By Tom Moutes, RLACEI Legislative Director
Charter Section 1112, added as part of the Charter revisions in 2000, requires the Mayor, Council and Controller to perform a management audit of LACERS “at least once in every five years”. That Charter provision goes on to state, “Each audit shall examine whether the pension or retirement system is operating in the most efficient and economical manner and shall evaluate the asset allocation of the system.”
Three things have been true about the audits that have been produced to date:
- They have not come out on time – although mandated every five years, only two audits have been produced in 21 years.
- No earth-shattering recommendations have been proposed; and
- The City has spent hundreds of thousands of dollars on each of these audits.
The audit recommendations produced to date have included:
- Unhelpful political recommendations (which should not be part of a management audit), including studying consolidation of the City’s pension funds (this will never happen).
- Helpful political recommendations that the City has chosen to ignore, like giving the LACERS Board full authority to administer the System, subject to the Board’s fiduciary responsibility; and
- Relatively minor operational recommendations that, while nice to have, certainly are not worth hundreds of thousands of dollars every five years.
So, how could the City get more bang for its audit buck going forward? Here are three suggestions:
- Revise the City Charter so that a full management audit does not have to be conducted every five years. While this may have been well intended, the audit results have shown that not much changes in a relatively short period of time. This could save the City hundreds of thousands of dollars.
- Conduct a cursory review of the LACERS investment program unless a deep dive is warranted. It would be relatively easy to assess whether the LACERS investment program is in the bounds of reasonableness when compared with other public pension plans. That review should be conducted first, with a deeper dive being paid for only if any anomalies are found in the cursory review.
- Focus the audits on what really matters – the City’s ability to make its ongoing annual contributions to LACERS. This could be accomplished through stochastic modeling of the somewhat random variables – such as investment return – into the future. The modeling would involve hundreds of potential outcomes for LACERS over the next ten years – including outcomes that would require the City’s contributions to LACERS to increase and decrease. By seeing the likelihood of the potential outcomes, the City could better plan its spending on payroll and payroll-related costs like pension contributions.
While it is important for the City to help ensure its pension systems are well run, one hopes it will conduct its audits of LACERS in a more thoughtful and economically prudent manner in the future.