Pensioners bent over in RI

[travelover]

............I guess I am struggling with the attitude that ripping off promised benefits is OK. Maybe I should go work for the private sector making much more money? ..............

I suspect that one's attitude depends on whether one is collecting a pension or just paying for someone else's. I say that as someone that has a pension and who is married to someone that stands to collect a public pension.

 

[Bimmerbill]

The public pension system in NH, where I live, has been in the news a lot lately. They are making changes mostly because the pension doesn't have the required funding. From what I gather, this is mostly because the state and towns didn't pay into the plan when they were supposed to. Now they owe a lot, and everyone is foaming at the mouth.

I think the risk of pension default, even public pensions, is increasing. I just don't know how to compute it. I work for the feds, so will have a FERS pension (I hope) in another 15 to 20 years.

They are already talking about changing to high 5 (from high 3) and increasing the employee contribution. They are also talking about a 5 year pay freeze, insead of the current 2 year pay freeze.

How do you factor in these risks? I used to think there were no risks. Certainly were none back in 1993 when I started.

 

[clifp]

I agree. It is a raw deal.

The bond holders should be paid and so should those pensioners.

But the bondholders took an investment risk... the employees did not.

The people to blame are the politicians and bureaucrats.

The excuse of having to pay higher interest rates is lame... It is a fact of investing.

They defaulted on the pension and changed the rule after the fact.

I wonder if there will be a court challenge of that state law... at least in terms of changing past agreements.

I am sorry blame "politician and the bureaucrats" is lame generic excuse. First there is only one politician the mayor. He makes 125K and is undoubtedly either corrupt or incompetent and more than likely both. There 5 city councilmen who met monthly or so and are paid less than $3,000 a year. How much work do you expect somebody to do for $3,000 a year?. As for the bureaucrats you are right they are blame, but lets be clear they are both culprits and the victims. The city finance guy, city clerk, and the union reps (again also a city worker) for the cops, fire fighters and other unions did saddle the city with overly generous pension plan that they couldn't afford to pay so. The bureaucrats/aka city workers had no capital budget, a pretty poor operating budgets, and non existent cost controls. They also went with outside Pension provider John Hancock who charged them 1% management fee (although that was somewhat negated by better than average returns). I suspect one of the reasons the pension is being cut is John Hancock is saying until you guys make your pension payments you've underfunded for so long, we aren't paying out the pension.

The way I figure the retired city workers collective have screwed the city for the last 25 years and don't deserve any pension much less a generous one.

 

[JOHNNIE36]

Not sure whether this applies to Sam or me. It sounds like it addresses my concerns. Unfortunately, as I was pointing out, the PBGC guarantees the pensions covered by ERISA which doesn't cover public employees.

The reply was meant for samclem who was wondering if there was a way to insure pensions, private or public, in case of failure. One would have to be lawyer to unravel all the mumbo-jumbo surrounding the PBGT and ERISCA.

 

[Bimmerbill]

But they said it wasn't a generous pension. Its a very modest pension.

 

[clifp]

Where were the financial regulators when the pension plan was being run into the ground? Isn't there some sort of protection built in to the system?


I guess I am struggling with the attitude that ripping off promised benefits is OK. Maybe I should go work for the private sector making much more money?

Not sure I explained that well enough.

The short answer is there is very little financial regulation when comes to
state and local pension plans. I am pretty sure that pension provider John Hancock notified the city each every year that you owe us X million for the pension and the city gave them 1/2 X in good years and $O in recent years. Remember aren't talking about a lot of city workers 70-100 for the whole city. So I am guessing the department heads as well as the city treasurer were all well aware of what was going on.

Also legislator at the both the city and state level are allowed to pass laws dictating assumptions. For instance at various times they can and have said the assumed return for the pension fund is 8% or in Hawaii, dictated the fund earns more than 10% in year than they state doesn't need to make a contribution. This is extremely useful power to have when trying to budget balance. Equivalent to individual saying next year I assume that bank will cut my mortgage payment from $2,500/month to $1,500 when planning your household budget.

