A staff chart given to Los Angeles city council labor negotiators this month shows that city retirement costs nearly doubled in the last seven years, soaring to 18.6 percent of general fund revenue this fiscal year, $848 million.
In the next four years, the annual cost of the two city retirement systems for police and firefighters and for non-sworn employees is projected to increase by half to $1.285 billion, about 25.5 percent of general fund revenue.
Retirement costs continue to climb as the deficit-ridden city, already hit by four years of deep cuts in the workforce and services, faces another major budget shortfall next fiscal year that could balloon to more than a quarter billion dollars.
How unusual is the size of the growing bite taken by pensions and retiree health care costs from funds needed for other government services?
In San Jose and San Diego, where voters in June approved sweeping pension reforms now opposed in the courts by public employee unions, retirement costs were about 20 percent of the general fund.
Before a stock market crash and deep economic recession hit pension fund investments expected to pay two-thirds of future pension costs, a governor’s commission reported in 2008 that the average pension cost was 4 percent of the general fund.
Former Los Angeles Mayor Richard Riordan, who warned in a Wall Street Journal article two years ago that the city was likely to declare bankruptcy by 2014, renewed his alarm in a television interview last week.
Asked if by fiscal “disaster” he meant “bankruptcy,” Riordan told Fox Business that bankruptcy is a “bad word” but will perhaps be necessary. If nothing is done to curb retirement costs, he predicted the city could become insolvent in one to three years.
“Maybe the only thing you can do is go into bankruptcy in order to have the court cut back on all these terrible pensions, health care and other things,” Riordan said.
If the city council does not curb retirement costs, Riordan and several business leaders said they will put a pension reform initiative on the ballot. Their preliminary plan would give new hires lower pensions and require voter approval of pension increases.
To reduce the cost of pensions promised current workers, widely believed to be protected by court decisions, salaries would be frozen when city pension contributions exceed 25 percent of police and firefighter pay and 15 percent of non-sworn pay.
A union-backed change placed on the March ballot last year by the city council, Measure G, gives lower pensions to new hires from the Los Angeles Fire and Police Pensions system.
Members also must contribute an additional 2 percent of pay to maintain full retiree health care, bringing their total contribution to LAFPP to 11 percent of pay. The city contribution to LAFPP is about 42 percent of pay.
Many members of the other city pension plan, the Los Angeles City Employees Retirement System, have agreed to increase their contributions to 11 percent of pay, some going up from 6 percent. The city contribution to LACERS is about 24 percent of pay.
Mayor Antonio Villaraigosa’s plan to cut LACERS costs for new hires, stalled by union opposition, reportedly would cap pensions at 75 percent of pay, cut retiree health care and inflation adjustments, and extend retirement to age 67 from the current 60 or 55.
Last week, the city council labor negotiations committee asked for an actuarial study of the Villaraigosa retirement proposals and another study of proposed tax increases on property sales and parking that could be put on the March ballot.
A negotiator for SEIU Local 721, Art Sweatman, said in a news release members have sacrificed to maintain public services by agreeing to contribute 11 percent of their pay, saving the city $63 million in one year and $810 million over five years.
“Any more pension ‘reform’ is out of the question for us. We don’t want a two-tier system,” Sweatman said, referring to lower pensions for new hires. “Putting the burden of the city’s economic problems on the backs of working people is a non-starter.”
Some think city council action to curb pension costs would aid voter approval of the tax increases, much like Gov. Brown’s state tax increase on the November ballot, Proposition 30, presumably being aided by legislative action on pension reform.
Democratic legislators have been privately reworking a 12-point pension reform proposed by Brown. Today the Legislature begins its final week of the session, when deals on controversial issues sometimes surface, reducing time for opposition to build.
One of Brown’s points that may not be in the legislative plan is retiree health care. The governor would add five years to the retiree health care vesting period for state workers, now 10 years for partial coverage and 20 years for full coverage.
He also called for an end to the “anomaly” that can have an active state worker paying 15 percent of health care costs, but nothing for health coverage in retirement. Legislators are said to think unions are willing to negotiate retiree health care costs.
As if in fact no good deed goes unpunished, about a quarter of the Los Angeles retirement costs come from pre-funding retiree health care like pensions, rare among California government employers.
Pre-funding sets aside money to invest to help pay the future retiree health care promised current workers, a policy advocated by the governor’s pension commission and others. A report thismonth by California Common Sense is a recent example.
Most government employers, like the state, simply pay the annual cost of retiree health care, letting future generations pay for the retiree health care promised workers providing services now.
How costly is pre-funding? State Controller John Chiang estimated in March that the state has a $62 billion “unfunded liability” for retiree health care promised current state workers and retirees over the next 30 years.
The state general fund paid about $1.7 billion last fiscal year for retiree health care, up 60 percent in five years. The controller estimated that fully pre-funding retiree health care would more than double the cost to $4.7 billion.
“Even slight amounts set aside will help lessen the impact on future generations, and ensure that we fulfill our responsibilities to the state workforce and our taxpayers,” Chiang said in a news release.
Los Angeles, except for a few years, recently has been trying to make the full actuarially required contribution to pre-fund retiree health care.
Of the city LACERS contribution, the pension contribution is 18.09 percent of pay and the retiree health care contribution is 6.40 percent of pay, combining for the total of 24.49 percent.
Of the city LAFPP contribution, the pension contribution is 31.33 percent of pay and the retiree health care contribution is 10.93 percent of pay, combining for the total of 42.26 percent.
Ed's Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/