The majority of America’s public pensions are on track for bankruptcy, but in Los Angeles, a group of labor and business leaders is trying to nip the problem in the bud. The group, known as the Los Angeles 2020 Commission, just released a report arguing that the city should adopt Warren Buffett’s estimates on the rate of return on pensions, moving to 6 percent from the city’s current estimated rate of 7.75 percent.This move could cost the city an extra $560 million per year, but even this number may not be going far enough to put pensions on a solid footing. The Bridgewater Associates pension stress test estimated that returns in the coming years will average only 4 percent, meaning still greater contributions from the city government would be required.The group’s recommendation is unlikely to be heeded by the city, which already faces a $240 million deficit. Reuters reports:
The portion of the city’s budget spent on retirement costs has grown from 3 percent in 2003 to 18 percent this year. Unfunded liabilities—the amount of money the city has to pay to meet its long-term obligations—have increased to $9.4 billion in the past 10 years from $87 million, according to a recent report by California Common Sense, a budget watchdog.
Unfortunately, the fact that the city cannot afford to make these changes without decimating its budget does not mean that they don’t need to be made. The longer the city delays adjusting expected rates of return downward, and the longer it delays upping its contributions to the system, the larger the gap between funding and liabilities will become.