The fundamental question facing Los Angeles City Hall today is whether L.A.’s residents should continue current funding for city employee pension and health care costs at the expense of basic city services. Last Friday, members of the City Council began to answer that question. While Friday’s motion was a beginning, the Council has much larger reforms to consider if they are to address the primary cause for the budget deficit, which is the cost of pensions and health care for retirees that is growing between $200 and $300 million per year. The Chamber was encouraged that the City Council discussed additional reforms at its meeting today. The reality is that every additional dollar the City lays out for pensions and retiree health care means a dollar less for libraries, parks, police, fire and other basic city services.
Last Friday’s motion by seven members of the Los Angeles City Council led by Council President Eric Garcetti directs the City Administrative Officer and the City Attorney to draft an ordinance that includes the following reforms:
• Raise the retirement age to at least 60
• Set final compensation on a three-year average
• Prohibit double dipping
• Lower the Consumer Price Index cap to two percent for the annual cost of living increase for retirees
• Require a minimum of two percent of salary contribution toward retiree health insurance
While these reforms are a step in the right direction, they will not have a noticeable impact on the $360 million dollar budget deficit projected for 2011 because they will only apply to new hires. To realize immediate savings, additional reforms need to be implemented, like having current employees contribute to their health care premiums and increasing the co-pay for office visits, which is $10 and has not been increased in more than 10 years.
Long term, meaningful pension reform would include switching from a defined benefit to a defined contribution plan for new employees and requiring a substantial employee contribution for post-retiree health insurance. If a defined benefit plan is continued, essential reforms include raising the retirement age to 65 or higher; reducing the current 2.16 percent retirement benefit per year of employment; capping the total annual benefits at 70-80 percent of final salary averaged over several years; and increasing the employee contribution to the pension plan while they are working.
To assure that the pension and health care reforms being proposed will result in the long-term savings that the City needs, the Mayor and City Council should insist upon an actuarial projection by an outside firm, which was included in the Council’s discussion today.
The City Council was right to begin this conversation on pension reform. But their good intentions will not forestall future budget cuts unless they reach a point that is actuarilly sound. Businesses and residents need to support the Mayor and City Council in making these tough decisions. They won’t get any easier next year.
And that’s The Business Perspective.
The Business Perspective is a weekly column by Gary Toebben, President & CEO of the Los Angeles Area Chamber of Commerce, produced with the input of Samuel Garrison, Vice President of Public Policy.