L.A. County should stabilize pension costs now
Business and Economics Op-Ed
By: Anthony P. Archie
5.11.2005
Los Angeles Daily News, May 11, 2005
Gov. Arnold Schwarzenegger has put his plans for pension reform on hold, but that doesn't mean counties, where pension disasters worsen day by day, should do the same. That is particularly true for Los Angeles County. In 2003, L.A. County had the largest pension deficit of California's 58 counties, a full $3.9 billion. Out of a budget of $18 billion, 4 percent, or $711 million, was allocated toward pension payouts. Further, the county was still making annual debt payments of $396 million on the $2 billion borrowed from a 1994 pension bond. With such debt, the county could only fund 87 percent of pension obligations. Two years later, the pension gap has widened to $5.6 billion. L.A. County now has an even lower funding ratio (83 percent) and is still paying off bond debt ($357 million this year). This year, retirement costs have swallowed up $125 million more of the budget, totaling $836 million. That's millions more that could be given back to taxpayers or allocated toward services. The jump in costs is due to the unpredictability of the defined-benefit pension system, which relies on a collective portfolio of investments to cover benefits. When under-performance occurs, many pension systems fail to earn enough to meet all of their liabilities. When that happens, taxpayers must dig into their pockets to make up the difference since employees' pension amounts are guaranteed. Defined-contribution pension plans, like the one the governor proposed, would stabilize the costs of the pension system, securing totally funded pensions for employees and allowing county supervisors the luxury of planning for future pension allocations. Who among the supervisors wouldn't want that? Apparently none, since the board has done little to address the inherent problems with the county's defined benefit plan. To its credit, the board has gone after surface issues that make the pension problem worse, such as massive disability fraud in the county's fire and sheriff's departments. Indeed, Supervisor Gloria Molina's call for a case-by-case investigation on "pension spiking" -- the practice of claiming injuries near retirement to boost benefits -- should be commended. Eliminating this avenue for wrongdoers could save as much as $12.5 million a year. Praise is also due for successfully shooting down costly proposals that would have changed the public safety employee benefit calculation from 2 percent per year of employment to 3 percent. Despite the endless cajoling by the sheriff's deputy lobby, supervisors stood resolute, knowing that the county couldn't afford such lavishness. But there the progress stopped. On March 8, the board caved and granted "longevity bonuses" to inflate the salaries of high-ranking public safety officials near retirement. The measure was unanimously approved without public debate, even though this largess will cost taxpayers $13.1 million a year. The 10 million residents of Los Angeles County are paying nearly $1.2 billion a year on pensions. That ghastly sum is due to a flawed pension structure reliant on taxpayer bailouts. Doling favors out to influential unions only makes it worse. L.A. County residents deserve a concerted effort to enact real reforms in the pension system. The best way to do that is to implement a defined-contribution plan for new county employees. Stabilizing pension costs will reduce the need to borrow, increase taxes or cut services to cover pension deficits. Los Angeles is known as a trendsetter. County leaders should not wait for Sacramento, which has its own problems, to come to the rescue. They should start now and make Los Angeles County the first locality in the state to clean up its pension mess. Taxpaying constituents will be certain to notice. Anthony Archie is a public policy fellow in Business and Economic Studies at the Pacific Research Institute. He can be reached at aarchie@pacificresearch.org.
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