Keith Comrie, Former Los Angeles CAO, Confirms that City's Fiscal Everest Has Deep Roots

Keith, as a former Chief Administrative Officer of the City of LA, our readers would welcome your reaction to last month’s TPR interview with current LA CAO, Miguel Santana (Miguel Santana, LA's City Administrative Officer, Demystifies Next Mayor's Fiscal Challenge). Relying on a recent City Report, City at a Crossroads, Miguel focused on the challenges facing the next Mayor and also on his assumed role in City Hall—the deliverer of bad news.

Keith Comrie: The CAO in the City of Los Angeles reports jointly to the mayor and the council, and it’s his or her job to present the city’s financial picture to them clearly, both positive and negative issues. Unfortunately when you present the negative issues, you sometimes are put in a difficult position. I think Miguel has tried very hard to bring the issues forward, and I can’t criticize anything he’s done. He’s raised the issues professionally and in a politic manner, but people don’t like to hear the problems.

The city obviously had nothing to do with this huge national recession we’ve had—the worst since the 1930s. Revenues not only didn’t increase, they decreased dramatically, and when revenues go down, you can’t finance existing salaries and pensions. The problem was compounded for the City of LA when former Mayor Richard Riordan jacked-up the pension systems. For example, with the police he raised the pension from 70 to 90 percent. These pensions can last longer than the people worked, so it’s very expensive when you do that.

Second, Riordan created something called DROP, or Deferred Retirement Optional Program, where he lets officers, in the last five years, collect their paycheck and pension simultaneously, and they hold it in a fund for them. There’s a poster boy right now (KCET did an story on him) that received a million-dollar check. They sold DROP as revenue neutral, but it can’t possibly be revenue neutral in the cases KCET presented because he gave up $5000 in his pension in exchange for the million dollars. That million dollars left in the pension fund, would generate $75,000 a year, as compared to the $5000. So it has to be costing the pension system a ton of money. As a result, the fire and police pension systems have been going up $50 to $100 million every year, while the city’s revenues have been declining. That’s why they have these deficits, are laying off staff, and are deferring maintenance on streets and sidewalks. The revenues are down and expenditures are up.

Now I’ve got to give them a lot of credit: it may be controversial, but they did step in where the retirement age was lowered for civilian employees from 60 to 55 (which is very expensive), and they modified that system dramatically. I don’t know all the details, but if you look at Miguel’s numbers, which he very carefully presents, that system not only stopped going up, but it dropped. In current forecasts, it’s back to where it was seven years ago, which is very significant for the city. It was costing $300-plus million seven years ago; now it’s back to $300 million. It stabilized the system through that change, where the fire and police system is still going up $50 to $100 million per year.

Miguel’s numbers are very clear. You can see where the deficit is—it’s the fire and police pensions. They’re still continuing out of control. The revenues are finally starting to pick up a bit, but the city got hurt for a number of years with reduced revenues. So that’s why they’re having trouble, and I don’t think they should take it out on the CAO. He’s only presenting the facts; he was not involved in the pension changes that were terribly expensive.

The next mayor is going to have a problem, and he or she is going to have to discuss it seriously. But don’t take it out on the CAO.

Keith, as the past and respected CAO of the City of LA, is it common for the CAO to be asked by the Mayor and Council to publicly deliver the “bad news” regarding the fiscal condition of the city?

Keith Comrie: It’s always the CAO who has the facts and figures and who monitors the budget, knowing what’s going on and what’s to be presented. I followed a very simple practice during my whole career in the city and county. When it was good news, the politicians received the credit for it; and when it was bad news, I had to present it. That’s how the profession is supposed to function. The elected officials need to be reelected so they receive credit for all the good things, and the bad things, you take the heat and try to present solutions.

In the run up to the May run-off campaign for Mayor, one candidate has voiced the opinion that recently negotiated agreements asking for contributions to the pension fund by new employees ought to be a matter of collective bargaining. Could you address the difficulty of reforming city pensions?

Keith Comrie: Anything that affects existing employees under the state’s bargaining laws has to be discussed and has to at least reach an impasse. Then, of course the city can move ahead if it has to, but it takes time to get to an impasse. I think the City Attorney gave standard information, from my memory, of the field, that if it only affects future employees, it may not be bargainable. But I’m not that close to it—you’ll have to talk to the City Attorney to see where that opinion came from. If the City Attorney ruled that way, and the city followed it, they should be on firm ground. And of course they’ll be tested in the courts to see.

My memory of collective bargaining rules is that you do go to the table, you do discuss it, but at some point, if you don’t reach an agreement, you can declare impasse and the city can move ahead on its own. So it doesn’t make any difference for future employees or even existing employees. You can move ahead as an employer and implement your final, last offer, and that one needs to be discussed with the City Attorney also.

