Public Pensions Bankrupt???

[jerryo]

Any thoughts about todays NY Times article on accounting irregularities and funding shortfalls in public (state & local) pensions?

Is there any real risk that public sector DB pensions will be unable to pay

Here's the link:

    javascriptl('http://www.nytimes.com/2006/08/08/business/08pension.html?th&emc=th');

 

[FinanceDude]

Yes, a real risk.............

Making up the difference usually involves raising taxes, which is not in favor in most places these days.

A lot of companies used to do their own managing........but today a number of them are outsourcing to the big insurance companies like Pru and hartford to take the headache off their plates.........

Funny how times of changed...........back in the 80's a number of leveraged buyouts were done using OVERFUNDED pension plans........

 

[Martha]

Any options besides raising taxes?  Maybe not.   I understand that at least for state government,  that most state constitutions guarantee pension promises.  Local government may be different.  There is no history of default in the United States on a public pension. No one knows what really would happen if there were defaults.

There is dispute among bankruptcy practitioners whether a bankruptcy under Chapter 9 (bankruptcy for municipalities)  could result in discharge of pension obliagations. 

I think the huge unfunded retiree health benefit obligations of state and local governments are much more at risk than pensions.

 

[FinanceDude]

Any options besides raising taxes?  Maybe not.   I understand that at least for state government,  that most state constitutions guarantee pension promises.  Local government may be different.  There is no history of default in the United States on a public pension. No one knows what really would happen if there were defaults.

There is dispute among bankruptcy practitioners whether a bankruptcy under Chapter 9 (bankruptcy for municipalities)  could result in discharge of pension obliagations. 

I think the huge unfunded retiree health benefit obligations of state and local governments are much more at risk than pensions.

That is true, but how are the states going to pay for it if they don't have the money? There's a little thing called a state budget. You can cut services and jobs, or you can raise taxes, or you can do a combo.

There's only so much money to go around............

I agree about the health insurance thing............Medicare/Medicaid is in WAY worse shape thand SS...........yet no one really talks about it..............

 

[maddythebeagle]

Yes, a real risk.............

agreed. Esp. some of the states that I have heard about including Illinois where they raided the public employee trust funds to plug their recent budget shortfalls...I also agree that it wont be funded with higher taxes...maybe ben. cuts and move to 401k type accounts for younger workers and increase retirement ages...as with everyone else...save for yourself....

I think the huge unfunded retiree health benefit obligations of state and local governments are much more at risk than pensions.

maybe, and it probably depends on the state...but I know a few that dont guarantee health bens.....it is just something they offer....Some make you pay for the premiums yourself but that isnt so bad considering it is a group plan....Our state allows for accumulated leave conversion to pay premiums…but they could stop this if they wanted to....

 

[Cut-Throat]

I think the huge unfunded retiree health benefit obligations of state and local governments are much more at risk than pensions.

Big Article on this in the Minneapolis paper in the last few days about Duluth.

 

[eridanus]

Funny how times of changed...........back in the 80's a number of leveraged buyouts were done using OVERFUNDED pension plans........

Warren Buffet talked about this at one of his annual talks in Omaha. Actuaries were allowed to use the high Treasury rates of the early 80s in their crystal balls, thus ensuring that pensions were well balanced on the backs of 13% T-bonds. When the rates began to slide, and the pension obligations continued to increase, the pension had a hole to fill.

 

[Martha]

Big Article on this in the Minneapolis paper in the last few days about Duluth.

Yes, we have a big problem with retiree health benefits.  There are plans to raise local taxes (which have been held down for some time) and plans to raise water and gas fees to start putting money away for these costs.  Taxpayers don't like it, needless to say.  I hate to say but our city promised too much.  

There are those who suggest bankruptcy for the city.

 

[Marshac]

Any options besides raising taxes?  Maybe not. 

