Pension Risk?

JBmadera

Recycles dryer sheets
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Apr 5, 2010
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Green Valley
Hi,

Not sure if I am asking this in the right forum section but here it goes:

Numerous family members RE'd mainly due to nice pensions (City, County, State, etc), they have all been retired for quite some time. With all the headlines about public sector bankruptcy and pension reform they are very worried about the safety of their pensions (they recall what happened to airline pilots pensions after some of the bankruptcies).

I have never worked in the public sector and do not have a pension so I really don't know how to address their concerns.

Bottom line - what happens to public sector pensions if a City or County goes bankrupt? Can a State or Federal agency change benefits to current retirees?

Thank you for any input.
 
I think many people on this forum are asking the same questions.

Here is a PEW report on State Pension and Retiree health reform. It gives a state by state run down on what different states plan to do. Many of them seem to still be trying to figure out what to do.

Pension and Retiree Health Care Reform in States - The Pew Center on the States


Here is another link to the National Association of Retirement Administrators that provides some links to information... include changes that have been enacted.

NASRA Changes Made to State and Local Pension and Retiree Health Care Benefits


IMO - I think cuts for current retirees would probably be avoided (as much as possible). But I suspect there will be some costs shifted to retirees anyway... could take the form of cola adjustments, increases in healthcare premiums or copays, etc.

So far, I have only read about one default.

http://www.nytimes.com/2010/12/23/business/23prichard.html?src=twrhp
 
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So far, I have only read about one default.

Alabama Town
That wasn't a default -- the default was refused by a court. The city simply stopped paying pensions and left retirees with nothing. Pretty scary situation. The city refused to pay anything -- even reduced benefits. Interesting to see what will happen in the long run. If the retirees can get it together to file suit it is probably possible that a court would seize control of the city and force it to pay at least partial benefits out of operating funds, raise taxes, etc. In the meantime retirees have nothing. And, if the city is small enough there may be no money to claim. The taxpayers can leave if the rates go up to much.
 
I think many people on this forum are asking the same questions.

Here is a PEW report on State Pension and Retiree health reform. It gives a state by state run down on what different states plan to do. Many of them seem to still be trying to figure out what to do.

Pension and Retiree Health Care Reform in States - The Pew Center on the States


Here is another link to the National Association of Retirement Administrators that provides some links to information... include changes that have been enacted.

NASRA Changes Made to State and Local Pension and Retiree Health Care Benefits


IMO - I think cuts for current retirees would probably be avoided (as much as possible). But I suspect there will be some costs shifted to retirees anyway... could take the form of cola adjustments, increases in healthcare premiums or copays, etc.

So far, I have only read about one default.

Alabama Town

Thanks very much for the information! I will pass it on to the family.
 
That wasn't a default -- the default was refused by a court. The city simply stopped paying pensions and left retirees with nothing. Pretty scary situation. The city refused to pay anything -- even reduced benefits. Interesting to see what will happen in the long run. If the retirees can get it together to file suit it is probably possible that a court would seize control of the city and force it to pay at least partial benefits out of operating funds, raise taxes, etc. In the meantime retirees have nothing. And, if the city is small enough there may be no money to claim. The taxpayers can leave if the rates go up to much.

If not "default"... then what word should I use?


Yes. Sounds like it's "de fault" of somebody :facepalm: ...

Re-reading my posts it sounds like I am saying Chinaco was wrong to chose the word "default" to describe a decision by the city to stop paying bills but I would have used default to describe it too. I was surprised upon reading the article to learn that the city was not allowed to "default" by the court. I guess that makes sense - people and companies can't just say "I am going bankrupt" and safely renege on their bills. They have to follow a process and get approval. Then they can renege on their bills. :) It looks like the city decided to play a little brinksmanship with the court or just to flip them the bird. As I said, above, it will be interesting to see where this goes and how the retirees make out in the long term (assuming there is a long term for many of them).
 
It is not clear at all what the priority is when a city/county/state is insolvent.

Do bondholders and pensioners get paid before schools and emergency workers ?

The courts could (conceivably) rule that pensioners must take less than they previously had.

This is all (mostly) unsettled law. The precedents are mostly not there.
 
