April 10 (Bloomberg) — Los Angeles should emulate Berkshire Hathaway Inc. 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 second-largest U.S. city relies on an overly optimistic forecast of 7.75 percent 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 billionaire Buffett, Berkshire counts on annual returns of 6 percent for its pensions.
The independent commission established last year by Los Angeles City Council President Herb Wesson identified a number of other threats to the city's competitiveness and quality of life. Fewer than a quarter of registered voters participated in last year's municipal elections, regional tourism efforts are balkanized among several agencies, and pensions now consume 18 percent of the city budget, up from 3 percent in 2003, the report said.
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"The city should use the discount rate and pension plan earnings assumptions Buffett uses at his company, Berkshire Hathaway," the report said. "Berkshire Hathaway is a large, diversified employer, like the City of Los Angeles, and has many businesses operating locally including BNSF and See's Candies."
Public pension plans threaten the financial health of U.S. cities and states more than taxpayers realize, Buffett wrote in his annual report to shareholders of Berkshire released on March 1. The company has more than 330,000 employees.
'Financial Tapeworm'
"Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made," Buffett wrote. "During the next decade, you will read a lot of news –- bad news -– about public pension plans."
As of June 30, 2013, the Los Angeles pension plan for non- safety employees was 68.7 percent 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.
The L.A. 2020 Commission also recommended merging the ports of Los Angeles and Long Beach, the busiest U.S. ports; establishing an "Office of Transparency and Accountability" at City Hall; and empowering an independent five-member commission to set water and power rates.
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