October 15, 2010

Honorable Antonio Villaraigosa

Mayor, City of Los Angeles
200 North Spring Street, Room 303
Los Angeles, California 90012

Members of the City Council

City of Los Angeles
c/o City Clerk, Room 395
City Hall, 200 North Spring Street
Los Angeles, California 90012

Dear Mayor Villaraigosa and Members of the City Council:

It has become quite clear to us that the City's current pension programs - for DWP,
Police and Fire, and civilian employees - are simply unsustainable. The cost of these programs
has resulted in an unacceptable reduction in city services and - unless reformed - these programs
will result in even greater reductions in city services in the future. In truth, this City faces a
fiscal crisis, both near term and long term, and part of the problem lies with the City pensions.

Over the last weeks and months we have met with the CAO, the General Managers of the
pension systems, actuaries, and representatives of employee organizations. We have also
consulted others outside of the City in an effort to understand the issues involved.

The City Administrative Officer has issued a report estimating that the City's
contribution to the retirement funds (excluding DWP) will grow from $463 Million in 1990 and
approximately $164 Million in 2001-02 to $1.75 Billion in 2015-16.

While there may be debate about specific numbers, there is little question that pension
liabilities are growing faster than the City of Los Angeles and its tax payers can afford. This
problem is not unique to Los Angeles pensions. It is a state and national problem. Nor is it a
problem wholly of the City's making, although substantial increases in benefits to Police and
Fire members in the early 2000s added significantly to the problem. Among other things, people
are simply living longer, costs of health care have increased dramatically, and returns on
investments have recently diminished. But it is a problem of crisis proportion nonetheless.

Simply put, the pension programs must be substantially reformed. We owe it to residents
of Los Angeles and to succeeding Angelenos. Every dollar overspent on pensions is a dollar less
for city services - parks, libraries, streets and the host of services the City must provide. Thus,
one cannot be responsible and oppose reforming the pension programs. Nor can we adopt half
measures. Either we cut public services ever further or pass an increasingly severe burden along
to our children. Neither is a responsible choice. In recent years government at all levels have
passed problems to succeeding governments and generations. Leadership means leaving this
City stronger rather than weaker for succeeding generations.
Honorable Antonio Villaraigosa
Members of the Los Angeles City Council
October 15,2010

City officials have been in discussions with affected unions for quite some time now.
While pension benefits for current employees are essentially untouchable, the City needs to come
to grips with benefits for future hires.

A number of Councilmembers recently introduced a Council resolution calling for certain

reforms. While the proposal represents a start, it falls short of what is required to make a
meaningful difference.

Each of the City's pension systems is different. But across the board, the following
reform principles should apply:

1) The minimum retirement age should be increased. For example, the Council
resolution called for raising the retirement age for LACERS from 55 to 60. But the average age
at retirement for LACERS members is already 60, so this change will make little difference in
City and citizen liabilities. The minimum retirement age should be 65, which would be
consistent with Social Security. For sworn officers and firefighters, who can retire now at age 50
the minimum retirement age should be moved to 55.

2) The maximum percentage of salary for retirement should be reduced. For example,
LACERS and DWP members may work enough years to receive a pension equivalent to 100%
of salary. Sworn officers and firefighters of Tier 5 may receive a pension equivalent to 90% of
salary after working 33 years. That needs to change through various formulas used to compute
retirement benefits at various ages and years of service.

3) The employee contributions to the retirement system should be increased. For

example, LACERS members currently contribute 6% of salary towards their pension. Sworn
officers and firefighters of Tier 5 contribute either 8% or 9% of salary, depending on the funded
status of the plan. Contributions should be increased.

4) Employees should make some contribution to retiree health. City employees do not
make any contributions towards retiree health, while healthcare costs continue to significantly
escalate on an annual basis. Employee contributions to retirement health will help with current
City budgets as well as future City budgets. In addition, while health costs have risen
dramatically, employee co-pays for office visits are only $10.00 and have not been increased in
more than 10 years.

