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Extracted from Consolidated Report

This investigation was originally published as part of a larger consolidated report containing multiple investigations. View the consolidated PDF for the complete document.

Los Angeles County Grand Jury • 2010-2011

Pensions Section 2: Areas of Review

90 pages
View PDF View Full Original

Findings 15 findings

F1 Page 207
It was noted that within thirty (30) days of receipt of a Hearing Examiner’s Report the DOT makes a recommendation to the City Council outlining areas under consideration for a PPD. If the proposed PPD meets all of the program’s criteria, DOT gives notice to area residents stating boundaries and parking restrictions of the permit parking district. Currently a two-year waiting period to obtain Permits has been known to occur.
F2
The following incidents have occurred: a. In 2008 a petition for Preferential Parking was initiated by the residents of 1600 Block of Hi-Point Street. 176 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY b. After repeated inquiries with DOT for two (2) years, in July 2010 the residents received a letter from DOT stating “preferential parking restriction requirements had been met, and the requested installation of a PPD had been approved.” c. On August 5, 2010 an additional petition was circulated opposing the establishment of a PPD. Of particular concern to the CGJ is that it took approximately two (2) years for approval of the PPD, and one (1) day for it to be denied.
F3 Page 208
In addition, there have been numerous attempts by area residents to get reasons for rescindment of the PPD, all to no avail.
F4 Page 208
When a PPD is approved, there appears to be no formal process for rescinding such a district or informing residents of same.
F5 Page 267
Longer term savings could be achieved by modifying some pension benefit provisions for new employees. These include: changing the basic benefit formulas to levels that existed prior to 2001 and restricting or eliminating service credit enhancement provisions, such as sick leave and “air time” service credit.
F6 Page 267
Regular review of actuarial assumptions facilitates keeping pension plans focused on prevailing investment climates, actuarial trends and other factors that influence pension assets, liabilities and sustainability. For example, the pension plan administrators of both CalPERS and LACERA review actuarial assumptions annually with their respective governing boards and evaluate them more rigorously on at least a triennial basis.
F7 Page 267
The risk of “pension spiking” could be reduced substantially by converting to a 36-month or longer basis for calculating Final Average Salary for at least 85% of CalPERS member agencies in LAC.
F8 Page 267
Besides regular salary, some jurisdictions allow other categories of compensation to be included in the calculation of pensionable salaries, including sick leave buy-back and certain categories of special pay and bonuses. This results in higher pension benefits and costs.
F9 Page 267
Hybrid defined benefit and defined contribution pension plans would more equitably share the risk of investment losses between the employer and employee. A jurisdiction’s ability to modify pension provisions for retirees, existing employees or future employees varies by group and may be controlled by statute and case law. A 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY
F10 Page 268
A small percentage of LAC CalPERS member agencies (13.2%) have decided to adopt post retirement COLA provisions that have a potential to increase pension system costs at rates that exceed inflation, effectively increasing the present value of retiree compensation over time.
F11 Page 268
The actuarial assumed rate of return using both the 10-year and a 15-year smoothing methodologies cause swings in actual investment gains and losses to moderate actuarial investment performance, and thus the actuarial value of assets. These methodologies ensure that jurisdictions contribute an amount each year that is closer to the normal contribution rate.
F12 Page 268
The overwhelming majority of jurisdictions in LAC are not prefunding retiree health benefits or contributing the Annual Required Contribution determined by actuaries, deciding instead to fund these benefits on a pay-as-you-go basis. This practice is inconsistent with recommendations by actuaries and the Government Finance Officers Association. In addition, this is a costly policy that reduces the jurisdictions’ capacity to discount contribution rates and, instead, passes full costs onto the taxpayer.
F13 Page 268
Opportunities may exist for some jurisdictions to cap benefit amounts, require copayments from retirees or implement other changes that would reduce costs for jurisdictions providing retiree health benefits to current retirees in the short term. However, each instance would need to be assessed by the jurisdictions’ legal counsel to ensure that such modifications would not be a violation of contract law.
F14 Page 268
It is unlikely that retiree health benefits can be modified for current retirees and employees. However, jurisdictions could change the benefit offered to new hires by establishing benefit caps or defined contribution components, establishing improved cost sharing agreements with employees and modifying plan design to more effectively couple retiree health benefits with Medicare. Such change may involve negotiations with collective bargaining groups.
F15 Page 268
Pension Obligation Bonds are not used extensively by Los Angeles County jurisdictions. However, there are indications that some jurisdictions are considering POBs to fund UAAL that developed during the recent economic downturn. The GFOA and other experts recommend that jurisdictions proceed cautiously when considering POB borrowings by: a. Thoroughly evaluating financial benefits and risks b. Fully recognizing “other issues” that may arise if the bonds are issued such as: i. The loss of flexibility in difficult economic times because of the need to make timely payments of principal and interest in order to not default on the bonds ii. Potential misunderstanding by policy makers regarding the possibility that an unfunded liability may recur in the future iii. Potential pressures for additional benefits by government employees if plans are fully funded and government’s contribution as a percentage of payroll has declined relative to neighboring jurisdictions 2010 – 2011 PHASE II: SECTION 1 LOS ANGELES COUNTY EMPLOYEES RETIREMENT ASSOCIATION SUMMARY The Los Angeles County Employees Retirement Association (LACERA) administers the pension system for the County of Los Angeles, acts as the trustee of contributions that have been made by the County and plan members, and invests assets in a manner that attempts to moderate risk and maximize returns. LACERA provides advice and counsel to County managers on the financial impact of proposed changes to the County’s retirement system, and are partners with the County on benefit design, funding strategy and other aspects of pension system management. Overall, LACERA is well run and effective at fulfilling its responsibilities, and the County has done a good job at moderating pension costs. However, LACERA could explore the benefits of changes to actuarial methodologies used to smooth investment returns and the County could, with input from LACERA, focus on discussions with employee bargaining groups to redesign benefits, including exploring benefit caps and establishing defined contribution alternatives; examining opportunities for cost reductions from modifying certain provisions that create opportunities for pension spiking; and consider policy changes to ensure the pre-funding of OPEB benefits by increasing annual contributions and narrowing the allowed uses of the County Contribution Credit Reserve. PURPOSE The Los Angeles County (LAC) and LACERA were chosen by the Civil Grand Jury (CGJ) for in- depth review based on its status as the largest plan in the region and relatively high dollar amount of liability. LACERA also has a better than average funded ratio and multiple plan tiers, as well as the County’s substantial pension obligation bond debt and retiree health benefit unfunded liability.

Recommendations 10