(Adds reaction from Los Angeles mayor's office)
By Tim Reid
LOS ANGELES, April 9 Los Angeles, faced with
nearly $10 billion in unfunded pension and retirement
liabilities, should adopt the pension formula used by investor
Warren Buffett at Berkshire Hathaway Inc to manage the
city's growing retirement costs, a report recommended on
The Los Angeles 2020 Commission, chaired by former U.S.
Commerce Secretary Mickey Kantor and former deputy mayor and
investment banker Austin Beutner, recommended that America's
second-largest city cut the projected return rate on its pension
investments from 7.75 percent to 6 percent, the rate used by
Buffett for Berkshire Hathaway's pension system.
Such a move would require the city to pay an extra $560
million a year into its two main retirement funds, said Miguel
Santana, the city's administrative officer, who was not party to
the report's recommendations.
Los Angeles projects its deficit next year at $240 million,
and such a drop in the projected rate of return would pose a
"significant challenge to the city," Santana told Reuters.
The lower the projected return rate, the more cities and
employers must pay into retirement funds. Los Angeles' current
7.75 percent projected return rate is similar to that used by
many other cities.
The portion of the city's budget spent on retirement costs
has grown from 3 percent in 2003 to 18 percent this year.
Unfunded liabilities - the amount of money the city has to pay
to meet its long-term obligations - have increased to $9.4
billion in the past 10 years from $87 million, according to a
recent report by California Common Sense, a budget watchdog.
Pension reformers argue that unless municipalities take
immediate action to pour more money into public pension systems,
some will face a crisis, including possible bankruptcy, in the
future because they failed to set aside necessary funds to pay
retirement promises made to current workers.
In March, Buffett warned that the crisis in public pensions
will intensify. The main reason, he wrote in a letter to
shareholders, is that public entities have promised pensions
they cannot afford.
The Los Angeles panel wrote: "Can anyone in City Hall claim
to know more about understanding future liabilities and how to
budget today for them than Warren Buffett?"
It is unlikely the pension recommendation will be adopted by
the current mayor, Democrat Eric Garcetti, who is scheduled to
give his first State of the City address on Thursday.
Yusef Robb, a spokesman for Garcetti, said: "Mayor Garcetti
always welcomes new ideas as he works to reform City Hall and
improve our economy."
In its initial report in January, the commission said Los
Angeles was faced with high poverty, crumbling infrastructure,
terrible traffic, weak government, and unfunded pensions. It
noted that L.A. is the only major U.S. city to show a net
decline in jobs in the last decade.
The panel made a series of recommendations, including
raising the minimum wage, merging the harbors of Los Angeles and
Long Beach into a single port facility, and adopting a more
transparent and responsible budgeting process.
(Edited by Ronald Grover, Peter Galloway and Matthew Lewis)