At the city's budget hearing Tuesday, Los Angeles city council members got some sobering news: Investment analysts expect the city's two pension funds to produce a lower rate of return in the coming years.
The city is already spending more than ever on pension contributions for its retirees – nearly $1.1 billion, which is nearly 20 percent of the city's general fund, according to a recent report from L.A.'s Interim Chief Administrative Officer Richard Llewellyn.
Costs have approximately doubled over the past decade as a wave of baby boomers retired and are now living longer on the generous pensions they were promised. The city expects another wave of retirement in the coming years, coupled with higher health care costs. The news of a lackluster investment forecast adds yet another financial obstacle.
L.A.'s pension funds, known as LACERS (Los Angeles City Employees Retirement System) and the LAFPP (Los Angeles Fire and Police Pension) currently have a rate of return of about 7.5 percent, but representatives from both funds told the city's Budget and Finance Committee they expect the rate of return to decline to about 6.5 percent over the next decade.
Ray Ciranna, general manager of the Department of Fire and Police Pensions, told the committee the expectations come from capital market assumptions on how public pension funds will perform.
"Most of the larger money managers are looking at a capital market that is trending downward overall. And these are the headwinds that we are facing as we move forward," he said.
Any investment declines would force the city to increase its contributions to compensate for the loss, said Thomas Moutes, general manager of LACERS.
"While we certainly do not want to burden the city's general fund with a higher contribution rate in the coming years, our fiduciary responsibility to our members requires that we ensure the city contribute adequate amounts to keep the benefit promises to tens of thousands of active and retired city employees," Moutes said.
Llewellyn estimates the city would pay an additional $100 million a year in pension costs if the rate of return fell by just 0.25 percent.
Both Moutes and Ciranna said they expect mortality rates to further push up costs.
"People are living longer, which is a good thing. But with folks in our plan, if they retire at 55 and live another 25-30 years that does weigh heavy on the system," Ciranna said.
LACERS and LAFPP each has a board of trustees that decides whether to lower the assumed rate of return. LACERS' board will meet in July.
If the assumed rate of return drops, the city would not need to act until the 2018-19 fiscal year, Moutes said.