(April 10, 2014) — The City of Los Angeles should adopt its own “Buffett Rule” in an attempt to curb its burgeoning pension problem, a think tank has suggested.
The Los Angeles 2020 Commission said the US’s second city should reduce its expected rate of return and discount rate used to value its pension liabilities to fall in line with those used by Warren Buffett’s Berkshire Hathaway.
“Can anyone in City Hall claim to know more about understanding future liabilities and how to budget today for them than Warren Buffett?” the think tank said in a statement yesterday. “Can anyone in City Hall make a credible case why City Hall is assuming it will do better on its investments over many decades than the world’s most successful investor?”
The commission, which is chaired by former US Commerce Secretary Mickey Kantor and former deputy mayor and investment banker Austin Beutner, said discount rates should be reduced from 7.75% to 4%, with the expected rate of return brought down from 7.75% to 6%. The lower numbers are those used by Berkshire Hathaway.
“The current discount rate of 7.75% used by the City of Los Angeles is at the high end of the range which makes future obligations seem smaller, and raises the question whether sufficient savings are being put away today,” the group said. “Even based on the 7.75% discount rate, funding ratios for the City’s pensions have continued to drop over the past decade.”
The slice of the city’s budget spent on retirement has risen from 3% in 2000 to 18% today, the group said, adding it was forecasted to rise even higher.
Where corporate pension funds were made to adhere to strict rules under the Employee Retirement Income Security Act of 1974, municipalities were not, and this has led to problems for many, the group said.
“Municipalities across the country are still largely self-regulating, and many have established discount rates that are much higher than the federal standards imposed upon private business. The most straightforward solution would be for the City to adhere to the same federal standards that apply to private industry. To be clear, we are advocating smart regulation, not turning the City into a corporation.”
The public purses of Detroit, San Bernadino, and Illinois have all suffered at the hands of their pension obligations in recent years.
The report received support from senior members of the Los Angeles County Federation of Labor, ALF-CIO, and Los Angeles Chamber of Commerce. The organisations’ representatives said they agreed with some—but not all—of the report’s recommendations, and it provided a starting point “for the necessary steps our community must take to better the lives of all Angelenos”.
Elsewhere in the US, the state of New Jersey has been placed on a watch list by several asset managers partly due to its ongoing pension problems.
“They’ve had some pretty optimistic assumptions on the revenue side, which haven’t come to fruition,” Peter Hayes, head of municipal debt at BlackRock, told Bloomberg. “Barring any pretty big pension reform, I would not be surprised at all to see a downgrade before the end of the year.”
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