Classic case of conflicting agendas. Pension boards, on the one hand, are supposed to make honest estimates on how much of a return they expect to make on their money. For years, the assumed return was 8 percent. State and local officials relied on that number - high as it might seem - because it lessened the impact of retirement benefits on government budgets. Public pensions, you see, are defined-benefit plans, which guarantee retirees a specific payment, no matter what. (That differs from a defined contribution plan, such as a 401(k), where there is no guarantee). Should a pension fund fail to make enough money, the government must cough up the shortfall. And that's where the conflicting agendas come in: One of the city's big pension funds is considering a plan to trim the return from 8 percent 8 percent to 7.75 percent, and the mayor is doing whatever he can to maintain that 8 percent level for at least a year, even if it's wildly unrealistic. From the LAT:
Similar adjustments already have been made by other public pension agencies during the economic downturn. But Villaraigosa wants the decision delayed for one year to lessen the effect on the city budget. "This request is completely reasonable ... given our own financial situation," he said Monday. City Administrative Officer Miguel Santana, who advises the mayor, warned that the city would need to lay off at least 400 employees if the pension board refused to go along with the delay. If the board ignores the mayor's request, it should at least spread the cost over five years, he said.
[Matt Szabo, Villaraigosa's deputy chief of staff] had a meeting that morning with the mayor and four council members, [said Roberta Conroy, president of the City Employees' Retirement System board], Conroy said, and wanted to know where she stood. "I indicated that it would be difficult" to ignore the agency's actuarial firm, which concluded an 8% annual return was unrealistic. That firm warned the board that the figure may have to drop to 7.5% next year, she said. Three days later, Villaraigosa's lawyer told Conroy she was being replaced.
It's worth noting that Villaraigosa's request for a one-year extension doesn't solve anything. Pension shortfalls are projected for many years down the road because the city simply doesn't have enough revenue coming in to cover its expenses. What the mayor - as well as many elected officials - are trying to do is Band-Aid a chronic budget deficit (fundamental reform is deemed politically impossible). Trouble is, you can't wish the deficit away - and pension reform does not have a magical and painless solution.
*Update: The City Employees' Retirement System Board did indeed vote to reduce the assumed rate of return from 8 percent to 7.75 percent. (City Maven)