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There was a discussion here about Central Falls, RI, cutting pensions by about 1/3 in order to pay bondholders first (http://www.early-retirement.org/forums/f28/pensioners-bent-over-in-ri-57271.html) that may or may not be interesting/frightening/enlightening.

Good luck to your family.
One thing about this decision is that pensioners are a pure load, their contribution is spent. While bondholders as a class have long memories, and can put a city out of business fast.

Few would think that if pensions were vastly weakened a city would not be able to staff its offices and courts and classrooms and police and fire departments.

I know, I know, it isn't fair, this was promised etc. But if this type of thing does not happen it won't be because it isn't fair, it will be because of the poitical power of public worker unions.

Ha
 
I know, I know, it isn't fair, this was promised etc. But if this type of thing does not happen it won't be because it isn't fair, it will be because of the poitical power of public worker unions.

Ha
Yup. And as much as pundits complain about unions for talking idiotic management into giving too much they do (or at least some do) protect workers from the abuses those same managers are ready and willing to heap on them at the drop of a hat.
 
As with real estate, all pensions are local. To make a broad sweeping statement using generalizations on pensions to your relatives individual pensions is probably meaningless. While the climate toward pension reform is unquestionably here, the status of pensions is unique to each system. If they are truly concerned about their pension and want to know how much they should worry, I would suggest they try to find out as much about their system as possible. Questions to ask may include: 1) how many years is the system pre funded 2) what is the assumed rate of return on investments 3) how has the system performed in relation to the assumed rate 4) what percentage of the assets of the system covers future liabilities.
5) Political climate in relation to the people who set the rules for the system. Number 4 is probably the most important. While 100% is optimal I've read over 80% is considered sound. While nothing is certain, if you find the system is well funded that should allow for some comfort. If it isn't, there would be legitimate reason for concern.
 
As with real estate, all pensions are local. To make a broad sweeping statement using generalizations on pensions to your relatives individual pensions is probably meaningless. While the climate toward pension reform is unquestionably here, the status of pensions is unique to each system. If they are truly concerned about their pension and want to know how much they should worry, I would suggest they try to find out as much about their system as possible. Questions to ask may include: 1) how many years is the system pre funded 2) what is the assumed rate of return on investments 3) how has the system performed in relation to the assumed rate 4) what percentage of the assets of the system covers future liabilities.
5) Political climate in relation to the people who set the rules for the system. Number 4 is probably the most important. While 100% is optimal I've read over 80% is considered sound. While nothing is certain, if you find the system is well funded that should allow for some comfort. If it isn't, there would be legitimate reason for concern.

You can add...

How many of the assets in the pension fund are listed at fantasy values ? What is the actual pension funding if the pension accounts are marked-to-market ? What are those collateralized debt obligations really worth in the pension fund ?
 
MasterBlaster said:
You can add...

How many of the assets in the pension fund are listed at fantasy values ? What is the actual pension funding if the pension accounts are marked-to-market ? What are those collateralized debt obligations really worth in the pension fund ?

MasterBlaster, you are getting above my pay grade with those terms. I'm just a lowly forum bloviator!
 
MasterBlaster, you are getting above my pay grade with those terms. I'm just a lowly forum bloviator!

In simple terms, the pension funding accounts may not be worth what is carried on the books or worth what is published. The problems may be worse than they first appear to be.
 
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MasterBlaster said:
In simple terms, the pension accounts may not be worth what is carried on the books or worth what is published. The problems may be worse that they first appear to be.

No offense Master, but as someone who lives solely off a pension, I think I would been better off if I hadn't read your last post:)
 
It would seem to me, that the party most able to find other income would be hit hardest with a default on a city/county/municipality, etc. How able is some retired guy in his 70's able to find work and make up the cut compared to a 35 year old fireman working and hasn't retired yet? Seems the pension would be last to get hit.

Also, there is the voter factor. What group could do more in the polls than another? And how about their children? If I told my son, move over and share the blanket, I'm a movin' in. He'd really call out the cavalry in order to be sure I'm able to afford my retirement.

It makes sense that lowering expectations of future income would be the better option than lowering actual income of current retirees. I think it's called a tiered system. California has it; 2%@55, 2%@60, etc. Personally the fire/police with the 3%@50 is way too generous. My job as a lineman for an electric utility company has a much higher risk than those according to statistics and I only get 2%@55 and there's no way a guy is going to be able to stay working as a lineman up into his 50's. Bodies wear out too soon for that to happen.
 
