PUBLIC SERVICE PROTECTION INITIATIVE 2012

Despite steps taken by the Mayor, City Council and Labor in recent years, essential public services provided by the City of Los Angeles have been and will continue to be eliminated unless effective actions are taken immediately to bring public sector pension costs under control. The following chart from the Chief Administrative Officer (CAO) illustrates the financial impact of these rapidly escalating costs on the General Fund.

In 2005-06, the City’s contribution to employee pensions was $435 million which was 10.5 percent of the General Fund. The rapid increase in the rising cost of pensions has been a major factor in forcing the City to reduce staff and make other cuts in essential services. The projected costs shown above are simply not sustainable without devastating the City’s ability to provide critical public safety and other core services. Between 2012 and 2016, pension costs are projected to increase by $442.6 million, and it could be more if the City’s pension funds do not earn a minimum investment return of 7.75% per year. Simply put, every dollar spent on employee pensions is a dollar that cannot be used to put police officers in patrol cars, firefighters in fire trucks and ambulances, or to resurface streets and repair sidewalks.

The following table from the CAO illustrates the magnitude of the escalating pension costs and examples of essential public services that could be provided if these taxpayer dollars were not diverted to pension obligations.

FUTURE PUBLIC SERVICES AT RISK
Possible Public Services Not Provided: Fill Potholes (per hole) Restore Street (per mile) Reconstruct Street (per mile) Police Officer Firefighter Fire Truck Ambulance Helicopter Aquatics Program New Library Books TOTAL Cost $21 $350,000 $600,000 $200,000 $200,000 $625,000 $181,000 $13,000,000 $10,000,000 $6,000,000 Number 475,000 300 150 500 100 25 50 1 5 5 2012 to 2016 Total $9,975,000 $105,000,000 $90,000,000 $100,000,000 $20,000,000 $15,625,000 $9,050,000 $13,000,000 $50,000,000 $30,000,000 $442,650,000

The residents of the City of Los Angeles deserve better results for their hard earned tax dollars. The first step to getting better results and improved public services is to bring City expenditures on employee pensions under control. Pension reform can be a complex administrative and legal issue, but the reforms we are proposing are founded on the bedrock of two simple principles: 1. Pension costs and the resulting impact on essential public services are of paramount importance to the residents and control of those costs should reside with the residents. Local government exists to provide essential public services, not to maintain structural pension costs that place those services at risk.

2.

Legal, permanent pension reform requires amending the current Charter of the City of Los Angeles. The following proposals would provide permanent pension reform and ensure that the overwhelming majority of taxpayer dollars are spent on providing essential city services.

CHARTER REFORM PROPOSALS 1. AMEND CHARTER SECTION 1150 TO REMOVE AUTHORITY OVER CIVILIAN PENSION PLAN DESIGN FROM THE MAYOR AND CITY COUNCIL AND RETURN IT TO THE RESIDENTS Authority over the civilian pension system was originally held by the residents of Los Angeles. In the Charter reform of 1972, voters delegated that authority to the Mayor and City Council, ostensibly to provide greater flexibility to address fiscal and employment issues. This amendment has left the citizens of Los Angeles without a voice. As a result, in the overwhelming majority of cases, the pension that a civilian employee receives is far superior to the pension that taxpayers, who are paying for that pension, can expect to receive through Social Security and company retirement plans. 2. AMEND CHARTER SECTION 1160 AND SECTION 1210 TO ESTABLISH THE CITY POLICY ON THE MAXIMUM CONTRIBUTION RATE FOR CIVILIAN AND SWORN PENSION PLANS Currently, Charter Sections 1160 and 1210 require the City of Los Angeles to make payment to the two pension systems in an amount equal to the normal cost of the benefit and an amortized payment of the systems’ unfunded liability. This is a sound policy and should be continued. The failure to achieve required investment performance, a significant increase in life expectancy and the granting of additional benefits by the City Council, and in some cases the voters, have led to tremendous and unsustainable increases in the City’s cost for pensions. Without immediate action, these costs will continue to rise and replace other core city services. Because the benefits enjoyed by current City employees are protected by law, the remaining most effective way to control pension costs for current City employees is to control the rate of salary growth because every increase in salary also increases the pension obligations of the City. For example: • For Civilian Plans, the maximum City Contribution to fund employee pensions (for both the normal cost and the unfunded liability) should not exceed 15% of pay. When the normal cost and the unfunded liability exceed 15%, the pension based salary amount for all civilian classifications should be frozen until the City’s required contribution is equal to or less than 15% of pay.

Recognizing the necessity to maintain a workforce that can perform the highly specialized demands of public safety, the maximum City Contribution to fund sworn employee pensions (for both normal cost and unfunded liability) should not exceed 25% of pay. When the normal cost and the unfunded liability exceed 25% of pay, the pension based salary amount for all sworn classifications should be frozen until the City’s required contribution is equal to or less than 25% of pay.

3.

NEW TIER FOR CIVILIAN PENSIONS Fundamental to the future cost of employee pensions is the level of benefits that will be provided to employees during their retirement years. It is worth noting that currently the maximum a private sector employee will receive from Social Security at age 66 is $30,615 per year. A new tier pension design for new civilian employees like proposal #2 provided by Bartel would ensure that pension costs for new hires will gradually reduce the threat to the City’s fiscal stability in the future.

PROPOSED PLAN DESIGN FEATURES Bartel Proposal #2 Retirement Factor Early Retirement Maximum Retirement Allowance Normal Retirement Age Employer Contribution Employee Contribution Cost of Living Adjustment Final Compensation Calculation Dual Pensions Estimated Savings over 30 years 1.60% Full actuarial value reduction 75% Tied to social security eligibility 25% of Normal Cost 75% of Normal Cost Consumer Price Index based with 1% Cap Based on highest five year salary average May not become a member of any other city retirement system. $3.188 Billion

Escalating pension costs and the corresponding reduction of essential city services in order to meet these growing pension obligations is the most ominous financial issue facing the Mayor and City Council. The issue has been seriously addressed at the bargaining table in recent years and progress has been made, but clearly not enough to divert continued cuts in essential city services. The existing pension system is still unsustainable over the long term. Unless substantially more steps are taken by the Mayor and City Council, more tax dollars each year will continue to be diverted from essential city services to pension contributions. As city services are cut, Los Angeles will become less attractive to business and to individuals making it more difficult to broaden the tax base and support existing city services. This is a vicious cycle. The time to act is now.

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