City of Los Angeles Full Lacers Board voted 4-3 in favor of the 15-year repayment period.
ERIP to be voted on by Council Twice if Approved, the 45 Day Early Retirement window will open and employees will begin filing for Retirement.
If Eligible please read the discussion forums area to make sure your classification has not been Excluded from participation or capped.
Description of Method: The GFOA’s Recommended Practice on “Evaluating Use of Early Retirement Incentives – 2004”, in part, states that: The incremental costs of an ERI should be amortized over a short-term payback period, such as three to five years. This payback period should match the period in which the savings are realized (emphasis added).
This is one of two proposed methods (the other being Method 3) that attempts to match the amortization period to a definable period of salary savings. Under the ERIP, the City would realize short-term salary savings associated with the decrease in the City’s active member payroll due to increased retirements. This savings period is short-term in that it only lasts until the time ERIP members would have retired anyway. Under this method, the amortization period for the ERIP costs would match this actuarially-calculated average salary savings period.
For example, a member who, according to actuarial assumption, would have retired 3 years from now takes the ERIP offer and retires immediately; the City’s salary for this member will be eliminated. However, the salary savings for this now-retired member will last for only 3 years because the member presumably would have retired in 3 years anyway, even if the ERIP did not exist.
At staff’s request, Segal calculated the average number of years of the salaries that will be eliminated and thus saved as a result of the ERIP – beginning from the early retirement date in the report through the actuarially-determined retirement date without the ERIP. The calculation indicates that the savings brought by the ERIP on salaries will last for an average of 4.3 to 5.1 years for Alternative 1 and 4.7 to 5.4 years for Alternative 2.
The emerging industry best practice points toward a short amortization period for costs of benefit enhancements resulting from early retirement incentives. One evidence of this emerging best practice is that, in its response to the Government Accounting Standard Board’s (GASB) Invitation to Comment on Pension Accounting and Financial Reporting (Attachment 11, Page 20) dated July 31, 2009, a group of public sector actuaries commented on this issue as follows: For early retirement incentives or other termination benefits which take the form of enhanced pensions, we would support amortizing the change over a substantially shorter period, possibly as short as five years. Resulting Amortization Period: 5 years.
• The ERIP liability is paid off during the time period that LACERS is expecting to payout a relatively high percentage of the ERIP-related benefits (Attachment 10) and is the only proposed method other than Method 1 (0-year amortization) that provides sufficient cash inflows to fully cover the expected benefit payments throughout the amortization period.
• This method is consistent with the model practices contained in the actuarial community’s comments to GASB and the recommended practice from GFOA. Disadvantage of this Method:
• This method creates larger City payments over the short-term than some of the other methods. Actuary’s Opinion on Method
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The Letter of Agreement indicates the City will recoup all costs associated with the ERIP from employees. Part of this recoupment will be accomplished by increasing the retirement contribution rate for all active LACERS members beginning July 1, 2011 by 0.75% of pay for a period not to exceed 15 years. This contribution increase alone will not pay for the estimated costs of the ERIP, as shown below: Present Value of Estimated ERIP Costs |
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Alternative (Retirements)
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Estimated Costs to City*/Increase in UAAL (A)
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Estimated Member Payment of ERIP Cost (B)**
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Difference (A-B)
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1 (2,229)
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$250 million
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$157 million
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$93 million
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2 (2,763)
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$354 million
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$156 million
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$198 million
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The fact that the City agreed to terms with the Coalition for the recoupment of some of the additional contributions (including the period over which that recoupment would occur) is a separate issue from the amortization period over which the City pays for the enhanced benefits. In fact, there will be an inherent mismatch between the employee contributions, if found to be permissible, and the City’s obligation to LACERS because the amount of the employee contributions are not sufficient to cover the full, estimated cost of the ERIP under either take rate scenario.
Visit the Discussion Forums for the Full Report!
We have worked very long and hard, been in contact with several council members, and we have published numerous articles on this issue.
It looks like our message has finally gotten through.
As always we failed to get any mention by the la times reporter on the story but that’s ok members of our site know we had a major role in this uprising. We said it and have been for a while.