Our state has cut back the retirement system for younger/new workers. New(er) employees get a 1% pension with no 401k match coupled with with draconian benefit reductions should you want to retire prior to 65 (ie: at age 55, you get 37% of your 1% pension). On my paystub I can see that my employer is giving the state more than 8% of my gross pay for retirement benefits.... so where is it going? Simple- To fund the Plan 1 liabilities (read: the underfunded pension plan for the older employees).

As a young employee who cares about his retirement benefits, it totally sucks- yes, the old plan was WAY too generous, but the existing plan really isn't much of a plan at all. Screw the DB- give me that 8% into my 401k. 

 

[shiny]

There are those who suggest bankruptcy for the city.

Yikes! As someone who holds Muni funds, there is one more thing to worry about.

 

[maddythebeagle]

Our state has cut back the retirement system for younger/new workers. New(er) employees get a 1% pension with no 401k match coupled with with draconian benefit reductions should you want to retire prior to 65 (ie: at age 55, you get 37% of your 1% pension). On my paystub I can see that my employer is giving the state more than 8% of my gross pay for retirement benefits.... so where is it going? Simple- To fund the Plan 1 liabilities (read: the underfunded pension plan for the older employees).

I was actually thinking about ours a little more and the "pension formula multiplier" is lower for new workers, also (still have the pension right now though)....so that is another way around it....Folks that retire right about now around age 55 are really getting a great deal with few worries with potentially long life spans....before the **** hit's the fan....

 

[dumpster56]

Well if the state of nj screws my pension, yes I have one worked 30 years was told I HAD TO BE PART OF THE SYSTEM, 5% of my pay was taken toward the pension every pay check for the 30 years, I would go and work full time again.

Kinda cool that I have a small mortgage and been offered three teaching jobs already here down in NC.

 

[katfish]

Yes N.J., what a wonderful state. Our pension fund was raided by gov.Whitman
back in, I guess the 90's,for the general operating budget. Then lost a bundle
in the market crash, and been in the red since. Now they are investing in hedge
funds, and god knows what other risky investments. They want to cut, and
I think they will, benefits for new hires.

 

[Leonidas]

I'm tickled pink that my pension is not managed by my soon-to-be previous employer. So many cities and states promising the stars to employees while not funding the plans. We voted to allow the city to underfund its contributions for several years (pension was more than 100% funded at the time) and then when it came time to pay up the full amount the mayor cried poverty and refused. We re-negotiated and gave up some benefits, raised employee contributions and drastically changed things for new hires - and the city still refused to pay its share. It took a lawsuit (negotiated settlement) before the administration forked over its obligation. I'm sure that if the city was the manager of the fund that it would be in terrible shape now.

We were underfunded by nearly 900 Million, but last year's actuarial report said that we would cut that to less than 700 Million if our fund hit its benchmark ROR in FY 06. Last month was the end of the fiscal year and we had hit 10.2% as opposed to the target of 8.5% (I think) so we may be in better shape than hoped for.

Modified to add

This may change the picture for a lot of state and municipal pensions:

The U.S. Senate passed the Pension Bill by a margin of 93 to 5. This bill contains two provisions that are of particular interest to members of xxx Pension System. First is a provision that will allow active police officers to retire at age 50, instead of age 55, and avoid the 10 % early distribution penalty. This provision will become effective upon the enactment of the legislation. Second, retirees will be allowed to exclude from their gross income up to $3,000 annually in order to pay insurance premiums under certain circumstances. This provision is slated to become effective December 31, 2006.

Before becoming law the bill must be signed by President Bush. The Board of Trustees continues to lobby, on your behalf, for the enactment of this legislation and will keep you informed of the progress.

 

[Robert the Red]

How long before someone notices that the Federal employee pension system has no resources behind it, except the ability of the Fed govt to tax and borrow -- the same ability as the States, writ large? What's the 'unfunded' liability of the CSRS and FERS? Trillions, for sure.

 

[Nords]

How long before someone notices that the Federal employee pension system has no resources behind it, except the ability of the Fed govt to tax and borrow -- the same ability as the States, writ large?  What's the 'unfunded' liability of the CSRS and FERS?  Trillions, for sure.

