While the City’s two pension funds experienced excellent returns on their investment portfolios for the fiscal year ending June 30, 2014, it still has a huge unfunded pension liability that will continue to devour a disproportionate share of the City’s budget, crowding out basic services such as the repair of our streets and sidewalks.

Last year, the Los Angeles City Employee Retirement System (“LACERS”) and the Fire and Police Pension Plans (“LAFPP”) had a blended rate of return of slightly less than 18%.  Since this return exceeded the investment rate assumption of 7.75%, the unfunded pension liability – based on the market value of the assets – decreased 23%, from $10 billion (74% funded) to $7.6 billion (81% funded).

This improvement would have been more that been over $1 billion more if the two plans had not followed the excellent recommendations of their actuary and lowered their investment rate assumptions to 7.5% and made adjustments to selected assumptions based on past experience.  This would have improved funded ratio to almost 83%. 

However, if the two plans adjusted their investment rate assumption to a more realistic 6.5% as recommended by Warren Buffett of Berkshire Hathaway fame and fortune, the unfunded liability would jump to over $12 billion (72% funded).

Despite these hefty returns, the City’s pension contribution is projected to rise by 8% to $1.1 billion, chewing up 21.5% of the General Fund budget.

To get a better understanding of the devastation to the budget and City services caused by the pension plans, the current contribution is more than three times the contribution of $350 million in 2005, the beginning of the Villaraigosa era.

These incremental funds that were diverted to the City’s very generous pension plans would have funded the repair and maintenance of our cracked sidewalks and a good portion of our lunar cratered streets.

Interestingly, our City’s pension plans are in much better shape than those of the County and the State, in large part because the City had the foresight to begin funding its post-retirement medical benefits (“PRMB”) over 25 years ago.  For example, the County’s pension system is less than 50% funded because its PRMB are funded on a pay as you go basis.  As a result, the unfunded retirement liability of the County is almost 30% higher than the City on a per capita basis.

It also appears the risk adjusted rate of return of the City’s two pension plans compares favorably with other similar entities, especially when considering that the asset management fees are more than reasonable.  Of course, this would be news to the misinformed Paul Koretz who has been drinking the Kool Aid dispensed by the City’s civilian labor unions in their quest to increase their salaries that now average almost $80,000.

The City’s two pension plans have enjoyed annual returns on their investment portfolios averaging 13% over the last five years, more than offsetting the 25% hit in 2008 and 2009.  Nevertheless, the pension funds and the City’s budget are still at the mercy of the stock and bond markets.

We also do not have a very good understanding of the driving factors behind the City’s long term retirement obligations.  That is why the LA 2020 Commission unanimously called for the establishment of a “Commission on Retirement Security” to make “concrete recommendations on how to achieve equilibrium on retirement costs by 2020.”

Unfortunately, the Herb Wesson led City Council and the Budget and Finance Committee chaired by Paul Krekorian have failed to even discuss the Committee on Retirement Security because of their fear that the Committee’s recommendations for reform would offend the leadership of the City’s public unions.

While the City Council continues “to kick the can down the road,” voters will not take kindly to dumping this $12 billion liability onto the next generation of Angelenos.  Nor will they appreciate the ever increasing demands of the pension plans as “the past continues to devour the future.”

The time for pension reform is now.  Or put another way, if there is no reform, the voters will once again reject any tax increase.