By 2015, the City of Los Angeles will need $2 billion every year to fund its public employee pension plan, four times as much as the current $530 million budget deficit. To put that number in perspective, $2 billion equals the combined budgets of the city fire department, police department and sanitation bureau. The message to city residents and taxpayers is clear – Los Angeles will likely go bankrupt within five years unless significant structural changes are made to the pension system.
All pension funds suffered horrible market losses over the past two years, but the economic downturn simply accelerated an inevitable crisis. Six years ago, pension fund contributions as a percentage of total city revenue were less than 4 percent. It is 8 percent this year, and the percentage is projected to exceed 20 percent by 2015. That means 20 cents of every taxpayer dollar will fund retiree pensions instead of actual city services.
The structural problems that are contributing to this crisis are many:
* Pension funds assume an 8 percent annual return, and the lifetime benefit to employees is based on that return.
* When the stock market doesn’t earn an 8 percent return or loses money, the city is expected to make up the difference.
* Employee contributions do not increase when market conditions change; only the city’s contribution changes.
* Early retirement ages and an increase in life expectancy means longer payments, some exceeding the number of years the employee worked for the city.
* The city plan includes an annual cost-of-living increase in addition to a guaranteed retirement benefit.
It’s obvious that fixing the city’s pension system will require fundamental structural changes. Essential to making these changes will be vigilant and vocal taxpayers, elected officials with vision and courage, and union leaders who understand that while the current situation may be a win for their members, it is a disaster waiting to happen for the 4 million residents and taxpayers of Los Angeles.
Last week, the Chamber’s Board of Directors recommended to Mayor Antonio Villaraigosa that he not add to this pension crisis during his negotiations with union leaders on this year’s budget. We also suggested that he immediately appoint a task force of business, labor and professional city staff to address this crisis and present a series of recommendations. We have no option but to fix the pension system today. This crisis is a municipal atomic bomb waiting to explode.