Here is the article. Thanks for the quote david.
Pension repayment plan could throw L.A.’s budget into disarray
The system’s general manager urges ‘prudent’ repayment in 5 years, not 15. The money would come from employees or the city’s general fund.
By David Zahniser
August 3, 2009
A high-level Los Angeles pension official has recommended that the city pay off the cost of an employee early retirement package 10 years sooner than previously planned — a move that threatens to throw the city’s budget into disarray.
Hoping to slash payroll costs and eliminate a $530-million budget shortfall, the City Council gave tentative approval last month to a deal that provides early retirement to 2,400 workers who belong to the Coalition of L.A. City Unions.
That agreement called for the city’s pension fund to be reimbursed over 15 years for the cost of giving retirement benefits ahead of schedule. The money was expected to come largely from higher retirement contributions from the remaining workforce.
But Sally Choi, general manager of the Los Angeles City Employees’ Retirement System, recommended Friday that her agency’s board require repayment within five years. Choi told the board, which is scheduled to vote today, that the faster payment schedule would be “more fiscally prudent,” based on a recently completed review of the plan.
The resulting higher payments would hike the cost of the city’s retirement package by at least $33.7 million in July 2010, the first year of payment. To cover that higher cost, city officials would be left with two choices: demand a considerably higher contribution from city employees or tap the city’s general fund, which is used to pay for police, fire protection and other basic services.
“This is not good news for the unions,” Councilman Dennis Zine said. “This is not good news for those who thought they had a deal for early retirement.”
The union coalition, which represents 22,000 employees, launched a last-minute lobbying effort against Choi’s recommendation Sunday, calling her recommendation “irresponsible” and saying that it would harm the city’s ability to deliver services. In a letter to board members, six union leaders said a 15-year payment schedule would be fiscally prudent.
Choi’s “recommendation is not only ill-timed and ill-conceived, but threatens to further burden city coffers in these extraordinarily hard economic times,” they wrote.
Choi said the pension board’s primary responsibility is to safeguard the financial health of the retirement system, which is charged with delivering benefits to 15,000 retired employees and 30,000 active employees. Any effort to relieve the city’s budget woes should be secondary, she said.
Mayor Antonio Villaraigosa, who selects four of the pension board’s seven members, plans to ask the board to delay a vote on the payment schedule. Mayoral spokesman Matt Szabo repeated Villaraigosa’s support for early retirement, which he hailed last month as a way to cut costs by $500 million within two years.
“The mayor continues to believe that an early retirement package is better than layoffs,” Szabo said. “The question now is, how much will it cost and how much will we save?”
City officials fear that a five-year repayment plan would cost so much that it would no longer save enough money to bring the city’s budget into balance.
The City Council still must cast two more votes on the early retirement deal. On Friday, it received a report from a city-hired actuary who looked at two early retirement scenarios, one that involves the departure of 2,229 employees and another involving 2,763.
Under the second scenario, the five-year payment schedule could increase the cost of the retirement package by $48.9 million in the first year of payment, according to a report issued to the pension board.
Choi said the payments to the pension fund should occur only during the period when the city is deriving the cost savings from a smaller workforce. Choi said the actuary defined that period as five years.
The coalition’s members ratified the early retirement plan last week, partly as a way of shielding themselves from layoffs and furloughs. As part of the agreement, workers agreed to increase their employee contribution from 6% to 6.75% starting in July 2011.
If city workers had to cover the cost of early retirement within five years, their contribution would increase to 8.86%. Under the more aggressive retirement scenario — the one allowing 2,763 workers to leave — the employee contribution would jump to 10.7%.
Coalition spokeswoman Barbara Maynard said early retirement would provide a benefit to the city over 15 years, not five.
Maynard warned that the coalition’s members have no intention of contributing more toward their retirement.
“We are not going to reopen the agreement that we just ratified,” she said.
Based on the current debate, Councilman Bernard C. Parks said he would have “grave difficulty” in moving ahead with early retirement.
Councilwoman Jan Perry said she was alarmed by the latest developments but did not yet know what the council’s next step should be.
“Obviously, putting ourselves in a deeper hole would not be a viable option,” she said.