Generally there is a audit of the state and local pension plans, but the reports are typically ignored. Moreover, often the auditors are required to accept the legislative mandates on things like assumed rates of return when doing the audit.

 

[clifp]

But they said it wasn't a generous pension. Its a very modest pension.

It isn't a modest pension due the length of time they can collect them.
For instance one of the example pensions that receivership used was for a public safety guys (cop or firefighter) who put in 20 years and retired at age 43 with a $40,000 a year pension (55% of pay).

Since you are a familiar with FERS system, I'll use the TSP annuity calculator. In order to get a $40K/pension at 43 with a COLA and 50% survivor benefit,you'd need to invest $1.71 million dollars to get that pension. Spread out over 20 years of working that is an additional 85K in benefits.

The proposal was cut this pension from 40K to 21K but even a 21K pension would require nearly $900K. That is hell of lot more than most people have saved up in their 401K by age 43.

 

[Bimmerbill]

NH changed the minimum retirement age to 55, I think, to counteract some of those issues.

$80K is a good salary for a cop or firefighter. Heck, I just barely cracked that and I have 20 years in IT.

 

[Berkshire_Bull]

I didn't see anything in the article that stated the employees were paid overinflated salaries or health benefits. I could have missed that. I have never been sure why government employees should live as paupers just because they are paid with taxpayer dollars. Besides, it is the politicians that in many cases allowed the employees to unionize, allowed the unions to negotiate just about everything and then agreed to the pay and benefits.

I'd love to see what that town spent all the money on. I assume they had some revenue. I wonder what pet projects, well-meaning programs and non essential services did they borrow money to fund while breaking their promise to their retirees. Right, wrong or indifferent, the politicians made a promise to those people and not keeping it is inexcusable. I have sympathy for the bond holders, but a lot of those pensioners probably have little or nothing to fall back on.

I didn't say the salaries were overinflated, I did say the health & benefits were. It's a simple deduction that they were overinflated due to the fact that there isn't enough money to pay for them.

 

[chinaco]

I am sorry blame "politician and the bureaucrats" is lame generic excuse. ...

As for the bureaucrats you are right they are blame, but lets be clear they are both culprits and the victims. ...


The way I figure the retired city workers collective have screwed the city for the last 25 years and don't deserve any pension much less a generous one.

Look... I don't know the specific detail of that situation. My comment was "in general". So I suppose others could be to blame.


Were there some situations on pension that were outrageous?? Like those council men and the mayor in that small California town?

If not...

Who else would we blame? They were/are the stewards of the entire system... they were/are the decision makers and the negotiators that have the responsibility to deal with any issues that arise. Doesn't matter if it is a union negotiation or what it is. I mean really... isn't that their job? I don't care how much they were paid or not paid. They are stepping into those jobs and have responsibility to everyone in that town or county or state or whatever.


It seems to me that everybody would have been better off if they did their job to begin with. If that meant a less generous pension... OK... but before the fact, not after. Those people can't make it up after they have retired or are approaching retirement.


It sure sound like they let people down... all around. If they went bankrupt... they really messed up. I don't believe they should get dispensation for that.

They knew it a long time ago. There is no way they could not have known! Have you ever worked in finance or accounting? I will guarantee you they knew! Somebody did not do their job!

 

[BTravlin]

If you want to know the details of the disaster of Central Falls. It is spelled out it pretty amazing detail in the state appointed receivers report right here.

It is tempting to blame this on politicians but as best I can tell the only politicians were a full time Mayor and handful of part time city council members. Many of whom I think were/are city workers. I haven't read the whole report but read enough to realize that much of the downfall of Central Falls is due to featherbedding by city workers and a way to generous pension plan which allowed city worker to retire at 50-65% after 20 or 25 years of service while only contributing 7% of their pay (and less in earlier years). While it is true that current pension were relatively modest 30K or so, the average income for the town is only 22K with many residents living below the poverty line.

