California Common Sense (CACS) released a report analyzing the city of Los Angeles’s pension system – the growth of the city’s pension expenses, the causes of the growth, and the challenges the city faces in handling their pension problems. The report comes as Los Angeles faces year-after-year deficits, including a $222 million budget deficit for the current fiscal year and a forecasted $427 million deficit for fiscal year 2014-15. City leaders have raised concerns about the city’s financial difficulties and observers have warned of potential bankruptcy.
Pension costs have increased at an alarming 25% average annual rate over the last decade. In 2002-03, pension costs consumed 3% of the city’s budget, but pension costs jumped to 18% of the budget in 2012-13. Absent significant reform, L.A.’s once fully-funded pension funds will continue to spiral downward under the pressure of their growing unfunded obligations.
The following are among the report’s findings:
In 2012-13, Los Angeles’s expected expenditures equal $7.2 billion and its anticipated pension costs are $1.3 billion, meaning that pension costs will consume 18% of the budget. That is up from 3% in 2002-03.
Over the last decade, pension costs have grown at an annual growth rate of 25% and have outpaced spending growth for every major area of the city’s budget.
In 2012-13, the city of Los Angeles is expected to spend up to 32 cents towards pension benefits for every dollar it spends on payroll for its employees. Employees will pay 9 cents for every dollar of payroll.
From 2003 to 2012, the aggregate official funding ratio of the city’s pension plans declined from 99.7% to 77.2%. Correspondingly, the city’s officially-reported unfunded liability increased from $87 million to $9.4 billion, more than a ten-fold increase.
Using Moody’s recommended assumption (5.5%), the unfunded liabilities would nearly triple to $25.9 billion.
Access the report here.