Solution to LA’s Pension Troubles? Continue to Study Them Until They Blow Up.

Apr. 14, 2014
by Bob Adelmann

It has been said that if you ask a liberal his opinion on how to solve a current problem he’ll analyze it and then give you a dim view of the obvious. But when you ask a group of liberals what they think, they’ll analyze it and then pass the buck on to another group of liberals.

That’s what just happened in California. In March of last year, an LA city councilman asked a former commerce secretary to gather a gaggle of liberals to analyze the City of Angels’ intractable and overwhelming financial problems and then come up with some solutions. Predictably he gathered around himself a shrewdness of individuals with the same mindset, spent a year analyzing the City’s troubles, and then recommended … another committee to study the issue further!

Called the Los Angeles 2020 Commission, its purpose was to present workable, real-world solutions to help Los Angeles become solvent again by 2020. In December, its first report, “A Time for Truth,” was truly frightening: Without something being done immediately, the city was going to turn into Detroit. It actually said it much more politely than that, of course, but the message was clear:

Los Angeles is barely treading water while the rest of the world is moving forward. We risk falling further behind in adapting to the realities of the 21st century and [instead risk] becoming a city in decline.

Especially unnerving among all of the city’s problems are those facing its three pension plans, one each for its workers, its fire and police, and its Department of Water and Power (DWP) employees. One of those plans earned 14 percent on its invested assets last year – just half of what stocks invested in the S&P 500 Index made, but still twice what the plan’s assumptions called for – and yet that single plan is still $5 billion underfunded! The three plans have less than 10 percent of what will be needed to pay out their promised benefits. That’s a 90 percent shortfall!

In the commission’s latest report issued last week, entitled “A Time for Action,” it decided to avoid addressing the reality that, short of a heavy dose of pixie dust, those plans are going to fail massively and force LA into bankruptcy in the process. Instead, the shrewdness talked about adjusting the three plans’ investment assumptions. Noting that those fewer and fewer Fortune 500 companies still using defined benefit pension plans use interest rate assumptions in the neighborhood of 4 to 4½ percent, whereas LA’s plans assume 7.75 percent will be earned every year, the commission said these were “overly generous” and some adjustments to them ought to be made. Here’s this from the report:

It’s no secret that retirement obligations are taking a toll on in the City’s budget. The portion of the City’s budget spent on retirement costs has grown from 3% in 2003 to 18% currently, and is forecasted to continue to take a larger share of the budget [in the future].

It then avoids any serious discussion of what that really means, and instead suggests that the current 7.75% interest rate assumption “is at the high end of the range” and “raises the question whether sufficient savings are being put away today.” Well, of course not, but that’s too obvious. It’s also too embarrassing to say that there really is no solution to the problem, short of bankruptcy.

Especially when some on the commission are working hard to protect their own interests. On the commission is former big-spending liberal California Governor Gray Davis, so tyrannical during his administration that his enemies nicknamed him “Red” Davis. There’s Mickey Kantor, former Commerce Secretary under Clinton and noted for his promotion of NAFTA. There’s Brian D’Arcy, the head of the DWP union. There’s Kathay Feng, head of California Common Cause. There’s Hilda Solis, former Labor Secretary under Obama.  Each of them has an agenda and a worldview that precludes telling the truth and instead doing everything they can to keep in place promises that can never be kept.

So they came up with a solution – 13 of them, actually, including a call for a commission to study the pension “issue” in more detail and come up with “a series of concrete measures to put the city on a path to fiscal stability and renew job creation.”  

At this late stage of the game, there really is only one solution to those promises made by other politicians in the past who were bad at math and didn’t care: bankruptcy. How many more commissions it will take before reality seeps into the shrewdness’ consciousness is unclear, but the endgame isn’t. As Mish Shedlock put it:

The 2020 report is sure to gather dust like all studies before and after until the inevitable happens. The inevitable is bankruptcy.

1.      The only conceivable way LA can meet its pension obligations is to reduce them.

2.      Given that unions will not negotiate, the only conceivable way to reduce them is [through] bankruptcy.

LA is already bankrupt. The only missing ingredient is recognition of that simple fact.

A graduate of Cornell University and a former investment advisor, Bob is a regular contributor to The New American magazine and blogs frequently at www.LightFromTheRight.com, primarily on economics and politics. He can be reached at BobAdelmann@msn.com.

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Sources:

Mish Shedlock: LA Commission Studies Pension Crisis, Recommends New Commission; Bankruptcy Inevitable

Los Angeles 2020 Commission

A Time for Truth

A Time for Action

Los Angeles Times: Los Angeles 2020 Commission calls for changes to improve the city

The New York Times: Report Finds Los Angeles at Risk of Decline

Bio of Mickey Kantor

S&P 500 gained 30 percent in 2013

Sobriquet “Red” Davis by CCIR

What do you call a group of apes: a shrewdness

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