The city of L.A.’s pension obligation is spiraling out of control and is at the core of the ongoing budget deficit. The cost of retiree pensions and health care grows by hundreds of millions of dollars each year, and the 2011 budget is already projected to have a $360 million deficit. Some (including former Mayor Richard Riordan) have even speculated that unless drastic changes are made the city could face bankruptcy. At the very least, there will have to be choices made between providing basic city services and meeting pension demands.
City leaders recently took a step toward pension reform with a motion by City Council President Eric Garcetti that would create a new retirement tier for employees covered under the Los Angeles City Employees’ Retirement System or Lacers. Changes to Lacers requirements can be done through an ordinance, where reforms to police and firefighter pensions require a ballot measure, and the Department of Water & Power Employees’ Retirement Plan must be changed by the board of DWP commissioners.
Under this new tier, the retirement age would be raised to at least 60 and would set final compensation based on a three-year average, instead of the final year, which has led to spiking salaries to raise pension benefits. The proposal would prohibit double-dipping. It would lower the Consumer Price Index cap to 2 percent and eliminate the practice of banking when the CPI is higher than the cap. In addition, the plan requires a minimum 2 percent employee contribution toward retiree health care.
Draining city coffers
While the proposal does address some common concerns about city pensions such as pension spiking and the CPI cap, the new tier only covers new employees. This means the changes proposed by the motion do nothing to address the pensions that are currently draining city coffers.
Additionally, some of the changes lack substance and seem to be added to create the appearance that reform is occurring. Raising the retirement age to 60 is practically insignificant, considering the current average age for Lacers retirees is 60. The practice known as double-dipping rarely happens, with less than 30 employees in the entire city receiving both pension benefits and a salary from the city (and two of those individuals are City Council members).
The Valley Industry and Commerce Association is somewhat reassured that the city is finally taking some kind of action to address the pension crisis, but this ordinance does not even come close to making the drastic reform needed to solve the problem. The costs of health care and benefits are increasing along with life expectancy for retirees, making the city responsible for higher contributions that will continue to drive Los Angeles toward bankruptcy if the real problem is not confronted.
Real pension reform needs to increase individual contributions and move from the defined benefit system to a defined contribution plan. Employees must also start contributing more to cover their health plans as costs continue to increase; the current $10 co-pay has not been raised in 10 years. City officials should also move forward with putting an actual fire and police pension reform package on the March 2011 ballot, unlike the plan recently put forth by Mayor Antonio Villaraigosa.
Yes, we recognize that pensions for current employees are difficult to modify, but we elect leaders to make hard decisions that are in the best interest of all residents and taxpayers. We cannot allow the rapidly growing pension obligation to be fed at the expense of vital city services. Unless the pensions that are currently robbing residents of basic services and threatening increased taxes for businesses can be cut down to a manageable level, quality of life in the city will suffer.
City officials must make significant structural reform to the entire city pension system in order for Los Angeles to continue to perform its core functions. True reform is lacking in the current proposal and VICA will not praise a job half-started. Instead, we will hold our applause until the task is completed.
Daymond Rice is chairman of the Valley Industry and Commerce Association, a business advocacy organization that represents employers throughout the Los Angeles County region at the local, state and federal levels of government.
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