Back on June 26, the day the City Council approved “in concept” the sweetened retirement deal for 2,400 city workers, Mayor Antonio Villaraigosa could not resist the temptation to boast that it would “save jobs and preserve services.”
He called it a “landmark” agreement between the city and unions that would “save $500 million over two years without layoffs” through early retirements and deferral of raises for those two years.
“Workers will cover the net cost of the early retirements, ensuring the
program will not burden the pension system,” the press release said.
Like the numerous self-congratulatory tweets continuously Twittering out of the mayor’s office, those statements are at best half-truths, at worst outright lies.
DECEIT No. 1: Let’s start with the mayor’s use of the phrase “net cost” of the early retirement package to obscure the fact that taxpayers are on the hook for from $250 to $475 million of the cost, between 40 and 60 percent, depending on how many workers take the deal..
The letter of agreement between the mayor and City Council and the
civilian work force covered by the LACERS pension fund indicates the city “will recoup all costs associated with the ERIP from employees” over a 15-year period, according to LACERS analysis.
But the deal to increase employees contributions to their pension from 6 to 6.75 percent will not pay back the “cost” of the Early Retirement Incentive Package (ERIP).
An Aug. 25 letter from the Chief Legislative Analyst and the City Administrative Officer answering questions raised by Earl Holoman, president of the LACERS Board, breaks down the costs and who pays:
Alternative 1 (2,229 retirees) Alternative 2 (2,763 retirees)
Unfunded Liability (UAAL) $560 million $787 million
Cash Incentives $43 million $51 million
Total Cost $603 million $838 million
Employee Payback $351 million $363 million
City Payback $252 million $475 million
Those figures include the $43 to $51 million cost of the cash buyouts of $15,000 for every employee who takes the deal but not the tens of millions of dollars it costs for the vacation and sick leave accruals. The city, i.e. taxpayers, face the bill for those costs upfront even as the city’s contributions to all its pension funds will nearly double next year to $1 billion because of the 25 percent losses in investments.
LACERS staff has recommended the city should pay back the cost over five years, not 15, because it meets government accounting and financial standards and aligns the payback period with the time the city would realize savings from reducing the work force.
But a LACERS board committee has rejected that recommendation and the full board will vote next week.
DECEIT No. 2: Contrary to the mayor’s assertion, nothing in this ERIP plan “saves jobs and preserves services.”
It simply avoids layoffs, which would be far less costly to taxpayers. Eliminating 10 percent or more of the civilian work force will surely mean a reduction in services to the public and presumably poorer services since the most experienced senior employees will be the ones taking the deal.
No one knows how many will actually take the money and run. But 500 workers retired in July and a couple of hundred more in August with promissory notes guaranteeing them the benefits of whatever deal is finally approved.
What’s on the table is basically five more years of retirement credit or a 12.5 increase in pensions that means most retirees will get 75 percent of their final salaries plus any regular bonuses and premium pay they were getting. The minimum retirement age is 55 but the five-year credit could reduce that to 50.
DECEIT No. 3: There’s no way the city will realize $500 million in payroll savings over two years.
We are already three months into the city’s fiscal year and it could take 6 or 7 months for LACERS to actually process the 2,400 workers through retirement.
That means the payroll savings this year will be a fraction of what was anticipated. But the costs to the city will begin as soon as a deal is finalized.
City workers, in contrast, won’t even begin paying the increased contribution rate until after the two-year period is over, on July 1, 2011.
DECEIT No. 4: It is true that the city is guaranteeing the unions there won’t be layoffs this year or next.
But there is a loophole: there won’t be any layoffs unless the financial position deteriorates further.
And that is as close to a certainty as anything about all this.
Property taxes throughout the county are about to be reduced for everyone because of deflation, sales tax receipts are falling, the state is taking away funds for the city.
Any way you look at it, the city budget that took effect July 1 is a fraud, built on false assumptions of cost reductions and revenue flows.
They can defer raises for two years but then they are committed to making workers whole plus a little more over the next three.
They can spread the payback period for the ERIP over five or 15 years but the cost just keeps on growing with interest and putting a drag on City Hall’s finances and on public services for that much longer.
UGLY TRUTH: The early retirement deal is probably illegal and will certainly be challenged in court. It provides a benefit to city workers at a huge cost to the city that reduces the value of payroll savings. It doesn’t solve the city’s financial crisis, is fiscally irresponsible and morally indefensible, representing the failure of our elected officials to fulfill their sworn duty to serve the people of the city and interests of the city as a whole.