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Villaraigosa v. Mathematics

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    NEWSLETTERS

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    Los Angeles Mayor Antonio Villaraigosa speaks at the launch of a political organization

    It is rarely a good thing when an important elected official fights mathematics.

    But that’s what Mayor Antonio Villaraigosa is doing.

    The math in question involves city pension funds, and specifically the annual rate of return they assume on their investments.

    This is crucial because investment returns are one of the three sources of funding for pensions.

    The other two are contributions from employees and contributions from employer – in the case of public pensions, city taxpayers.

    When pension funds can’t produce enough money to meet their pension obligation, the employer – taxpayers – must make up the difference out of funds that would be better spent on services.

    Los Angeles has been assuming an 8 percent return.

    But experts say that assumption is too high, and are arguing for reducing the expected return to 7.75 percent. The number may have to be adjusted further down to 7.5 percent in the near future, the experts warn.

    Villaraigosa doesn’t want that – because lowering the expected rate of return requires the city to set aside more money for pensions.

    That adds to the city’s budget problem – and may require additional layoffs. So the mayor has been voicing his opinion and using his power to replace members of pension boards that don’t agree with him on the issue.

    He won a small victory this week when a pension board, in making the change, agreed to spread the cost over five years.

    Villaraigosa’s objections are understandable – and common; local elected officials all over California have been making best-case assumptions about pensions in order to avoid short-term pain. But the mayor says he’s a leader.

    This sort of thing doesn’t help the credibility of a public official who has been bold, in other areas (especially education and tax policy), in confronting difficult truths.

    In a larger sense, the whole debate over these rates of return on pension investments seems divorced from reality. All three assumptions – 8 percent, 7.75 percent, and 7.5 percent – seem rather high, at least when compared to the standard for low-risk returns, U.S. government bonds.

    Put another way, if an investment advisor approached you for your business and guaranteed a rate of return of 7.5, 7.75 or 8 percent, you would be rightly suspicious. But that’s what the pension funds are doing.

    An elected official who pushes for a higher assumption on rate of return is effectively claiming that he or she has some special ability to beat the market. And if Mayor Villaraigosa possesses such powers, we’d all be better off if he quit his current job and managed our pension funds.

    If not, he should stop quarreling with mathematics. 

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