Los Angeles needs Warren Buffett model for pension plans, panel says

Warren Buffett
Warren Buffett

Los Angeles should emulate Berkshire Hathaway Chairman Warren Buffett to curb a sixfold increase in city pension costs since 2003, a panel led by former U.S. Commerce Secretary Mickey Cantor recommended.

The city relies on an overly optimistic forecast of 7.75% annual returns for its pension fund, causing the gap between available assets and obligations to widen, according to the report by the L.A. 2020 Commission. Under Mr. Buffett, Berkshire counts on annual returns of 6% for its pension funds and uses a 4% discount rate.

The independent commission was established last year by Los Angeles City Council President Herb Wesson. Pension funds now consume 18% of the city budget, up from 3% in 2003, the report said.

“The city should use the discount rate and pension plan earnings assumptions Buffett uses at his company, Berkshire Hathaway,” the report said.

Public pension plans threaten the financial health of U.S. cities and states more than taxpayers realize, Mr. Buffett wrote in his annual report to Berkshire shareholders, released March 1.

“Citizens and public officials typically underappreciated the gigantic financial tapeworm that was born when promises were made,” Mr. Buffett wrote. “During the next decade, you will read a lot of news — bad news — about public pension plans.”

As of June 30, the Los Angeles pension plan for non-safety employees was 68.7% funded. The pension fund had $10.2 billion in assets and $14.9 billion in liabilities, resulting in an unfunded accrued liability of $4.7 billion.

A spokesman for Mayor Eric Garcetti, who was elected last year, wasn't immediately available for comment on the report's recommendations.