The City of Los Angeles is a microcosm of the State of California: a high-tax, high-regulation area with a poor business climate and ballooning pension and budget deficits. The city is facing a $350 million budget deficit next fiscal year, and its unfunded pension liability is officially estimated at $6.8 billion, although, given the optimistic nature of public pension actuarial assumptions, the actual deficit is almost certainly higher. The city's annual pension contributions are expected to nearly double in the next few years, from $653 million last year to $1.2 billion, and pension and health care costs for retired city employees are projected to consume approximately one-third of the city's general fund by 2015.
On the Los Angeles Area Chamber of Commerce's "The Business Perspective" blog, Chamber President and CEO Gary Toebben discussed the need for city employee retirement benefits reform and the unfairness of the current system.
Most residents and business taxpayers are surprised to find out that the City of Los Angeles offers 100 percent paid basic health care premiums for nearly all municipal workers, dependents, retirees and spouses or partners. For retirees alone, the cost to provide free, lifetime health insurance is $292 million a year and rising.
The issue is about employee benefits versus basic municipal services. It's also about fairness. Many city residents struggle to fund their own retirements and pay their own family's health care costs, yet they are providing city employees and retirees with a nearly 100 percent paid health insurance package. These benefits are fiscally unsustainable and blatantly unfair to millions of Angelenos.
Enacting reasonable reforms is not about punishing city workers nor is it union bashing. Far from it. It's about maintaining basic city services and bringing fiscal responsibility and equity to the entire city family — municipal workers, residents and businesses.
Greater cost-sharing for health care and pensions will save a large number of city jobs. While city employees will have to pay more for health care and retirement, this cost saving move will help bring an end to uncertainty around layoffs and furlough days. It's better to have a job with access to affordable health care than no job with zero health care coverage.
What's clear is that these reforms must take place at the bargaining table. Mayor Antonio Villaraigosa and City Council must collaborate on a strong push in negotiations with the Coalition of LA City Unions. This push is necessary to save city services and the employees we currently have. Without it, the mayor and City Council will have no choice but to lay off more employees, enact more furloughs and cut the basic services that the taxpayers of Los Angeles expect and are paying for. Everyone in our city of 4 million residents loses under that scenario.
Unfortunately, the current L.A. pension reform proposals, including Measure G on the March 2011 ballot concerning potential changes to police and firefighter benefits, merely involve some minor tinkering with provisions of the current system, such as extending the retirement age a couple of years or offering a second tier of reduced benefits for new hires. But it is the entire defined-benefit retirement system that is unsustainable and susceptible to unaffordable future benefit increases, volatile annual city contribution requirements (due to a heavy reliance on pension fund investment performance), and manipulations or inaccuracies of pension fund actuarial assumptions.
These problems would be resolved by switching to a 401(k)-style defined-contribution retirement system with pay and benefits set comparable to those received in the private sector. In addition, Los Angeles should follow the example of San Francisco, San Diego, and Orange County and implement a requirement that voters must approve future public employee benefit increases. This would allow the taxpayers, who are the ones paying those government workers' salaries and benefits, to act as a final check against unreasonable benefit enhancements and unfair collusion among politicians and public employee labor unions.
» See also the Reason study, How California's Public Pension System Broke (and How to Fix It)