By Tom Moutes, RLACEI Director
“On Oct. 23, the City Administrative Officer (CAO) released the First Financial Status Report for the current fiscal year. As you might imagine, the news was not good. Overall, the City and LACERS have not fared too badly in areas that tend to get pension plans in trouble. But let’s look more closely.
The projected shortfall grew from a projected $200 million to $400 million, to $400 million to $600 million. The CAO’s report indicated this shortfall will represent from 6 percent to 9 percent of the 2020-21 budget and “absent increased or new sources of funds, therefore, the City will only be able to address this revenue challenge by aggressively reducing costs and services in the coming months using all available fiscal restraint tools.”
What does this budgetary shortfall mean to LACERS retirees like us? The answer is likely not much, but it is too early to tell for sure.
The Good News
The City has always made its full annual contribution to LACERS. The LACERS Board, in conjunction with its actuary, determines the percentage of pay the City needs to provide. That percentage of pay is multiplied by the payroll the City derives through its budget process, and the result of that multiplication provides the contribution amount the City owes LACERS. While there were some discussions during the Great Recession about delaying part of the LACERS contribution, those conversations didn’t make it very far. The full City contributions were paid.
Also, there are at least two good reasons for the City to ensure LACERS is well funded:
- The City is legally required to make benefit payments to its Retirees. As we saw with the cities of Stockton and Vallejo, even bankruptcy won’t necessarily get the city off the hook for retirement benefit payments. The City would be better off having those payments come from a well-funded pension plan rather than straight out of the City coffers and without the benefit of investment returns.
The City’s credit rating likely would take a hit if the City failed to fully fund its pension obligations. If the City’s credit rating decreases, it will cost the City more to borrow money, which it does every year.
Why Public Pension Funding Gets Out of Whack
Public pension plans, like LACERS, tend to get into financial difficulty in four ways:
- The plan sponsors (in our case the City) don’t make their full annual contributions;
- The plan sponsors raise benefits without properly funding the benefit increases;
- The retirement plan boards manipulate the actuarial assumptions to allow the plan sponsors to pay less in contributions than they should; and/or
- The investment returns don’t meet or exceed the assumed returns.
Let’s look at how the City and LACERS rate in these four areas:
- As stated earlier in this article, the City always has made its full contribution. While one Councilmember at a recent Budget and Finance Committee meeting brought up the concept of delaying part of the contribution to LACERS next fiscal year, the CAO quickly cautioned against that.
- The City has increased some benefits over the years, such as allowing for Government Service Buybacks and the Early Retirement Incentive Program during the Great Recession but has not raised benefits as much as many other jurisdictions.
- n While the LACERS Board twice rejected lowering the assumed annual rate of investment return from 7.25 percent to 7 percent, it recently made that change. In the last ten years, LACERS assumed rate of return has been lowered from 8 percent to 7 percent, a much more reasonable assumption.
- LACERS investment returns over the last five years have averaged approximately 6 percent. This is not too bad but would become problematic if the trend continues.
So, overall, the City and LACERS have not fared too badly in the areas that tend to get pension plans in trouble – especially if the City continues to make its full annual contribution and does not ask LACERS for any funding favors like it did during the Great Recession.
Stay tuned! RLACEI will continue to report on this extremely important issue as the fiscal year progresses.