The agency that delivers retirement benefits to thousands of Los Angeles city employees is looking to scale back its investment projections — a move that could blow a hole in an already precarious municipal budget.
The board that oversees the Los Angeles City Employees’ Retirement System will meet Tuesday to consider cutting its “assumed rate of return,” the yearly expected earnings for its investment portfolio, from 7.5% to 7.25%.
The move is expected to shift about $38 million in retirement costs onto the city’s general fund, which pays for police patrols, firefighter staffing and other basic services, in mid-2018. The pension board also has the option to pursue a more dramatic step: taking the investment assumption to 7%, which would add $93 million to the city’s yearly pension burden, officials said.
City Councilman Paul Koretz, who represents part of the Westside, said he thinks a move to 7% would be “way too extreme” for the city budget.
“If you take that much out of the general fund every year, you’re talking about reduced services,” he said.
Koretz, like other council members, has no direct power over the pension board, which oversees benefits for more than 41,000 active and retired civilian city employees. The seven-member board is made up of appointees of Mayor Eric Garcetti and representatives of current and retired city employees.
The pension system, known as LACERS, has 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 from the budget to cover the system’s benefits.
Almost 20% of the city’s general fund — more than $1 billion — will be devoted to retirement costs this year.
Asked about this week’s pension decision, Garcetti said through a spokesman that he is “committed to making sure we use every taxpayer dollar wisely.”
“We will continue to maximize every dollar of general fund revenue and manage the city’s pension obligations as carefully and prudently as possible,” spokesman Alex Comisar said.
City officials are preparing for the financial fallout from a recent vote by another retirement agency. Last month, the Los Angeles Fire and Police Pensions board, which serves retired firefighters and police officers, cut its yearly assumed rate of return from 7.5% to 7.25%.
That move is expected to add $84 million in retirement costs to the general fund starting in mid-2018, budget analysts say.
The rising pension costs are sure to complicate matters in a city already struggling to balance its budget.
Last year, Garcetti and the council began working on a plan to borrow up to $60 million to pay for some of Los Angeles’ more expensive legal settlements. That proposal, which would require $20 million in interest payments over a decade, will be taken up later this year, one budget official said.
Pension boards across the state have been revising their earnings assumptions downward, taking them to 7.25% or 7%. Taxpayer watchdogs long have argued that Los Angeles’ city retirement systems rely on overly rosy investment projections.
In 2014, a citizens’ panel convened by council President Herb Wesson recommended that pension officials reduce their investment assumptions to a figure well below 7%. Critics called that idea unwarranted, with some warning it would push the city into bankruptcy.
At LACERS, an outside consultant recently recommended the pension system cut its earnings assumption to 7%. However, the pension board has also been offered an alternative strategy: move the agency’s earnings assumption to 7.25% while scheduling another review of the issue next year. That, according to the proposal, would occur after the pension agency had decided whether to rework its mix of investments.
Elizabeth Greenwood, who serves on the seven-member pension board, said she wants the panel to pursue the smaller reduction — and phase it in over three years to cushion the effect on the city budget.
Although pension board members have a fiduciary duty to the health of the retirement fund, they also have a secondary obligation to make sure their actions do not destabilize the city, said Greenwood, who represents current municipal employees.
“What we do not only affects the [existing city] employees, but it affects all taxpayers,” she said.