LOS ANGELES (Reuters) — Los Angeles, faced with nearly $10 billion (all figures U .S.) in unfunded pension and retirement liabilities, should adopt the pension formula used by investor Warren Buffett at Berkshire Hathaway Inc to manage the city's growing retirement costs, a report recommended last week.
The Los Angeles 2020 Commission, chaired by former U.S. Commerce Secretary Mickey Kantor and former deputy mayor and investment banker Austin Beutner, recommended that America's second-largest city cut the projected return rate on its pension investments from 7.75 per cent to six per cent, the rate used by Buffett for Berkshire Hathaway's pension system.
Such a move would require the city to pay an extra $560 million a year into its two main retirement funds, said Miguel Santana, the city's administrative officer, who was not party to the report's recommendations.
Los Angeles projects its deficit next year at $240 million, and such a drop in the projected rate of return would pose a "significant challenge to the city," Santana told Reuters.
The lower the projected return rate, the more cities and employers must pay into retirement funds. Los Angeles' current 7.75 per cent projected return rate is similar to that used by many other cities.
The portion of the city's budget spent on retirement costs has grown from three per cent in 2003 to 18 per cent 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.
Pension reformers argue that unless municipalities take immediate action to pour more money into public pension systems, some will face a crisis, including possible bankruptcy, in the future because they failed to set aside necessary funds to pay retirement promises made to current workers.
In March, Buffett warned that the crisis in public pensions will intensify. The main reason, he wrote in a letter to shareholders, is that public entities have promised pensions they cannot afford.
The Los Angeles panel wrote: "Can anyone in City Hall claim to know more about understanding future liabilities and how to budget today for them than Warren Buffett?"
It is unlikely the pension recommendation will be adopted by the current mayor, Democrat Eric Garcetti, who is scheduled to give his first State of the City address on Thursday.
Yusef Robb, a spokesman for Garcetti, said: "Mayor Garcetti always welcomes new ideas as he works to reformCity Hall and improve our economy."
In its initial report in January, the commission said Los Angeles was faced with high poverty, crumbling infrastructure, terrible traffic, weak government, and unfunded pensions. It noted that L.A. is the only major U.S. city to show a net decline in jobs in the last decade.
The panel made a series of recommendations, including raising the minimum wage, merging the harbors of Los Angeles and Long Beach into a single port facility, and adopting a more transparent and responsible budgeting process
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