Village to Village, by Paul Hatfield, an. 30, 2010

I attended the BudgetLA.org Forum today at Hollywood City Hall.  Alex Rubalcava was the guest speaker.  Mr. Rubalcava is President of Rubalcava Capital Management.  He spoke about the pension crisis and the prospects of municipal bankruptcy.

Alex’s concerns go back a few years as evidenced by a 2006 article in the Daily News.  He sparred with city and LACERS officials over the assumptions driving the civilian pension plan.

The concerns he raised then are still valid today.  Is the earnings rate assumption of 8% sustainable?  If it is not, then the unfunded liability is higher.  I have written about this before.  No one knows for sure, but in a world filled with both economic and social uncertainties and volatility, conservative assumptions seem to be in order.  8% is not conservative.

In his presentation, he stated that city contributions to benefit plans will grow to $3 billion within five years, barring a further downturn  (Note: that’s the equivalent of over half the current General Fund budget).

Alex walked the group through the Los Angeles County Business Federation’s recommendations to the Mayor regarding needed pension reform. He emphasized the employee contribution rate to the pension must be increased.  Every 1% increase in the rate saves taxpayers $40 million per year.  Raising the retirement age by five years will reduce the unfunded liability by half.

Employees need to kick in to cover health benefits.  Alex stated that the city currently spends $350 million each year on plan subsidies- with no contribution from employees.

It is interesting that the Mayor is now suggesting higher contributions from union members. “This year, we can avoid layoffs if they will step forward and take a little cut and agree to an increase in the pension contributions,” Villaraigosa said, according to the Los Angeles Daily News.

All well and good, but if he thinks he can squeeze meaningful concessions from the civilian unions after he went on record as saying absolutely no to bankruptcy, he should have listened to SEIU’s regional director Julie Butcher, who was also present today (she will have a chance to speak at an upcoming meeting).

Julie broke into Alex’s presentation twice, but Alex held his ground. In her view, city employees have sacrificed enough.  Compensation and benefits are a one-way street; a one-way street with a barricade.

What may be fair in the minds of LA city employees may not be fair to the taxpayers.  Compensation is not just about fairness to the employee, it is also about affordability to the taxpayers.  It is a two-way street.

Julie’s mantra is “the average city employee pension is $36,000 per year, with no social security.”

What Julie neglects to tell the public is there is nothing stopping employees from contributing to an IRA, just as most people in the private sector do to supplement a much lower social security benefit.

What I hope Julie is telling her members is what could happen to their contracts in the event of Chapter 9.

On that point, the most sobering note delivered by Alex concerned bankruptcy.  He predicts the city will have to file Chapter 9 within three years.  That’s assuming no further decline in the economy.

If his prediction is in the ballpark, the Mayor must engage bankruptcy attorneys for general advice as soon as possible.  The possibility of bankruptcy is not something you can ignore until the last minute.  For a city the size of Los Angeles, prep time will be vital.