Going for broke in L.A.?
Former mayor Richard Riordan has been roiling the civic waters by arguing that the surest -- and perhaps the only -- way out of Los Angeles’ fiscal crisis is a declaration of municipal bankruptcy, which he believes ought to come sooner rather than later.
In a conversation with The Times over the weekend, Riordan argued that bankruptcy may be the only way to attack the structural problem gnawing the heart out of the city budget: unsustainable public employee pension costs. Currently, Riordan says, the city is struggling to meet its pension obligations, and that’s assuming it will receive 8% annually on the money invested on retirees’ behalf. In fact, the average return over the past decade has been just 4%. Over the next few years, L.A. may be looking at $1.5 billion in pension obligations it can’t meet. “We need some adults to come alive in the city and to talk through how to meet that liability,” he said. “If that doesn’t happen, we shouldn’t rule out bankruptcy.”
Mayor Antonio Villaraigosa’s chief of staff, Jeff Carr, says categorically that “this mayor has made it clear that we are not going to declare bankruptcy.” Moreover, while federal law lets bankruptcy judges reduce negotiated pension and health benefits in the private sector, it forbids changes in public employees’ agreements.
Wherever you come down on the bankruptcy question, it’s clear that anything approaching a genuine resolution of the civic financial troubles will have to involve a thorough overhaul of the pension system. Traditionally, public employment offered generous benefits because wages and salaries were lower than in the private sector for comparable work. More recently, public sector salaries have increased -- in part because the governmental workforce is the most significantly unionized in the American economy -- at the same time compensation in most of the private sector has been falling. When you narrow the focus of this national trend to labor-friendly L.A., the picture that emerges is fairly stunning.
Dean Hansell, vice president of the Police and Fire Pension Board, agrees that even the intermediate outlook is alarming. He said Monday that less than a month ago, his board received a new set of projections on what police and fire pensions and retirement health benefits will cost over the next five years, assuming an annual return of 8% on investment. This year, the city will need to come up with $423 million to cover those costs. Over the next five years, the annual bill escalates thus: $526 million (2011-12); $643 million (2012-13); $788 million (2013-14); $902 million (2014-15). In 2015-16, Los Angeles will have to come up with more than $1 billion just to pay its retired police officers and firefighters their pensions and to cover their healthcare. As Hansell put it, “Those are astonishing numbers.” They’re also unsustainable.
Carr, like the mayor, thinks the answer is a new round of labor negotiations in which “you get the unions to agree on sensible annual caps to their current members’ future retirement and health benefits and to increases in the employees’ pension contributions.” He also thinks the city needs to confront the unmentionable topic of increasing revenues. “At the moment everybody wants services we really can’t afford.”
Riordan says he doesn’t “believe the city will ever get those sorts of concessions from its unions. It would take tremendous guts on everyone’s part. We’re not seeing any evidence of that, and we’re probably not going to because everybody negotiating for the city was elected with the unions’ support.” Bankruptcy, he adds, would allow a judge to do what city officials can’t or won’t: fundamentally restructure the city’s labor agreements. As Riordan puts it: “Who wants to live in a city without decent police or fire protection or libraries or parks? Unless we get these pension costs under control, we won’t be able to afford any of those things.”
Carr would put that question differently: If a bankruptcy judge were allowed to decide whether or how L.A. would meet its obligations to its employees and creditors, “we’d need to ask ourselves, who wants to live in a city that doesn’t keep its word?”
That is a tragic set of options. As Riordan says: “Nobody likes any of these choices, but the question now is whether we want to make the future of this city and its people hostage to the bad decisions of the past.”