L.A. pension officials deliver another financial blow to the city budget

“Will & Grace” Ribbon Cutting Ceremony
Los Angeles Mayor Eric Garcetti, appearing at an event last month, will have to contend with significantly higher city employee pension costs in next year’s budget.
(Matt Winkelmeyer / Getty Images)

A Los Angeles pension board voted Tuesday to scale back its long-range investment projections, creating yet another budget problem for the city’s elected officials.

The City Employees’ Retirement System board, which oversees pension benefits for thousands of city workers, voted unanimously to cut its assumed rate of return — the yearly earnings expected from the agency’s investment portfolio — to 7.25%, down from 7.5%.

The decision is expected to shift $38 million in retirement costs onto the general fund budget, consuming funds that would otherwise pay for basic services. And it comes at a time of increased concern over the city’s growing pension burden.

Another pension agency, which oversees benefits for thousands of retired firefighters and police officers, recently reduced its own rate of return and recalculated the expected lifespan of its beneficiaries. Meanwhile, growth in the overall city payroll is also expected to push pension payments upward.


Those issues, taken together, will add an additional $170 million in retirement costs in next year’s budget, city analysts say.

Alex Comisar, spokesman for Mayor Eric Garcetti, said in an email that his boss intends to minimize the effect of those extra costs on city services. The retirement board, Comisar said, acted “in the best interest of the pension system and its members.”

That view was not shared by Jack Humphreville, one of the city’s Neighborhood Council Budget Advocates, who said board members missed the chance to adopt a more realistic investment assumption. Garcetti’s appointees focused too much on shielding the city budget from additional costs and not enough on safeguarding the long-term health of the retirement system, Humphreville said.

“Their primary fiduciary duty should only be to the pension plan,” he said. “That’s what the law says.”


The board was presented with three scenarios for changing the agency’s economic assumptions. Garcetti’s four appointees backed the proposal with the smallest impact on the budget.

Tuesday’s vote comes as Garcetti and the City Council face a series of daunting financial challenges. Retirement costs are on track to consume $1.3 billion of the general fund within two years, according to a recent forecast. At the same time, city leaders have made long-term legal commitments on sidewalk repairs and other spending.

The city’s budget woes have been serious enough that earlier this year, Garcetti and the council considered a plan — later shelved — to borrow money to cover the city’s ongoing legal bills.

The retirement board, frequently referred to as LACERS, relies on three sources of funding: contributions from city employees, earnings from its investment portfolio and payments from the city budget. The lower the investment return, the larger the payment typically needed from the budget to cover the system’s benefits.

The retirement system has experienced wild swings in its investments in recent years. After the last recession, the agency seesawed from double-digit losses to double-digit gains. Although this year’s return was 13.3%, it was 0.5% the year before that.

Still, officials see the long-term trend as moving steadily downward. As a result, the board has repeatedly reduced its assumed rate of return, taking it from 8% down to 7.75% in 2011, then to 7.5% in 2014.

This time, the LACERS board struggled for nearly three months before making a decision. The agency’s consultant recommended taking the assumed rate of return down to 7%, a move that would cost the city budget $51 million to $84 million next year, depending on the inflation assumption chosen by the board.

City pension officials advised board members they could also seek a smaller decrease — but only if a fresh review of the agency’s long-range economic assumptions is conducted again next year.


Board member Michael Wilkinson, who represents retired city workers, pushed for the board to a move to 7%, arguing it would be “dangerous” for the agency to rely on a higher, and less realistic, number. Wilkinson’s proposal was defeated on a 4-2 vote, with all of the mayor’s representatives voting to reject it.

Cynthia Ruiz, one of Garcetti’s appointees, said a decrease to 7% would be too drastic. By moving to 7.25%, the board’s forecast would be the same as those adopted by the city’s other two pension agencies, she said.

After the vote, Ruiz acknowledged that the impact on the city budget was a factor in her decision — but not the overriding one. “Obviously, it’s something we take into consideration,” she said.

Board member Nilza Serrano said she wasn’t concerned about how the decision would affect the city budget. Serrano said she would be willing to consider a lower investment assumption when the issue is revisited next year.

“If we need to go to 7%, by gosh I will be the first one to vote for it,” she said.

Twitter: @DavidZahniser

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