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BACKGROUND



On April 14, 2025, the Los Angeles City Controller, Kenneth Mejia, met with LAFPP staff to discuss the City’s general fund contribution. &nbsp;The discussion focused on a “true-up” of the City’s annual contribution. &nbsp;As part of the yearly actuarial valuation process, the LAFPP Board commissions a report from its independent consulting actuary, which determines the annual contribution rates (on a percentage of sworn payroll basis) required to fund the pension and retiree health benefits promised by the City to LAFPP members.



A true-up is a term used by accountants and actuaries to describe an adjustment made to account for the difference between the estimated contribution paid to LAFPP, which is based on the City’s budgeted sworn payroll, and the required contribution based on actual sworn payroll. A true-up was one of several recommendations in a March 7, 2014 audit issued by the City Controller. In 2018, in response to this audit recommendation, LAFPP staff calculated a sample true-up based on actual sworn payroll in fiscal year (FY) 2017-18, which determined that the City’s contribution was deficient by approximately $476,000, while the Harbor and Airports would have received a credit of $465,000 and $48,000, respectively, due to contributing amounts in excess of what their actual payroll would have required. These results were discussed with the Office of the City Administrative Officer (CAO) at the time, and the CAO did not pursue it any further.



After a series of meetings to discuss the details and requirements of the true-up calculation, the Controller’s Office provided LAFPP with their true-up analysis on May 7, 2025. Their analysis showed a savings of $49 million if the temporarily non-pensionable salary increases were not included in “pensionable” salary (which refers to the salary amount that is used to calculate a member’s pension benefit), or $3.1 million if all pensionable salaries were included. LAFPP staff discussed these two approaches with our independent consulting actuary and was advised that the temporarily non-pensionable salaries should be included in any true-up calculation, as they will be included in members’ pension benefits and were included when the City made its contribution at the beginning of the fiscal year.



The pensionable salary issue and its impact on future City contributions to LAFPP was discussed at a prior Board meeting on <a href="https://content.lafpp.lacity.gov/wp-content/uploads/2024/04/04182024-Special-Agenda-Package.pdf#page=17" target="_blank" rel="noreferrer noopener">April 18, 2024</a>. At this meeting, the Board’s actuarial consultant presented a report on the instability in the Plan’s funding and the City’s contribution due to the City granting salary increases to sworn employees that start off as non-pensionable and later convert to pensionable salary increases. As discussed in the Board report, staff from the CAO’s office suggested calculating the City’s annual contribution based on sworn payroll that included these temporarily non-pensionable salary amounts. As a result, the actuary did not recommend a change in LAFPP’s valuation procedure to mitigate the instability in the City’s contributions. The Harbor and Airports departments followed this same approach to include the temporarily non-pensionable salaries in determining their contributions to LAFPP.



BOARD CONSIDERATION OF TRUE-UP



On <a href="https://content.lafpp.lacity.gov/wp-content/uploads/2025/04/051525-Board-package.pdf#page=4" target="_blank" rel="noreferrer noopener">May 15, 2025</a>, the LAFPP Board considered requests from the Mayor and the City Controller regarding a true-up mechanism on annual City contribution amounts needed to fund the pension and retiree health benefits promised to LAFPP members. Controller Kenneth Mejia made a public comment and requested the Board approve and perform a true-up analysis for the current fiscal year (FY 2024-25) based on specific pensionable payroll only (i.e., excluding the temporarily non-pensionable salaries), and if the City overpaid, approve a credit back to the City. &nbsp;As discussed during the Board meeting, these “non-pensionable” salary increases are indeed pensionable, since any of these members who retire will have those salary increases included as part of their pensionable final average salary. Following the advice of the Board’s actuarial consultant, the Board agreed that any true-up mechanism should include the above salary increases as pensionable.



Although the Board did not move forward with a true-up for FY 2024-25, they directed staff to return on July 3, 2025, for further discussion on implementing a true-up mechanism beginning with FY 2025-26, which would impact the City’s FY 2026-27 contribution to LAFPP.



While evaluating the request to immediately implement the contribution true-up for the 2024–25 fiscal year, staff presented the Board with the following considerations:



<ul>
<li>Staff needs additional time to review the methodology and validate the true-up calculation that the Controller’s Office provided staff on May 7, 2025.</li>



<li>Staff has identified concerns about the ability to obtain the necessary payroll data from Workday, the City’s new payroll system, to perform an accurate, reliable contribution true-up.</li>



<li>The City has acknowledged issues concerning the accuracy of Los Angeles Fire Department and Los Angeles Police Department payroll data (see <a href="https://cityclerk.lacity.org/lacityclerkconnect/index.cfm?fa=ccfi.viewrecord&amp;cfnumber=25-0073-S1" target="_blank" rel="noreferrer noopener">Council File 25-0073-S1</a> and <a href="https://cityclerk.lacity.org/lacityclerkconnect/index.cfm?fa=ccfi.viewrecord&amp;cfnumber=25-0116" target="_blank" rel="noreferrer noopener">Council File 25-0116</a>). There are scenarios where members do not make an employee pension contribution but earn service credit (IOD or military leave), or do not earn service credit (suspensions or unpaid leaves of absence). Additionally, retroactive adjustments in pay would have to be accounted for in any true-up that is calculated. Correct payroll data is critical to ensure any true-up is accurate.</li>



<li>If the true-up is based on incorrect salary data, the Board risks underfunding the plan if credits are improperly provided against the City’s annual required contribution.</li>



<li>The CAO indicated to staff that any true-up for FY 2024-25 would need to be completed prior to the City Council’s adoption of the budget, which must occur by June 1, 2025.</li>



<li>Once a&nbsp;true-up&nbsp;process is adopted by the LAFPP Board, it must be calculated by LAFPP and applied each year going forward, regardless of whether the&nbsp;true-up&nbsp;results in a contribution credit (amount credited against the following year’s annual required contribution amount) or shortfall (additional amount owed on top of the&nbsp;following year’s annual required contribution).</li>
</ul>

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