Los Angeles pension board cuts its expected investment return to 7.75%

Faced with dire warnings about city workers losing their jobs, a Los Angeles pension board voted Tuesday to soften the budget impact of lowering its earnings estimates for the next several years.

On a 5-1 vote, the City Employees’ Retirement System board decreased its expected investment return from 8% to 7.75% per year. But after hearing from budget officials, union leaders and city workers, the panel agreed to spread the cost of that change over the next five years.

The decision handed a partial victory to Mayor Antonio Villaraigosa and his budget advisor, City Administrative Officer Miguel Santana, who had urged the board to delay a decision for one year. Santana had warned that an immediate reduction would require additional outlays for city pension expenses and spark at least 400 layoffs next year.

The board’s action ensures that the full cost of the reduced investment income projections won’t hit the city budget until after Villaraigosa has left office.

Weaker investment earnings at two city pension systems have caused officials to devote a greater share of the city’s revenue to public employee retirement benefits. That problem, experienced by retirement systems up and down the state, has caused the mayor to become much more aggressive in his effort to influence pension board decisions.

Santana told the board that the proposed reduction in investment earnings would punch a $22-million hole in next year’s general fund budget and leave two semi-independent city departments — the Harbor Department and Los Angeles World Airports — with an extra $5 million in costs.

Santana’s budget message was so grim that the pension board’s fiduciary counsel said it raised questions about whether the city will be able to cover future retirement obligations to its employees.

“We have a major American city saying that as far as the eye can see, it has nothing but deficits on the horizon,” attorney Harvey Leiderman told the panel. “That gives me great concern for this board — and the ability of this board to carry out its constitutional responsibilities.”

Matt Szabo, deputy chief of staff to Villaraigosa, said after the meeting that the city has never missed a pension payment. And Santana told the board that the city has cut its yearly deficit in half, bringing it down to roughly $250 million.

“I know of no other city that has done the same thing,” he said.

The board’s decision means that the city will face an additional $5.3-million cost next year, not the $26.7 million that had been feared, Santana said. The vote drew criticism from Jack Humphreville, a neighborhood council member who warned that Villaraigosa and the city budget leaders were kicking the can down the road.

“We’ve been talking about the unrealistic 8% investment assumption for a number of years, and 7.75% is still an unrealistic rate,” he said.

david.zahniser@latimes.com