| Los Angeles on the Brink of Bankruptcy
OPINION
by Richard Riordan and Alexander Rubalcava
The Wall Street Journal
May 5, 2010
Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa and the City Council have been either unable or unwilling to face this fact.
According to the city's own forecasts, in the next four years annual pension and post-retirement health-care costs will increase by about $2.5 billion if no action is taken by the city government.
Even if Mr. Villaraigosa were to enact drastic pension reform today, which he shows no signs of doing, the city would only save a few hundred million per year.
Los Angeles's fiscal woes can be traced to two numbers: 8% and 5,000. Eight percent has been the projected annual rate of return on the assets in Los Angeles pension funds. Four years ago, we strenuously warned Mr. Villaraigosa of the dangers behind the myth of that 8%, only to be told by the city controller's office that our warnings were "based on faulty assumptions which are largely disputed."
How faulty were our assumptions? Over the last decade, the two main pension funds in Los Angeles have seen their assets grow at just 3.5% and 2.8% annually.
Five thousand is the number of employees added to the city's payroll during Mr. Villaraigosa's first term as mayor. According to California's Economic Development Department, when Mr. Villaraigosa took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people. Today, there are just 4.19 million jobs in Los Angeles and over 632,000 unemployed people.
The mayor can't control the economy, but he could have chosen to control spending to keep the size of government proportional to the size of the local economy. Instead he's done the opposite: squeezing the city's productive workers to fund the salaries, pensions and other benefits of government workers.
How have city leaders responded to the crisis? Pension officials have played accounting games, like smoothing the investment return over seven years rather than five years. This is designed to dilute the near-term effect of the financial meltdown at the expense of much higher payments later.
The City Council, wincing at the mere thought of layoffs, chose to shrink the work force through an early retirement program for city workers. This costly program, suggested by union leaders, will not be paid off for 15 years. And most egregiously, rather than laying off employees, city officials have shifted certain workers to agencies like the Department of Water and Power and the airport, which have their own funding.
In order to pull the city back from the brink and put Los Angeles on the road to recovery, the following steps must be taken:
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Defined benefit pensions must be replaced with 401(k) accounts for new employees. |
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Current employees must pay much more than 6% (or 9% in the case of public safety employees) of their salaries for their pension benefits. At a time when the city is contributing over 25% of payroll to the pension funds, this is only fair. |
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Increase the retirement age to 65. |
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Reduce city staff back to 2005 levels. Since the police and fire departments represent more than 80% of the city budget, they must also be forced to run more efficiently. |
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Eliminate the $300 million spent on costly retiree health-care benefits. City workers who retire before they are eligible for Medicare enjoy health insurance subsidies up to $1,200 a month, courtesy of Los Angeles. We can no longer afford to subsidize these Cadillac plans. |
As a result of his delays in responding to the city's fiscal emergency, Mr. Villaraigosa has squandered not just his career, but his relevancy. He continues to insist that bankruptcy is not an option for Los Angeles even as anyone who can count understands there is no other option.
Meanwhile, Los Angeles is still the best place to live—ask anyone who enjoys its beaches, mountains and climate. If the mayor wants to keep it this way, he'd better act now.
Mr. Riordan is a former mayor of Los Angeles. Mr. Rubalcava is the president of Rubalcava Capital Management, an investment advisory firm.
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EDITOR'S NOTE: Please see the UPDATE on this story below .. an article about the response from City Hall which appeared in The Los Angeles Times:
L.A. city officials dispute former mayor Riordan's bankruptcy prediction
The Los Angeles Times
May 6, 2010
Former Los Angeles Mayor Richard Riordan has been stirring a municipal hornet's nest over the last few weeks, repeatedly warning that the city he once ran would need to file for bankruptcy unless major policy decisions are made.
His most recent comments were aimed specifically at Mayor Antonio Villaragiosa and the City Council.
But city budget officials have begun to fight back over the last 24 hours, issuing a three-page report that challenges some of Riordan's figures. They also have begun arguing publicly that they inherited some of the city's financial woes from Riordan himself -- particularly its growing pension burden.
In one of the last acts of his administration, Riordan campaigned for a ballot measure that made it possible for police officers and firefighters to receive 90% of their salaries each year once they retire, up from 70%.
That beefed-up pension benefit, which was approved by voters, is seen by some budget analysts as a contributor to the city's pension woes.
“We're having to clean up after the lack of reform in our pension system from that administration,” City Administrative Officer Miguel Santana, the top budget analyst at City Hall, told a council committee on Wednesday.
The issue has piqued city officials so much that Riordan's recent commentary published in the Wall Street Journal -– and his use of the B-word –- is scheduled for discussion Friday at the council's meeting. Riordan said Thursday that he hasn't received an invitation but thinks that the discussion of his own administration is a waste of time.
“The relevant thing is where are we today and what are going to do about it,” he said. “To me, it's child's play to look at every sin I've done in my life, because you could spend 100 years doing that.”
Riordan, 80, has been discussing municipal bankruptcy as part of a larger campaign to roll back benefits for many of the city's unionized workers. In his writings and remarks, he has argued that public pensions should be replaced with a 401(k) plan for new employees. He also said eligibility for retirement should be hiked to age 65; it currently varies by job classification.
In 2001, Riordan signed the ballot argument for Charter Amendment A, which established that police officers and firefighters could retire as early as 50. In that same election, Riordan endorsed Villaraigosa for mayor.
Riordan backed Villaraigosa in 2005 and again in 2009. Yet the sharpest words in his Wall Street Journal piece were reserved for his longtime ally.
“As a result of his delays in responding to the city's fiscal emergency, Mr. Villaraigosa has squandered not just his career, but his relevancy,” Riordan wrote, along with former city animal commissioner Alex Rubalcava, president of an investment advisory firm. “He continues to insist that bankruptcy is not an option for Los Angeles even as anyone who can count understands there is no other option.”
Santana said the city is taking steps to make sure bankruptcy doesn't happen. And he responded to some of Riordan's recommendations, such as the assertion that the city needs to eliminate $300 million in retiree health benefits. Santana said that the city budget currently contributes $183 million for those benefits.
Riordan also called for the number of public employees to be scaled back to 2005 levels. Santana responded by saying that Villaraigosa's proposed 2010-11 budget does just that. Santana also said Riordan, who left office in 2001, boosted the workforce by 8.5% during his administration, growing it to 35,459 positions.
Riordan has not yet received Santana's position paper. But he said he would sit down with city officials to discuss the city's financial woes at greater length.
“The bottom line is, we ought to get together with the experts I rely on and the experts they rely on and see who is right and who's wrong,” he said. “But they don't seem to have any interest in doing that.”
http://latimesblogs.latimes.com/lanow/2010/05/la-city-officials-dispute-former-mayor-riordans-bankruptcy-prediction.html#more |
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