The town had 19,000 resident in roughly 6,700 households the total area for the town is tiny 1.3 square miles so the place is primarily multiplexes and apartments. Looking at the police department is instructive as example of feather bedding. In a department of roughly 40 cops, they had 1 chief, a Major, a Captain, 6 Lieutenants, 6 Sargents. This seems top heavy to me but more importantly they failed to do a good job making the city safe with crime rates significantly above the State or Federal level. Certainly their staffing level would support having a cop every few blocks.
The union instituted a number of work rules and staffing requirements that drove up the cost to the city.

However, ultimately the what killed the city was the pension, since there were more retirees than workers. The report said that the city would be required to allocate 5 years of revenue while providing NO SERVICES (trash, cops, firefighters, inspectors etc) to fund the unfunded liability. Just paying the actuarial required payment to keep current would require an increase of 50% in property tax (they were already raised 25% and the tax per assessed valuation was almost double due to falling property values). To put another way paying the pension would require collecting 7% of all of the median income earned in the city.

It is worth noting that state took over the failing school system 20 years and over the last 20 years has providing more than $600 million or $31,000/resident in funding. If Central Falls was paying for their kids education (instead of the other residents of Rhode Island) the situation would be far worse.

Central Falls is worse than most places but I fear it the proverbial canary in the coal mine.

The situation in Central Falls aside, my main point for posting this was more concerned with the state law that moves pensioners behind bondholders in the case of bankruptcy. Buyers of bonds take a calculated risk when making such an investment while government pensioners put in their time according to the rules and were made a promise by their employer. Bond holders should not be placed ahead of the pensioners.

 

[clifp]

The situation in Central Falls aside, my main point for posting this was more concerned with the state law that moves pensioners behind bondholders in the case of bankruptcy. Buyers of bonds take a calculated risk when making such an investment while government pensioners put in their time according to the rules and were made a promise by their employer. Bond holders should not be placed ahead of the pensioners.

From an ethical side I suppose one could argue that. Although I suspect after reading the receiver report that finance department either lied and/or was financially incompetent. I am not sure what rating Moody's gave the bonds initially probably much higher than their current below junk bond status.

My argument is the people that were in the best position to know the trouble the city was the mayor, and the individual city workers. It was after all the city workers who got mailed each year a report showing that the pension was under funded. It is the city workers that help prepare and discuss and distribute the city budget. Perhaps the part time City council member did or should have known but if they went by the numbers prepared by city workers how much digging should be expected.

Frankly any city worker in any type of management position was in a much better position to know how bad the situation was than some Moody's analyst much less the guy who buys a Vanguard muni bond fund.


Forgetting the ethical discussion from a practical position it is much better to prioritize bond holders over the pensioners. The city is going to borrow money in the future and at the current rate of 8.6% it is pretty expensive if they stiff the bondholders, that effectively denies the city access to any type of capital. Also even if they completely hose the bond holders that only closes $20 of the $80 million they need to fund the pension. Paying the pensioners first just screws the rest of the city and my argument is that it is the city workers who screwed the city.

I think the law finally gives city workers an incentive not bankrupt their employer which is a good thing.

 

[clifp]

It sure sound like they let people down... all around. If they went bankrupt... they really messed up. I don't believe they should get dispensation for that.

They knew it a long time ago. There is no way they could not have known! Have you ever worked in finance or accounting? I will guarantee you they knew! Somebody did not do their job!

I am not sure who they is. As I said in previous post the 4 folks who worked in the finance dept. the collection dept, along with top officials in police and fire department all had to know what was going on, and didn't blow the whistle. So I think a lot of people didn't do there job for a long time, which is why I have no problems seeing their pensions whacked.

 

[Koolau]

I don't think anyone has mentioned it specifically, but the situation in this small RI town is a preview of what SS and Medicare will be like. Yes, the US gummint can print (ever more worthless) money to cover these obligations, but, in reality, that is a kind of "default" - paying off obligations with "worthless" money.