I don’t see this issue that they’re debating right now, either way, it would have been resolved. If the mayor and council wanted to change that retirement system and raise the age, they could have done it whether they reached agreement with the unions or did not.

The City of LA must renegotiate many of its collective bargaining agreements with public employees in 2014. How important will the subject of pension obligations be in these upcoming negotiations?

Keith Comrie: If the fire and police systems continue to move at $50 to $100 million-a-year increases, I don’t know how they are going to stabilize the city. They have to bring that under control somehow.

People have asked, “Well why isn’t LA County having problems?” They did not create a DROP program, which cost the City of LA a billion dollars so far with only some small offset. Additionally, they did not go to 90 percent pensions. It was even a campaign issue in the county but the board blocked it. I have to assume that’s one of the reasons the county does not have the same problem that the city has with escalating retirement costs.

As far as I can tell, from a financial viewpoint, they’ve solved the civilian system for the non-water-and-power employees. It’s back to where it was seven years ago in cost. The fire and police systems, however, just continue to go up—that’s just constant pressure.

My concern, as I mentioned to KCET, is Richard Riordan came in last year and wanted to abolish all the pension systems, and create a small 401K of some kind for them. Unfortunately, I think the voters are ready for such a change if it gets on the ballot. Then they will lose the pension systems. Of course that’s a problem for future city employees, but it’s also a problem for the city because the city recruits and maintains good employees when it has a good retirement system. It’s a real plus. If you transfer a defined benefits system, where the employee has years of credit, and if he quits and goes some other place, he only takes his own contribution back, which is usually the lesser of the contributions. With the 401K, he can pack up and leave at any time and take his contributions, plus the city contributions, and the earnings on both contributions, and walk away. So you’ll have a huge turnover problem in the future, and I think that’s a very significant issue to be concerned about.

Richard Riordan said he’s coming back, and he is going to come roaring back. This billion-dollar DROP program is just going to enrage the voters. They’re going to ask, “How can you collect a pension and salary at the same time and walk away with a million-dollar check?” They’re going to be extremely upset, and they’ll probably vote to abolish the pension systems, creating a massive future turnover problem for the city.

LA County’s fiscal health seems far superior to the City of LA’s. How is it that the County is able to attract and retain professional talent and not bust the bank, while the City faces a structural deficit and is laying off or retiring its managers?

Keith Comrie: Both have a standard pension that the employees contributed to. The County’s plan has a higher retirement age, a lower retirement formula—not that 90 percent system some cities put in—plus, they don’t have the deferred option program, which has cost the City of Los Angeles $100 million a year.

How is the County able to more prudently negotiate with its unions than the City? The elected county board of supervisors, like the City of LA, is governed by a liberal majority; their labor unions are affiliated with the City’s labor unions. Yet, LA County is fiscally more healthy, has labor peace, and has a better set of employee salary and pension benefits.

Keith Comrie: I really can’t tell you why. Maybe the smaller governing body helps? I always found when I worked for the County, they pretty much knew if they put more in one category—say pensions and salaries—they had to lessen the amount of services they could provide. It didn’t matter what board it was—going back 30 years they were more restrained in what they did. They modified their pensions years ago, when Harry Hufford was there, to bring them in line with lower-level averages. There’s nothing wrong with the County pension systems; they’re all good.

For some reason the City of LA and other cities just put a ton of money in. To get back to the issue of the former mayor coming in with a reform: don’t forget it’s been tried in San Jose, San Diego, and, I think, Orange County and their voters voted them all away. They abolished the retirement systems. So the City is looking at a serious problem for recruitment and retention in the future.

Keith you’re no longer a voter in the City of LA, so allow us to ask what you would want to hear from the mayoral candidates about management of the City’s budget that would give you confidence going forward?

Keith Comrie: I would hope that they recognize that they first need to be very business friendly, which, I think, both candidates seem to be. They need to help that environment, whether it’s how fast you get a permit or how many hoops you have to jump through.

Second, they have to restrain costs. Remember, the city is a people budget—it’s firefighters, police officers, librarians, street maintenance workers. They somehow have to contain salaries, pensions, and health benefits. I’m not close enough now—but I don’t think their salaries are significantly out of line. The pension and health benefits appear to be the problem.

Lastly Keith, as we mentioned earlier, the City goes into negotiations on a great number of its labor contracts in 2014. How would you advise that new leadership and its staff in preparation for those negotiations?

Keith Comrie: The current CAO knows where they need to go. I would hope they would listen to him. He seems to present the facts and take a beating for it, but he has to because the way it was going, not only were the fire and police systems out of control but also the civilian system.

I don’t think I agree with Riordan that we’re on the immediate bankruptcy road, but in the long run, services are going to deteriorate very dramatically if they have to put significantly more money into the pension systems and revenues go up only gradually. Slowly the city will decline.

So listen to the CAO, and I hope the new mayor or council either retains Miguel or appoints someone who will also actively forward possible solutions.