LACERS BOARD UPDATE
By Michael R. Wilkinson, LACERS Commissioner
LACERS’ actuary, Segal Consulting, reported to the LACERS Board that the funding level has increased for both the retirement and the health plan. LACERS reports funding for the retirement plan and health plan separately.
The funded ratio for the retirement plan increased from 71.6 percent to 73.3 percent, and for Retiree health benefits, the funded ratio increased from 94.6 percent to 97.0 percent. This ratio compares the actuarial value of LACERS assets to its actuarial value of its liabilities. The health benefit funded ratio is high because LACERS has been funding the health plan while most plans were relying on “pay as you go” to pay benefits without “prefunding” the obligation while employees were working before retirement.
Prefunding is the method that almost all pensions are funded by, making contributions to support pensions while an employee is working. However, most pension plans were not prefunding health until relatively recently, but LACERS is nearly 100 percent funded because it was paying this out of its budget for decades.
The funded ratio is used for many purposes, including setting the contribution rate of payroll for the City to pay its share of the pension. The City contribution rate (percentage of payroll) went up from 29.39 percent to 29.43 percent for the retirement fund and from 3.92 percent to 3.93 percent for the health fund. These are the combined rates for Tier 1 and Tier 3.
The City is legally obligated to pay the total cost of employees’ contributions and has always paid 100 percent of the required contribution. However, when you look around the country and see some of the public retirement plans that are in dire financial straits, there is one problem that repeats – a failure of the employer to pay the required contribution. The LACERS board is aware of how important proper funding is and would legally enforce this requirement, if necessary.
The pension plans for two of the worst funded states, Illinois (42 percent funded) and New Jersey (31 percent funded) had other problems as well, but both regularly failed to make required contributions. This lack of needed contributions led to a devastating underfunding of the plans. The City of LA has always paid its full obligation on time when it was due. Proper funding from the employer is critical so that the funds will be there to run the plan and to make investments, since the investment returns make up the largest share of plan assets.
The LACERS investment team uses a disciplined approach to long-term investing to diversify investments among asset classes to get long-term returns that support the members’ pension and health plans.