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Feb 2011
When you can’t win with facts, resort to spin

Jack Humphreville, the self-proclaimed LA Watchdog, does not like our December 22 blog, “Pension holidays aren’t just ‘ancient history.’” In his latest CityWatch rant, Jack is upset with many facts and issues we raised. Let’s take apart his spin and insert some facts.

We pointed out that if the City had not taken “contribution holidays” and “simply made all its required annual payments, the system would’ve currently been funded at over 100%.” And we noted that the “pension reformers of today remained silent as the government shirked its pension obligations, helping to create the current situation.”

Looking to shift the blame, Humphreville plaintively asks: “where was the leadership of the PPL while the City was stiffing the Fire and Police Pension Plans (‘FPP’)? ” The answer: LAPPL leadership knew that if the City skipped payments and then had to make them up later, it would be the City’s choice. It’s the pension reformers, not us, who seek to bury the history of skipped payments and how that money would have multiplied in the markets if it had been contributed.

We also pointed out that the current pension plan is 91.6% funded. While acknowledging that this fact is accurate, he states “the ‘Actuarial Valuation and Review of Pension and Other Postemployment Benefits (OPEB) as of June 30, 2010’ indicates the unfunded liability is $5.9 billion based on market values, implying a funded ratio of 67.6%.”

This is an example of changing the facts to suit your argument. Jack, your comparisons are apples and oranges, the pension system is soundly funded. The OPEB, for benefits such as retiree health care, is not the pension system.

Jack then tries to change more facts, claiming that the unfunded pension liability number he has “…is based on an Investment Return Assumption of 7.75%, a level that is considered unsustainable over time and substantially higher than what is permitted in Corporate America.”

First, as a long term rate of return, 7.75% is sustainable. The actual long term performance of the plan has validated the approach used by our pension fund. Also, there are sound reasons why the public pension systems use a different funding ratio than corporate plans. GASB, the independent agency that provides accounting standards for public plans, has approved the approach used by the Los Angeles Fire and Police Pension System. Sorry, Jack, but changing the numbers because they don’t achieve the negative result you want won’t fly.

Working himself into full fury, Jack claims, “The Annual Required Contribution (“ARC”), the FPP Board of Commissioners relies on phony baloney, actuarial accounting techniques that peg the unfunded liability at $3 billion, implying a funded ratio of about 83%.” Now we know we are diving into numbers mumbo jumbo, but we simply have to point out the many fallacies underlying that rant.

Jack is apparently comfortable with the actuary deciding what the total liability of the plan is; he just doesn’t like the same actuary then calculating what the unfunded liability is. So, rather than intelligently analyzing how that number was arrived at, he resorts to calling the actuarial accounting “phony baloney.” Well, thanks for the cogent argument.

Jack wrongly claims that the “the City’s General Fund will be required to contribute $500 million to the FPP in 2011-12, or 37% the $1.357 billion total annual payroll, representing over 11% of the General Fund. This is an increase of over $110 million from the previous year.” Actually, the percentage of the General Fund paid to the pension system is within the historical range of what the City has paid, in good times and bad.

Jack next tries to question the recently adopted new pension tier, saying, “There is also no guarantee that this new tier is actuarially sound since it relies on an unsustainable Investment Rate Assumption of 7.75% and it allows officers to retire before the age of 65.” As stated above, the assumption rate is sustainable. And apparently, Jack wants 65-year-old police officers on patrol.

He wrongly asserts that, “Coupled with the unfunded liability of the Los Angeles City Employee Retirement System, the City has an unfunded pension liability for its two principal pension plans of over $15 billion assuming the market value of assets and a realistic Investment Rate Assumption.” It is important that you note how Jack changes the actual facts. The $15 billion number is a number he and other pension opponents created by using a Treasury bond rate for the return rate of pension funds. The approach has been rejected by the Government Accounting Standards Board, which sets accounting standards for government agencies. Fitch ratings called this approach "unrealistic, " yet it is the approach opponents insist on using to sell their point.

Having invented a parallel universe of financial facts and assumptions, Jack then closes by wondering why the City does not have a plan to address the universe he created – fascinating.

Jack didn’t like us pointing out the actual history of how we got here, claiming that was “spilt milk.” We can only guess he won’t be too happy with us pointing out his fabricated numbers to try to make today’s reality seem extremely dire.



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