Los Angeles Faces Billions in Unfunded Pension Liabilities

With swearing in of former Los Angeles city councilman Eric Garcetti as mayor of Los Angeles on Sunday, the city has a new opportunity to steer itself in the right direction. Maybe.

The $7.7 billion city budget for fiscal year 2013-14, which began on Monday, purports to set the stage for a budget surplus by fiscal year 2017-18, though it forecasts budget deficits in excess of $95 million annually through 2017. The deficit reduction achieved for fiscal year 2013-14 involved one-time actions, including depleting the Los Angeles Budget Stabilization Fund of $53 million of $69 million, as well as one-time revenue increases. Garcetti will not be able to rely on such actions to close deficits.

Further, the 2013-14 budget does not include money to cover a scheduled 5.5% pay increase for city workers, which the city estimates would add $108 million to the 2014-15 budget.

More challenging is Los Angeles’ unfunded liabilities in pension obligations and retiree health care. For years, Los Angeles has accumulated unsustainable pension obligations to city workers. Former mayor Antonio Villaraigosa and retired City Councilman Richard Alarcon, both having left office on Monday, are eligible for more than $100,000 per year in pensions for their public service, joining at least 841 retired city employees who collect over $100,000 in pensions annually. As of this writing, only Alarcon has applied for his estimated $115,000 pension. Meanwhile, exiting Councilwoman Jan Perry, who has worked in city government for nearly 22 years, recently withdrew her pension request of $84,098, deciding she was “not ready to retire,” thereby potentially increasing her pension earnings down the line.

It isn’t just public servants who are bestowed with such lavish retirement subsidies. According to a February 2012 Stanford Institute for Economic Policy Research (SIEPR) review of 24 public pension systems in California, Los Angeles employees receive pensions averaging $46,211, higher than any other system. There are three pension funds in Los Angeles: the City of Los Angeles Fire and Police Pension System (LAFPPS), the Los Angeles City Employees’ Retirement System (LACERS), and the City of Los Angeles Water and Power Employees’ Retirement Plan (LAWPERP). Combined, these pension funds provide benefits to approximately 30,000 beneficiaries. According to the SIEPR study, the three funds were underfunded by a combined total of $27 billion. Due to the variability in discount rate estimates, Los Angeles city officials provide a lower, though still substantial estimate. LACERS estimates a $6 billion unfunded liability by fiscal year 2016-17, billions less than the $11 billion that SIEPR calculated. In January 2013, the moderate Pew calculated unfunded pension liabilities in Los Angeles at $4 billion.

Regardless of the ultimate unfunded pension liabilities, pensions have and will take up an increasing percentage of the city budget and thereby larger amounts of taxpayer money. From 2003 to 2012, unfunded pension liabilities have exploded from only $87 million to the current $4-27 billion range. As a percentage of the budget, in that same period, pension payments grew from 3% of the city budget to now over 15%.

Los Angeles did reform it’s LACERS system in 2012, raising the retirement age from 55 to 65, and reducing the maximum pension benefit from up to 100% of final salary to 75%. This plan only affects new hires beginning this month. Public safety and Department of Water and Power (DWP) workers are not affected.

Chief among Garcetti’s campaign promises was to take a look at the DWP.

While Los Angeles residents have seen rate hikes from the DWP, DWP workers have been living comfortably: the average salary for a DWP employee is over $100,000. While the Los Angeles unemployment rate has stayed above 10% since 2008 until recently, DWP salaries have increased in that time period. Including, according to the Los Angeles Times, average pay for custodians, which grew from $56,060 to $69,995. For reference, the median household income in Los Angeles was $46,000 in 2011.

With Villaraigosa headed off to contemplate a gubernatorial candidacy, it remains to be seen how City Hall deals with this mess.