Widespread Pension Demands Compound Fiscal Crises

By KATE BERRY

Staff Reporter

Despite strong investment returns from the stock market last year, Los Angeles city and county officials face millions of dollars of payouts to shore up pension funds, part of a growing crisis nationwide.

Pension fund obligations are compounding the fiscal crises of cities and counties, which already face huge revenue shortfalls because of state budget cuts. Contra Costa County and Philadelphia have looked to refinance the unfunded portions of employee retirement benefits, for example. The states of West Virginia, North Carolina and Oregon have among the worst-funded public pension plans in the nation.

The shortfalls have appeared partly due to accounting requirements. Returns are calculated on a five-year moving average, so 2003’s returns, though positive, weren’t enough to make up for earlier down years.

As a result, the City of Los Angeles expects to shell out $225 million to the Los Angeles Employees’ Retirement System, which pays health and retirement benefits to nearly 40,000 current and retired city employees even though the fund’s assets rose by 25.8 percent in calendar 2003.

That payment, which the city typically makes in one lump sum on July 1, comes on top of a $90 million contribution the city made in July 2003.

“The law requires us to fund our pension plans at a certain level,” said Mayor James Hahn. “Because of the terrible performance of the stock market, we’re going to have to put in $135 million more into the pension systems next year than this year that’s a huge hit.”

Meanwhile, L.A. County projects it will pay $762 million in its upcoming fiscal year to fund a pension system that covers 135,000 current and retired county employees. That’s a 42 percent jump from last year’s $537 million payout.

The county, however, is in much better shape than most local governments because it floated $2 billion of pension obligation bonds in 1994, setting aside a credit reserve that can be tapped to defray yearly expenses. For the upcoming fiscal year, the county expects to use $314 million from its reserve to help fund the shortfall. That leaves about $448 million that will come out of its anticipated budget of $16.5 billion for 2004-2005.

Some local governments in California face pension crises so dire that retired employees may see cuts in their monthly checks.

The $2.5 billion San Diego City Employees Retirement System, for example, faces a $1.1 billion deficit as a result of city officials underfunding the pension system when it was reaping huge stock market returns in the late 1990s that have since reversed course.

In addition, the FBI, the Securities and Exchange Commission and the U.S. Attorney’s office are investigating whether city officials committed fraud by failing to disclose accounting errors in the sale of $2.3 billion of municipal bonds dating back to 1996.

Funding dips

Wall Street’s strong performance in 2003 could bring some much-needed relief in the years ahead

The city of Los Angeles’ pension system has seen a 25.8 percent rise in its portfolio, to $7.6 billion for the calendar year ended Dec. 31. “We’re starting to regain those investment earnings,” said Robert Aguallo, general manager of the city’s pension system.

Another way to look at pension funding is to gauge the system’s assets versus the long-term value of its benefits paid out, or liabilities, often referred to as a funding ratio.

The City of Los Angeles’ funding ratio fell to 89 percent in fiscal 2003, from 96 percent in 2002.

Meanwhile, L.A. County’s funding ratio fell to 87.2 percent for the fiscal year ended June 30, 2003, from 99.4 percent at the end of fiscal 2002.

Most pension funds have actuaries that determine liabilities based on demographic changes, mortality rates and employee salaries, among other items such as inflation and anticipated investment returns. The assumptions determine the city’s annual contribution.

Increasing benefits can hurt pension fund ratios just as falling equities can, said Gregg Rademacher, assistant executive officer at Los Angeles County Employee Retirement Association.

Pensioners received a windfall in 1999 when a bill sponsored by the California Public Employees Retirement System increased retirement benefits but resulted in ballooning costs to local governments during the economic downturn.

Laws passed in 2000 granted new benefits increases to employees of the 26 counties outside Calpers.

In 2001, voters agreed to increase benefits for police and firefighters in the city of Los Angeles. The county refrained from granting the higher benefits and is currently in mediation with several unions that want to increase benefits, said Donald Washington, assistant division chief of employee relations for the county. “With the state budget crisis the way it is, the negotiations may go on for a while,” he said.

Losing Ground – Despite markets’ rise, L.A. pension funds need shoring up.

Pension fund City of Los Angeles County of Los Angeles

Employees 25,000 87,760

Retirees 14,000 47,233

Pension assets (Dec. 31, 2003) $7.6 billion $26.6 billion

Change in past 6 months +$900 million ($1.7 billion)

Funding required June 30, 2003 $90 million $537 million

Anticipated requirement June 30, 2004 $225 million $762 million

Sources: Los Angeles City Employees’ Retirement System, Los Angeles County Employees Retirement Association