I mention this because I don't see this one incident as isolated. It's happening or soon will happen in many municipalities, then states and then the Fed gummint. We've kicked a lot of cans down a lot of roads in the last 40 or so years. We've made promises that either we can't keep or else will take draconian taxes and/or service cuts to make good. This was NOT unforeseeable. What has probably brought all of this to a head (a bit earlier than most would have expected) was the last recession which devastated jobs for so long. The various houses of cards are beginning to collapse and it will get a lot worse before it gets better. I've seen (but forgotten) the total unfunded liabilities of states and municipalities. IIRC, it is similar to the US liabilities (roughly $80 trillion).

As the old song goes: Somethin's gotta give, somethin's gotta give, somethin's gotta give.

Okay, so the "glass-half-empty" guy will now climb down off the soap box and return you to our regularly scheduled program.

 

[BTravlin]

From an ethical side I suppose one could argue that. Although I suspect after reading the receiver report that finance department either lied and/or was financially incompetent. I am not sure what rating Moody's gave the bonds initially probably much higher than their current below junk bond status.

My argument is the people that were in the best position to know the trouble the city was the mayor, and the individual city workers. It was after all the city workers who got mailed each year a report showing that the pension was under funded. It is the city workers that help prepare and discuss and distribute the city budget. Perhaps the part time City council member did or should have known but if they went by the numbers prepared by city workers how much digging should be expected.

Frankly any city worker in any type of management position was in a much better position to know how bad the situation was than some Moody's analyst much less the guy who buys a Vanguard muni bond fund.


Forgetting the ethical discussion from a practical position it is much better to prioritize bond holders over the pensioners. The city is going to borrow money in the future and at the current rate of 8.6% it is pretty expensive if they stiff the bondholders, that effectively denies the city access to any type of capital. Also even if they completely hose the bond holders that only closes $20 of the $80 million they need to fund the pension. Paying the pensioners first just screws the rest of the city and my argument is that it is the city workers who screwed the city.

I think the law finally gives city workers an incentive not bankrupt their employer which is a good thing.

Yes, there may well have been malfeasance in Central Falls but we are talking about a state law here and that is where I take issue with making pensioners subordinate to bondholders. Not a precedent I want to see spread across the country.

 

[clifp]

Yes, there may well have been malfeasance in Central Falls but we are talking about a state law here and that is where I take issue with making pensioners subordinate to bondholders. Not a precedent I want to see spread across the country.

To be fair if I was getting a pension, I'd probably agree with you.
However, since I am not I guess we'll agree to disagree.

I know that there are bankruptcy lawyers on the forum so I'll defer to them, but it seems to me that pensioner are unsecured creditors while in most cases bondholders are secured creditors and generally speaking secured creditor get paid before unsecured creditors.

 

[BTravlin]

To be fair if I was getting a pension, I'd probably agree with you.
However, since I am not I guess we'll agree to disagree.

I know that there are bankruptcy lawyers on the forum so I'll defer to them, but it seems to me that pensioner are unsecured creditors while in most cases bondholders are secured creditors and generally speaking secured creditor get paid before unsecured creditors.

I don't have a pension either but I guess we will indeed agree to disagree.

People plan their lives based on those pension promises so I don't think it should be so easy to push them behind a bond investor.

 

[traineeinvestor]

Yes, there may well have been malfeasance in Central Falls but we are talking about a state law here and that is where I take issue with making pensioners subordinate to bondholders. Not a precedent I want to see spread across the country.

As much as I may sympathise with those pensioners who were genuinely ignorant of the true position and of the economics of the promises that were made to them, I agree with this.

Firstly, as a matter of not changing the law retroactively - both the bond holders and the pensioners relied on promises that cannot both be kept. Changing the legal position after the fact would represent a major departure from the country's legal system and would be subject to legal challenge on various grounds. Second, as a practical matter, if the bond holders lose their priority then no state which is in financial difficulties will be able to borrow money (or will have to pay a much higher interest rate to do so).