Yes, but unlike the DoD's pensioners, none of the FERS/CSRS people were intentionally trained by their employers as contract killers...

Just like the dollar and Treasuries, if the federal pension systems go belly up then we'll all have far worse things to worry about.

 

[Robert the Red]

Yes, but unlike the DoD's pensioners, none of the FERS/CSRS people were intentionally trained by their employers as contract killers...

CIA?  8)

 

[rmark]

I suspect the pension underfunding problem is only half as bad as reported - if people are not saving enough additional money to retire, they are unlikely to quit work. This should reduce the upfront money pensions have to come up with, while stretching payments out over a longer period of time.

 

[Arif]

So let me get this straight. The private sector has the benefits safety net that the gov't set up (PB something or other) and the public sector is flying naked on an important subject such as this? I guess some folks better get ready for higher taxes locally. As much taxes as Texas charges they shouldn't be one of them.

 

[setab]

"Underfunded" pensions is somewhat of a red herring. The assumption in these scare articles is that there isn't enough money if eveything had to be paid today. The fact is, everything doe not have to be paid today, thank goodness. What worries me far more than actual lack of funds is that these "underfunded" claims will be used to panic people into agreeing to break promises made to hundereds of thousand public employees who accepted less than market wages for their entire careers with the promise of these DB pensions as a type of deffered benefit. We have already seen the private sector get away with total breaches of trust, confidence and contract to the employees who made them huge profits. I have wondered how long it would take for a similar attempt to be made to treat public pensions the same way. It was wrong in the private sector and it would be equally wrong, at least, to break commitments to public pensioners (and, yes, I am one), that were relied on for 25-30 years.

setab

 

[Marshac]

So let me get this straight. The private sector has the benefits safety net that the gov't set up (PB something or other)

The PBGC isn't in the best of health either.

 

[MasterBlaster]

"Underfunded" pensions is somewhat of a red herring.  The assumption in these scare articles is that there isn't enough money if eveything had to be paid today.  The fact is, everything doe not have to be paid today, thank goodness.  What worries me far more than actual lack of funds is that these "underfunded" claims will be used to panic people into agreeing to break promises made to hundereds of thousand public employees who accepted less than market wages for their entire careers with the promise of these DB pensions as a type of deffered benefit.  We have already seen the private sector get away with total breaches of trust, confidence and contract to the employees who made them huge profits.  I have wondered how long it would take for a similar attempt to be made to treat public pensions the same way.  It was wrong in the private sector and it would be equally wrong, at least, to break commitments to public pensioners (and, yes, I am one), that were relied on for 25-30 years. 

setab

Change the word underfunded to unfunded to get a better drift of the problem. We as a nation have promised more to people both in and out of government than can be realistically delivered. Big funding problems occur not just with public employee pensions but with social security and medicare. Add in all the problems with massive public debt at all levels of government and - "Houston We've got a a problem".

The sad truth is that we have promised much more than we can ever deliver. Increased taxes alone won't save us. The only option we have at this stage is to wait and watch to see which groups get hit hard and which ones keep their "promises". Things are gonna change for the worse. It is inevitable.

 

[Marshac]

Things are gonna change for the worse. It is inevitable.

Exactly why I don't even factor in SS or a DB into my calculations... I stick to the factors I have some control over and leave it at that. If the other two pan out, awesome, if not, i'm not screwed.

 

[setab]

Change the word underfunded to unfunded to get a better drift of the problem.

I paid 7-9 percent of my income into my retirement system for 27 years. (IN addition to the 10 percent to TSP) If there isn't money there, someone took it.

setab

 

[MasterBlaster]

I paid 7-9 percent of my income into my retirement system for 27 years. (IN addition to the 10 percent to TSP)  If there isn't money there, someone took it.

setab

Quarterly statements aside, I take it that you are under the impression that your money went into your (lockbox) account rather than being thrown into the giant abyss know as the federal budget.

Keep saying it... I paid... they promised...I paid... they promised...

maybe that will make you feel better.