the City. Under the new plan, the employees will contribute an amount equal to 75% of the “Normal Cost” (the annual expense) and 50% of the new tier’s unfunded pension liability.

So under this new scenario, the employees would contribute 10% of their salary and the City would contribute 3.31% of the employees’ salary. There is no contribution for the unfunded pension liability since this is a new plan without any previous liabilities or overvalued assets.

Under the present system, the employees are contributing 11% of their salary while the City is getting tagged for 25.25% as a result of the huge unfunded pension liability caused primarily by the overly optimistic investment rate assumption.

So the simple math would indicate that the City is “saving” almost 22% of the salaries of the participating employees.

While the optics of $4 billion in savings over the next thirty years are compelling, we have all learned that we need to wear our hip boots when the mathematically challenged Mayor starts tossing around big numbers involving the City’s finances.

Unfortunately, the short term to intermediate impact is negligible since the plan applies only to new civilian employees and does not impact existing civilian or sworn employees. And that is compounded by the fact that there is a hiring freeze at City Hall.

As a result, the proposed saving are miniscule compared to the $437 million, 52% escalation in pension costs over the next four years, the four year $1.1 billion projected budget deficit, and the $10 billion unfunded pension liability.

For example, while our Mayor hailed the cumulative savings of $30 million to $70 million over the next five years, in reality the annual savings is $15 million in the fifth year, resulting in a meager 5% decrease in the projected budget deficit of $265 million.

Furthermore, pension contributions are expected to increase from $848 million this year to $1.271 billion, a decrease of 1% from the City’s current projections.

Of course, the leaders of the City’s civilian labor unions are going absolutely bananas over this “pension evisceration,” threatening to haul the City into court because this “frontal attack on all city workers” violates their collective bargain rights.

In the City’s defense, the City made a concerted effort over the last 33 months to work with the civilian unions, despite its opinion that the establishment of the Tier II plan for new employees is not subject to mandatory collective bargaining.

And rather than bargain in good faith like the members of the Fire and Police Pension Plans, the union leadership had the audacity to propose two plans that would have increased the pension costs to our financially strapped City.

But this so called pension reform is just the beginning of City Hall’s efforts to have voters approve a $150 million increase in taxes through the doubling of the Documentary Transfer Tax and a 50% increase in the 10% Parking Occupancy Tax.

And while the City’s so called pension reform plan results in more “savings” than the less than transparent pension scheme that was railroaded through Sacramento in the dead of night, both plans are crude attempts to convince the voters that City Hall and Sacramento are worthy stewards of their hard earned money.

In March, Angelenos will more than likely be asked to approve $150 million in new taxes.  But unless we have an accompanying ballot measure that requires the City to “Live Within Its Means,” then we should not be bamboozled by the false promises of pension reform that are being promoted by the Mayor.

(Jack Humphreville is the LA Watchdog writer for CityWatch, President of the DWP Advocacy Committee, Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and Publisher of the Recycler. Originally posted on Fox & Hounds.)