If the bondholders had not enjoyed statutory preference at the time the bonds were issued, my views would have been different (but then, this whole mess would have come to a head much earlier).

My biggest sympathy goes to the long suffering local taxpayers who are getting stuck with what are (IMHO) ridiculously high taxes.

 

[samclem]

People plan their lives based on those pension promises so I don't think it should be so easy to push them behind a bond investor.

And many people plan their lives around the promises made to muni bondholders. There really are grannies out there clipping coupons to make ends meet each month.

 

[Spanky]

My biggest sympathy goes to the long suffering local taxpayers who are getting stuck with what are (IMHO) ridiculously high taxes.

Agreed - paying for people who are no longer providing the services.

 

[Texas Proud]

Look... I don't know the specific detail of that situation. My comment was "in general". So I suppose others could be to blame.


Were there some situations on pension that were outrageous?? Like those council men and the mayor in that small California town?

If not...

Who else would we blame? They were/are the stewards of the entire system... they were/are the decision makers and the negotiators that have the responsibility to deal with any issues that arise. Doesn't matter if it is a union negotiation or what it is. I mean really... isn't that their job? I don't care how much they were paid or not paid. They are stepping into those jobs and have responsibility to everyone in that town or county or state or whatever.


It seems to me that everybody would have been better off if they did their job to begin with. If that meant a less generous pension... OK... but before the fact, not after. Those people can't make it up after they have retired or are approaching retirement.


It sure sound like they let people down... all around. If they went bankrupt... they really messed up. I don't believe they should get dispensation for that.

They knew it a long time ago. There is no way they could not have known! Have you ever worked in finance or accounting? I will guarantee you they knew! Somebody did not do their job!

+1 on your post....

But you can't get blood from a turnip.... so the people who pay are the ones who were supposed to be covered by a pension...


And it is not like it has not happened to a lot of others.... look at the steel industry or the airlines.... many people lost their pensions there because someone was not doing their job.... it is a fact of live....

 

[Texas Proud]

Yes, there may well have been malfeasance in Central Falls but we are talking about a state law here and that is where I take issue with making pensioners subordinate to bondholders. Not a precedent I want to see spread across the country.

More than likely it will spread.... when I saw this on the TV news they were showing a good number of states and municipalities that were on the road to the same fate...


The difference is that right now a state can not declare BK.... I think that will change in the next few years....

 

[donheff]

As much as I may sympathise with those pensioners who were genuinely ignorant of the true position and of the economics of the promises that were made to them, I agree with this...

My biggest sympathy goes to the long suffering local taxpayers who are getting stuck with what are (IMHO) ridiculously high taxes.

Why sympathise with the taxpayers? They chose to live there, they voted in the miscreants, and they are as much to blame for their ignorance of the true situation as the civil servants. At least the taxpayers can move and avoid the consequences (high taxes). The pensioners are toast.

 

[Mulligan]

As a pensioner, I am worried. Many retirement systems passed on increased benefits during the go go market boom of the 90's and the problems are just now coming home to roost. Combine this with assumed actuary results of 8%, you get a funding problem. Most pension funds have to be diversified to some degree. How may safe bonds out there pay 8%? Cash funds 8% HA! So how much in the equity market will you have to return to make up for that money? 15%-20% yearly? That doesn't seem to be very reasonable.

 

[Berkshire_Bull]

Why sympathise with the taxpayers? They chose to live there, they voted in the miscreants, and they are as much to blame for their ignorance of the true situation as the civil servants. At least the taxpayers can move and avoid the consequences (high taxes). The pensioners are toast.

The taxpayers fullfilled their promise when they put the money into the fund. If the fund was too generous with benefits, mismanaged their funds etc then it is what it is.

People seem to be under some dillusion that government pension funds are backed by the government entity that funded them in the first place having the ability to levy future taxes. This is not the case.