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LACERS Perspective on Los Angeles 2020 Commission Report

The Los Angeles 2020 Commission released a report titled: “A Time for Truth” (http://www.la2020reports.org/reports/A-Time-For-Truth.pdf).  The report details what the Commission perceives to be “the current situation and issues facing Los Angeles.”
City employee pensions and retiree healthcare are mentioned in the report.  The first mention is on Page 3 in the first full bullet point.  That bullet point indicates, in part, “Today’s workers are paying into a system whose benefits they are increasingly unlikely to see.”  The Commission bases this on the Solvency Test from our Comprehensive Annual Financial Report for Fiscal Year 2011-12 (CAFR, Page 71).  The Solvency Test is not the best measure to determine the financial health of a pension system because:

  • It is based on an unrealistic pension plan termination scenario (may be more appropriate for a corporate pension plan than a municipality).
  • It does not include future contributions from members or the employer, and future investment returns on those contributions.
  • It is a “leveraged measure” in that it artificially places all of the unfunded liability on active employees.  It artificially makes the Plan look worse by segregating retired and active employees. 

A more appropriate way to look at the financial health of a pension system is to review the funded status through the Schedule of Funding Progress (CAFR, Page 44; and additionally, for health care benefits, Page 46).

Our Board is very aware of the issues surrounding public pension funding, especially in light of the recent Great Recession.  Almost all public pension systems are dealing with similar issues and most do not have the strong pre-funding of retiree health care benefits that we have at LACERS.

The Commission discusses the “discount rate” (AKA our investment return assumption) on Page 14 of the report.  This discussion has been taking place at public pension plans throughout the country for several years.  You might recall that our Board lowered our return assumption from 8.00% to 7.75%.  There are several facts that the 2020 Report does not address regarding this issue, including the differences between the pension plans of major corporations and public entities, which is an important distinction when discussing this issue.  Another is that our current 7.75% assumption is quite common for public pension plans.  If you look at Page 3 of the issue brief from the National Association of State Retirement Administrators on this topic (http://www.nasra.org/files/Issue%20Briefs/NASRAInvReturnAssumptBrief.pdf), you will see that the vast majority of systems are in the 7.00% to 8.00% range.

In April 2014, the 2020 Commission expects to bring forward some recommendations to help resolve the issues they outlined in their initial report.