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Feb 2012
Why are we surprised by good news?
LAPPL Board of Directors

It turns out that its pension funds performed well enough last year to save the City $90 million in anticipated contributions.

The cries of alarm from self-proclaimed experts looking to eliminate public pensions have been inversely proportional to the depth of the 2008 market collapse: the lower the market went, the louder their calls for ending public pensions became. Continuing to fund public pensions would lead to bankruptcy, they constantly claimed.

Yet, as actuaries and trustees have repeatedly explained, pension systems operate and invest over a long period of time. There are periodic upticks in the market, which in the past have been misused to grant “pension holidays” that allowed governments to skip their required annual payments. Likewise, there have been down times in the market, which have necessitated larger contributions.

As the League has pointed out many times before, skipped payments in good market times not only deprive the pension funds of principal necessary to generate investment returns, but also exacerbate the depth of a downturn since there is less money in the fund to cushion losses. The City’s sworn personnel are never allowed to skip their contribution payments–in good times or bad. But today’s self-styled “pension reformers” were deathly silent as the government shirked its pension obligations, which helped create the current problems of other pension systems.

A 7.75 percent long-term rate of return is sustainable in a well-diversified institutional plan that invests its assets for the long term. The long-term performance of the Los Angeles Fire and Police pension plan has validated this assumption. As for contributions by the City of Los Angeles, it is also important to point out that the percentage of the general fund paid into the pension system is within the historical range of what the City has paid, in good times and bad.

The news of this $90 million pension savings is a reminder that the funded status of pension systems ebbs and flows, as do the City’s corresponding contributions. Any proposed changes to pension systems need to be mindful of this fact, especially when affecting such an important benefit that provides security in retirement.

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