One of the biggest challenges facing the next mayor of Los Angeles is the ballooning cost of pensions for city employees. Those costs eat into other city services such as street repairs and paramedics.
To get a sense of the challenge, meet Jacob Miller. He ‘s worked at the Department of Animal Services for 11 years.
"If you are dropping off an animal, or adopting, or redeeming your own pet that got lost, I'm the person you would talk to,” Miller explains after working an overnight shift. “And I make sure your pet is comfortable while it’s at the shelter."
Miller, 34, recalls the words of his father, who also worked in the public sector: "He said, 'Once you have a city job, you're set for life. They're going to take care of you.'”
In L.A., that means a $46,000 annual pension for life for an average worker like Miller, after about 30 years on the job. Department of Water and Power employees average about $55,000 thanks to a powerful labor union that negotiates better pensions. Cops and firefighters receive even more -- on average, $66,000 annually. Most city workers also receive retiree healthcare. (Note: city pensioners are not eligible for social security.)
Here’s the problem: the city’s portion of these pensions has soared to more than a billion dollars a year—fully 20% of the general fund (see chart). That means less money for other services, including parks and potholes.
“We are at the bone now of city government," says City Administrative Officer Miguel Santana.
Lower tax revenues contribute to the city's financial woes, but generous pensions play a big role — exacerbated by pension fund investment returns that tanked during the economic crash. Retired city workers, like everybody else, are also living longer.
"The truth of the matter is, we have a 50-year tree-trimming cycle and our sidewalks are falling apart,” says Jay Handle of the city's Neighborhood Council Budget Advocates. “The reality is we're broke and we're broken."
Not everyone is so pessimistic.
"In a couple of years, the city's contribution to the pension fund is going to start declining, and should continue to decline because we've done well in our investments," says Liz Greenwood. She is a deputy city attorney who sits on one of the city’s three pension boards as an employee representative.
After dramatic losses following the 2008 crash, her pension fund has a 15 percent return on investments this fiscal year, she says. Greenwood is confident the fund will beat the board’s long-term average annual projection of seven and three quarters percent.
Investment returns play a key role in how much the city must contribute to employee pensions. When returns go up, the city’s contribution goes down. The opposite is also true. A growing number of economists say projected rates of return for pension funds should be lower.
“I would be surprised if the pension funds don’t lower their rate of return at some point,” Santana says.
David Draine, a Senior Researcher at the Pew Charitable Trusts, has studied L.A.'s pension funds. He says they're in better shape than most cities' funds because L.A. consistently has contributed to them. He dismisses former Mayor Richard Riordan's warning of bankruptcy.
But Draine notes L.A.’s three pension funds remain up to 20% underfunded. In other words, the city faces a $7 billion shortfall between the funds’ current balance and what is committed to retirees and active city workers.
"When you've got a bill like that to pay, it prevents you from spending in other areas, or from giving raises to current workers," Draine says.
Greenwood maintains the funds will make up the shortfall over time.
L.A. has taken recent steps to reduce retiree costs. It convinced labor unions to raise contributions for retiree healthcare. It also unilaterally upped the retirement age and reduced benefits for some new employees — moves that the unions have threatened to challenge in court.
Mayoral candidate Wendy Greuel has said she would look at raising the retirement age for current city workers. But state law is clear on this issue: the city can't touch pension benefits for current employees without providing an equal benefit, which would negate any savings.
So one big challenge for the next mayor is to keep the workforce small – it’s already shrunk by 5,000 positions. The next mayor must be stingy with pay raises, because pensions are based on salaries, Santana says.
At a recent debate, mayoral candidate Eric Garcetti touted reforms he’s supported, including the retiree healthcare changes, and wondered if Greuel could stand up to labor unions that are spending millions backing her campaign.
“Who has the independence to be able to deliver,” Garcetti said.
Greuel said Garcetti has enjoyed the backing of city unions in the past, and that she has the backbone to face labor.
"Yes, I have made some of those tough choices and, yes, I have spoken out about things that we need to do in the future," Greuel said.
City workers like Miller watch the pension debate the same way private sectors workers watch their 401Ks — nervously. Stories of fat cat government pensioners are the exception, he says, not the rule.
"I'm not going to be living in the Hollywood Hills and I'm not going to be driving a fancy car,” Miller says. “I just want to make sure that I have a roof over my head.”
The problem for city leaders: the cost of Miller's retirement roof is taxing the city budget.
Police & fire
Dept. of Water & Power
|Avg. member contribution (% of paycheck)||11%||7% - 11%||6%|
|Avg. age at retirement||60||52||58|
|Avg. tenure (in years)||27||28||30|
|No. of members currently working||25,000||13,400||9,000|
|No. of members retired||13,000||7,800||9,000|
|Avg. annual payout to retirees||$46,000||$66,000||$55,000|