A new Rockefeller Institute pension model report on the Los Angeles Fire and Police Pension Plan (LAFPP) found that “LAFPP is much better funded than most public pension plans with a funded ratio of 91%” and is well positioned financially given the conservative amortization policies and contribution policy by the City of Los Angeles.
The Rockefeller Institute pension model report on LAFPP finds that even with volatility in annual returns, the risks of severe underfunding for pension funds are greatly reduced if contribution policy is conservative and participating governments pay their full actuarially determined contributions in all years. LAFPP was one of five public plans selected for detailed study by Rockefeller researchers. This is the sixth report of the Pension Simulation Project at the Rockefeller Institute, which examines the potential consequences of investment-return risk for public pension plans, governments, and stakeholders in government.
As highlighted in the study, LAFPP spreads its investment gains and losses over fixed 20-year amortization periods in accordance with the LAFPP Board’s funding policy, which is a more conservative funding methodology when compared to agencies that may amortize gains and losses over periods of 30+ years. Researchers also acknowledge the City of Los Angeles for its diligence in paying the full contributions determined by LAFPP’s actuaries, in contrast to many other public agencies. This disciplined funding approach is one of the items noted in the study to minimize a plan’s chance of facing a funding crisis even if investment returns are quite volatile. In spite of this finding, the study notes that governments still face a risk of substantial contribution increases, particularly if the plan benefits are relatively expensive, when investment volatility is greater.
The detailed study examined the potential implications of investment return volatility for public pension plans by modeling the finances of LAFPP and contributions from the City under six different investment return scenarios (both deterministic, where the Plan achieves its investment return assumption each year, and stochastic, where returns are random but follow a specific distribution). Researchers examined the six investment return scenarios under LAFPP’s current funding policy, as well as their impact under hypothetical policies that would arise if California voters were to approve statewide pension reform initiatives similar to previously proposed initiatives which would limit employer pension contributions for new hires (see former San Jose Mayor Chuck Reed’s proposed “Government Pension Cap Act of 2016” which failed to qualify for the ballot on June 17, 2016).
The study concludes that “if LAFPP’s investment return assumption is approximately correct over the long run, the plan has very little risk of becoming severely underfunded in the next thirty years, even if investment returns vary significantly from year to year. The main reasons for this are LAFPP’s good current funded status, its relatively conservative method of determining contributions, and our assumption that the City of Los Angeles will continue its good track record of fully paying actuarially determined contributions.”