5) Cost of Living Adjustment (COLA) increases should be capped at 2% with no ability

to "bank" COLA for use in future years.

6) Final compensation calculations should be based on an average of the last 3 years of

employment. Although the City does not appear to have a "pension spiking" problem, enacting
this should further diminish public concern and help restore public confidence.

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Honorable Antonio Villaraigosa
Members of the Los Angeles City Council
October 15,2010

There is another major issue over which there is substantial debate and which in the
minds of some may cause the City far greater financial exposure still: the anticipated return on
invested retirement funds. The civilian city pension system currently assumes that its
investments will earn an annual return of 8%. Both the DWP and Police and Fire retirement
boards of administration recently approved changes to their annual rate of return assumptions
from 8% to 7.75%. A significant number of well respected persons believe that these are overly
optimistic assumptions; that the country has settled into a "new normal" in terms of investment
returns, closer to 5% than 8% (or 7.75% for that matter). This difference of opinion is critical
because whatever shortfall results from the return on investments must be provided by the City,
further encumbering the General Fund. This is a complicated and much debated issue. For
Police and Fire alone, a reduction of 114% in the assumed return will result in an additional $40
Million required from the City's General Fund and away from City services. We make no
judgment regarding what assumptions should be made regarding investment returns, althoughwe
note that the 8% return anticipated by the LACERS system is greater than that assumed by many
other public pension systems in the state. Rather, we raise the issue to emphasize how even
more important it is to reform the pension benefits themselves. If the pension systems are wrong
about investment return assumptions, current Angelenos and future Angelenos face even more
serious problems.

The City Council can set future civilian employee retirement age, contributions and
benefits by city ordinance. A Charter amendment, placed on the ballot by the City Council, is
required to change the Police and Fire system. The Department of Water and Power system can
be changed by a decision by the DWP Board of Commissioners, all of whom are appointed by
the Mayor. The City Council must act by November 3, 2010 to place the required Charter
amendment on the March 2011 ballot. Changes to LACERS should be adopted concurrently.

We often hear our public officials talk about the "city family," the elected officials and
hardworking, dedicated city employees who work in our government. We deeply appreciate
their service. But we have another view of what constitutes the "city family." It includes the
nearly 4 million residents of our City and its future generations. Angelenos deserve and require
confidence in the future health of our City, including its ability to provide the services we all
need. We urge the appropriate bodies and the city leadership to address the pension issue
squarely and aggressively, and to address it now.

Sincerely,

Ed Avila Gene D. Block

President, Alliance For A Better Community Chancellor, University of California, Los Angeles

Elise Buik Geoffrey Cowan

President and CEO, United Way of Greater Los University Professor, University of Southern
Angeles California

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Honorable Antonio Villaraigosa
Members of the Los Angeles City Council
October 15, 2010

John B. Emerson Kathay Feng

Executive Director, California Common Cause

David Fleming Russell Goldsmith

Of Counsel, Latham & Watkins LLP Chairman and CEO, City National Bank
Founding Chair, Los Angeles County Business
Federation

Antonia Hernandez David Holtzman

President and CEO, California Community President, League of Women Voters
Foundation

Mickey Kantor George David Kieffer

Partner, Mayer Brown LLP Partner, Manatt, Phelps & Phillips, LLP

Stewart Kwoh Andy Lipkis

President and Executive Director, Asian Pacific President, TreePeople
American Legal Center

Cindy Miscikowski Thomas H. Priselac

President, Board of Harbor Commissioners, Port President and CEO, Cedars-Sinai Health System
of Los Angeles

Robert K. Ross, M .D. John H. Semcken III

President and CEO, The California Endowment

StevenIL. Soboro{f
Soboroff Partners

Blair H. Taylor GaryToebben

President and CEO, Los Angeles Urban League President and CEO, Los Angeles Area Chamber of
Commerce

M atthew A. Toledo
-
Publisher and CEO, Los Angeles Business
Journal

Organizations have been listed for identification purposes only.