Los Angeles, CA–There are certain respects in which Los Angeles, for all its innate advantages, feels like an unsustainable city. It has the nation’s largest homeless population, the worst traffic, and numerous other service failures. Lack of money isn’t the problem, since the city has both high taxes and a wealthy population. It is instead because large sums go to employee pension benefits, sucking money from core services, and serving as a case study in how misappropriated resources can sink a city.
Indeed Los Angeles, like so many major U.S. cities, is being crippled by its public employee pension debt. According to the most recent actuarial report, the city’s three retirement systems–for public safety workers, water and power workers, and general employees–have a combined $15 billion debt. In the last 2 years, the city has put $2 billion into the system, accounting for 20% of annual general fund revenue. Despite this, the system is only 78% funded, according to city budget officials. And chances are this figure is generously high, since it assumes future returns of between 7.5% and 8.5%, rather than the 5.5% investment return assumption used by Moody’s. Under this latter assumption, the city’s pension debt is closer to $26 billion, and figures are set to greatly increase in coming years.
This wasn’t an issue for Los Angeles until recently. In 2003, the pension system was almost fully funded, accounting for 3% of city expenditures. A combination of factors caused the spike.
One is increased retirement expenses. In 2001, city voters approved a Tier 5 retirement plan, allowing public safety workers to retire at age 50 with up to 90% of their salaries, and 3% annual cost-of-living increases. Ever since, annual liabilities have skyrocketed, and L.A’s public safety workers get some of the nation’s highest average payouts.
“In 2014,” writes the Los Angeles Times in a lengthy November report, “the [public safety worker] fund’s average pension of $62,964 exceeded those for New York City firefighters ($60,136), New York City police officers ($44,133) and Chicago police officers ($49,535), among others.”
In total, LA’s system has 38,113 retirees and beneficiaries receiving average yearly benefits of $48,218, and many of them no longer live in California, reducing these plans’ supposed multiplier benefits.
The second factor is returns that were less than anticipated–the 5-year averages were 6.8% for LACERS and 6.6% for LAFPP.
These factors explain why, between 2003 and 2012, pension costs grew by 25% annually, far outpacing the annual spending growth for core services like health and sanitation (6.2%), community development (2.7%), transportation (4.2%) and culture and recreation (.6%). There have been attempts, notably by ex-mayor Antonio Villaraigosa, to shave some of these benefits, but true structural reform is difficult. It is resisted politically by union interests, and legally by the “California Rule,” a state law that protects retirement benefits.
This is not an unusual problem for California cities. Unfunded pension liabilities have already caused bankruptcy in Stockton, Vallejo and San Bernardino; and eat up similarly large chunks of the budget in San Jose and San Diego (despite those cities’ previous reform attempts). L.A.’s situation already caused Miguel Santana, the city’s Chief Administrative Officer, towarn of potential bankruptcy. Whether or not that happens, the city is feeling the impact of steering 20% of revenue towards non-economical, non-service-oriented purposes.