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Pension repayment plan could throw L.A.'s budget into disarray

The system's general manager urges 'prudent' repayment in 5 years, not 15. The money would come from employees or the city's general fund.

August 03, 2009|David Zahniser

A high-level Los Angeles pension official has recommended that the city pay off the cost of an employee early retirement package 10 years sooner than previously planned -- a move that threatens to throw the city's budget into disarray.

Hoping to slash payroll costs and eliminate a $530-million budget shortfall, the City Council gave tentative approval last month to a deal that provides early retirement to 2,400 workers who belong to the Coalition of L.A. City Unions.

That agreement called for the city's pension fund to be reimbursed over 15 years for the cost of giving retirement benefits ahead of schedule. The money was expected to come largely from higher retirement contributions from the remaining workforce.

But Sally Choi, general manager of the Los Angeles City Employees' Retirement System, recommended Friday that her agency's board require repayment within five years. Choi told the board, which is scheduled to vote today, that the faster payment schedule would be "more fiscally prudent," based on a recently completed review of the plan.

The resulting higher payments would hike the cost of the city's retirement package by at least $33.7 million in July 2010, the first year of payment. To cover that higher cost, city officials would be left with two choices: demand a considerably higher contribution from city employees or tap the city's general fund, which is used to pay for police, fire protection and other basic services.

"This is not good news for the unions," Councilman Dennis Zine said. "This is not good news for those who thought they had a deal for early retirement."

The union coalition, which represents 22,000 employees, launched a last-minute lobbying effort against Choi's recommendation Sunday, calling her recommendation "irresponsible" and saying that it would harm the city's ability to deliver services. In a letter to board members, six union leaders said a 15-year payment schedule would be fiscally prudent.

Choi's "recommendation is not only ill-timed and ill-conceived, but threatens to further burden city coffers in these extraordinarily hard economic times," they wrote.

Choi said the pension board's primary responsibility is to safeguard the financial health of the retirement system, which is charged with delivering benefits to 15,000 retired employees and 30,000 active employees. Any effort to relieve the city's budget woes should be secondary, she said.

Mayor Antonio Villaraigosa, who selects four of the pension board's seven members, plans to ask the board to delay a vote on the payment schedule. Mayoral spokesman Matt Szabo repeated Villaraigosa's support for early retirement, which he hailed last month as a way to cut costs by $500 million within two years.

"The mayor continues to believe that an early retirement package is better than layoffs," Szabo said. "The question now is, how much will it cost and how much will we save?"

City officials fear that a five-year repayment plan would cost so much that it would no longer save enough money to bring the city's budget into balance.

The City Council still must cast two more votes on the early retirement deal. On Friday, it received a report from a city-hired actuary who looked at two early retirement scenarios, one that involves the departure of 2,229 employees and another involving 2,763.

Under the second scenario, the five-year payment schedule could increase the cost of the retirement package by $48.9 million in the first year of payment, according to a report issued to the pension board.

Choi said the payments to the pension fund should occur only during the period when the city is deriving the cost savings from a smaller workforce. Choi said the actuary defined that period as five years.

The coalition's members ratified the early retirement plan last week, partly as a way of shielding themselves from layoffs and furloughs. As part of the agreement, workers agreed to increase their employee contribution from 6% to 6.75% starting in July 2011.

If city workers had to cover the cost of early retirement within five years, their contribution would increase to 8.86%. Under the more aggressive retirement scenario -- the one allowing 2,763 workers to leave -- the employee contribution would jump to 10.7%.

Coalition spokeswoman Barbara Maynard said early retirement would provide a benefit to the city over 15 years, not five.

Maynard warned that the coalition's members have no intention of contributing more toward their retirement.

"We are not going to reopen the agreement that we just ratified," she said.

Based on the current debate, Councilman Bernard C. Parks said he would have "grave difficulty" in moving ahead with early retirement.

Councilwoman Jan Perry said she was alarmed by the latest developments but did not yet know what the council's next step should be.

"Obviously, putting ourselves in a deeper hole would not be a viable option," she said.

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david.zahniser@latimes.com

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