The City’s Annual Contribution to LACERS


RLACEI

Tom Moutes

The LACERS Board:

By Tom Moutes, RLACEI Director

LACERS, the City’s department handling the pensions for most Retired employees (exceptions include DWP and Fire/Police Retirees), receives funds in three ways: contributions (payments) from the City (thanks to the taxpayers); contributions from City employees; and investment returns.

The City’s annual contribution to LACERS is calculated by multiplying the payroll the City adopts during its budget process for employees covered by LACERS times the necessary percentage of pay (as calculated by a LACERS actuary).

In the early 2000s, the City’s contribution to LACERS was well under $100 million per year. This year, the City’s contribution is $676.7 million. Yes, $676.7 million – up well more than 600 percent!

Let’s take a quick look at the factors impacting that huge increase in the City’s contributions to LACERS:

As noted above, the City’s annual contribution to LACERS is calculated by multiplying the payroll times the necessary percentage of pay. The City’s payroll for employees covered by LACERS has almost doubled since the early 2000s. All other things being equal, that alone would have caused almost a doubling of the City’s contribution to LACERS.

The other component, the percentage of pay as calculated by a LACERS actuary, has increased dramatically – mainly due to LACERS investment return experience and assumption changes adopted by the LACERS Board.

• LACERS investment return experience has been mixed since 2000, with some excellent years such as plus-18.6 percent (2004); plus-19.5 percent (2007); and plus-22.6 percent (2011). But it has had some down years as well, including minus-4.8 percent (2002); minus-5.8 percent (2008); and minus-19.5 percent (2009). Because LACERS assumes it will make 7.25 percent per year, on average, any year it earns less than that puts some pressure on the City’s contribution.

LACERS’ actual investment returns over the next five to seven years – pursuant to its own expert consultant – are expected to be below LACERS assumed rate of 7.25 percent. If this turns out to be true, it will require further increases to the City’s contributions to LACERS.

• Assumption changes include such things as lowering the assumed rate of investment return; recognizing fewer employees are leaving the workforce than anticipated; and retirees are living longer than expected. It is important to ensure that the assumptions are reasonable to help assure the proper funding of LACERS and that today’s taxpayers are not pushing the costs of today’s services on future taxpayers (this is referred to as intergenerational equity).

The LACERS Board reviews these assumptions approximately every three years, and the resulting outcome on the City’s contribution to LACERS is seldom good news for the City.

While the City experienced record revenues in recent years, it did little to help improve LACERS funding status and continued to have a structural budget deficit (outflows exceeding inflows) during that time. Now that the economy has soured and City tax revenues are drying up, in part due to the Covid-19 pandemic, it is going to be even more difficult for the City to pay its annual contribution to LACERS. Fortunately, the budget shows the City paying its full contribution for fiscal year 2020-21.

Tom served at LACERS for approximately 16 years, the last seven of those years as the General Manager of the pension system. He retired in 2018. Tom can be reached at necessarypensionconversations@gmail.com.

Note: On Tuesday, June 23, 2020, the LACERS Board of Administration is expected to take action on proposed assumption changes. Story to follow in the August issue of Alive!

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