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Few would think that if pensions were vastly weakened a city would not be able to staff its offices and courts and classrooms and police and fire departments.
Absolutely. There will always be people lined up to get that badge and arrest power no matter how little you pay. Now, whether or not you want to actually live in such a place is completely up to you.
 
Absolutely. There will always be people lined up to get that badge and arrest power no matter how little you pay. Now, whether or not you want to actually live in such a place is completely up to you.

Does one really lead to another? Certainly, you need to attract qualified people that meet the standards that the locality desires. To what extent pensions need to be a major part of that, I'm not sure.

I know a teacher that started a few years back. She is now better aware of pensions and some of the issues surrounding them. She told me, none of this mattered when she went into teaching. It is what she wanted to do (and she's a bright, motivated, grounded young lady, I have no doubt she's very good at it).

-ERD50
 
It's more of an issue of retaining quality people.

I don't have a clue what the hiring costs are for other endeavors, but I know it costs my former employer $250,000 to field one basic-trained rookie police officer. We called them "fours" when I was a trainer because that was the minimum acceptable score in any graded behavior ("eights" walked on water). A four could be counted on to drive a police car without wrecking it on most nights, could find his way to wherever he was sent within a reasonable time, could investigate simple crimes and was generally safe enough that we felt comfortable about him being out there on his own. Even then we seldom ever let them ride by themselves even after a year of field training and evaluation.

It takes 5 years to make a well-qualified police officer who is really effective at his job. That's the starting point for anybody who wants to move up in the organization and investigate real crimes, or supervise all the neophytes. A 5-year patrol officer is the average street cop, and he/she only accounts for half of the organization. What did it cost to produce this basic building block of police work? A couple of million maybe would be my rough estimate.

And those are the people that all the other organizations want to steal from us because it saves them so much money in hiring and training.

In the early 80's there were only two police agencies in the country that paid more than us (LAPD and Anchorage), and we were still losing 5-7 year experienced cops left and right. Some of it was working conditions (we were the murder capitol in 1981), but a lot of it was over pension. Several friends went to work for agencies like the DEA, Secret Service and Customs and all told me that they took a pay cut to do so. At the time our pension did not compete with what the feds and a lot of other agencies were providing.

I had a patrol partner in the 80's whose secret service application was stuck because of the Reagan federal hiring freeze. Every night I had to listen to how great the retirement was going to be if he ever got hired there. And at the time it was a joke that all our pension meant was that you could sleep in a flophouse hotel instead of under the bridge, and you could buy brand name cigarettes to go with your MD 20-20 wine. When I was a detective we used point to winos on the street corner and say, "look, there goes a retired detective."

You can spend the money to hire quality people and then fail to spend the money to retain them and still suffer as if you were hiring garbage at the front door. All the people with potential to be something other than a basic worker all have what it takes to get hired elsewhere, and many of them start looking at their future with different considerations after they've been there a few years. When they leave you wind up with decent patrol officers but incompetent supervision, investigations, management, etc. Before long the patrol function would just fail as well.

It's not that you can't hire people to do these jobs on the cheap. The problem is what you get when you do it on the cheap. Atlanta PD in the late 70's and early 80's was an underpaid department that self-destructed. New Orleans PD was the same thing in the 80's and 90's (and some would argue the 2000's as well).

Cities get the kind of police department that they pay for. You pay to hire quality and to retain it.

Just to prove that my former employer was a dream to work for, in a few short years they managed to turn the situation all around and make the pay some of the least-competitive in the country while improving the pension to something to hang around for. And that's when we started getting some problems in the lower levels of the organization because we weren't hiring the right folks. And the transition period was fun too - morale was so low that a common refrain was, "Screw it, it's not my house getting broken into. We'll get there when we get there."
 
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Cities get the kind of police department that they pay for.

I don't think that's always true. I lived in a city where the police force was highly paid and earned an extremely generous pension. Yet there was a high level of corruption, payola, graft and failure to execute the basic requirements of the profession at all levels. The stereotype of the fat cop sitting in the doughnut shop counting the bribe money he had collected during his shift was reality. This tied into the corrupt, patronage and payola driven city government.
 
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