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City's early retirement plan was premature

It turns out the proposal may not pencil out. But the alternatives are also costly, leaving the council and the city's pension board with a tough decision to make.

August 20, 2009

There was nothing intrinsically nefarious about the plan to close the city's budget gap by enticing 2,400 employees into early retirement, as long as the city could afford it. Long-term costs would be wiped off the books without layoffs and with minimal service disruptions. The city didn't have cash for a straight buyout of employees, so it asked the unions to forgo contracted pay raises for two years and to partly finance the early retirement with increased pension contributions.

But Mayor Antonio Villaraigosa championed the Early Retirement Incentive Plan, and the City Council accepted it before completion of a required actuarial study to show how much it would cost. Now the numbers are in, and it's not clear the city can afford the plan. But with the budget already adopted and with the agreement with city labor unions virtually concluded, it's not clear the city can afford any alternative either. City officials undermined their own oversight of the treasury by rushing, and now they're making matters worse by delaying: Every month without early retirement -- or layoffs or other measures to cut from the city budget -- costs close to $12 million. Yet neither the council nor the board of the Los Angeles City Employees' Retirement System, or LACERS, are scheduled to make a decision before September.

The mayor and the council have been in desperate need of someone to tell them "no." Through much of the last 18 months, as this year's budget was crafted and the union contracts were renegotiated, the mayor left the crucially important position of city administrative officer vacant. The CAO is the city's chief budget manager and top labor negotiator, and one of the few high-ranking officials the mayor cannot fire.

Now, finally, there is someone telling the mayor and the council "no": Sally Choi, general manager of LACERS and, interestingly, Villaraigosa's former budget chief. After looking at the numbers, Choi told her board the most prudent thing for the pension fund would be for employees and the city to pay off the new pension obligation within five years. But the agreement with the union calls for a 15-year repayment.

Choi's "no" may be too late. The labor unions have ratified the deal, and if the council rejects an ordinance to implement the plan, the unions' previous contract will be reinstated with raises the city can't afford. So the answer then is widespread layoffs? Perhaps, but layoffs too are costly, hitting the city with new obligations to pay unemployment and enhanced medical benefits (under federal law). Instead of ridding the city of an excess of high-paid managers, as the early retirement program would, layoffs would cut from the low-paid bottom, then compel the managers to do work they are unsuited for. That's no way to serve the taxpaying public.

When the pension board does vote, its members will have to decide whether their duty to preserve the integrity of the pension fund requires them to accept Choi's argument that the early retirement proposal as written is not a "best practice," or whether, instead, their broader duty requires them to accept the plan to preserve the city's general fund, which partly funds the retirement system. But the mayor appoints a majority of pension board members. Because of that, there is no doubt pressure on those appointees to support the mayor's plan; it's an inherent conflict in the board's structure that should be revisited after the current quandary has been resolved.

And it must be resolved. Quickly. It may well be that the early retirement plan, for all its flaws, is the most prudent way forward for the city. If the council members who are now getting cold feet have numbers to back up a more responsible course, they should cut short their vacations and make their case. Likewise, if they're ready to adopt the plan, they must demonstrate that the city can afford it, and that it is something more than a politically expedient way to push fiscal disaster a year or two into the future.

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