Economics

Cincinnati Must Pay Through the Nose—and not just for crapola football and baseball teams!

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In a story that I'm sure is being repeated all across America, even in cities with good sports teams, The Cincinnati Enquirer is reporting that Queen City officials must kick in a whopping extra $125 million to its municipal-employees pension fund. The reason for the huge contribution, which represents 81 percent of city payroll and 30 percent of its general budget? Massive losses in the stock market.

The city's stratospheric pension payment for 2010 is largely the result of a staggering $854 million loss suffered in last year's stock market meltdown, which saw the retirement fund's assets plummet from $2.69 billion to $1.83 billion….

Under the arcane accounting procedures used to monitor the pension system's ever-changing conditions, investment gains and losses are spread over multiple years to avoid overreaction to the stock market's cyclical ups and downs. But a loss as severe as last year's inevitably has a significant impact on the city's payment, based on an annual report examining the retirement fund's short- and long-term assets, expenses and liabilities….

The $125 million figure represents 81 percent of the city's payroll. In contrast, for 2008, council approved a $25 million payment, or 17 percent of payroll, half the "required" contribution for that year of $51 million, 34 percent of payroll.

More here.

Cincinnati will certainly find a legalistic way out of paying that sum all at once, or even ever, I'm sure. There must be tons of burgs all across this vast republic that are facing exactly the same sort of thing.

This sort of story is bad enough in the private sector where businesses end up shoveling increasing amounts of resources on retired employees. But it's really awful in the public sector, where government entities pass on extra costs to residents in the form of hiked taxes, reductions in services, and more. This sort of story also represents one of the great benefits of defined-contribution retirement plans: The money goes in every pay cycle and that's that from the employer's angle.

The big problem there, of course, will be political demands for higher-than-average returns on investments under individual control, especially during bear markets. 401(k)s only came online during the '80s due to a tax code loophole and it's clear that there is going to be a huge societal learning curve as the first folks whose retirements are solely based on those instruments start to cash out (and realize they underfunded the damn things tremendously and/or screwed up their investments). But one problem at a time.

How did Keynes pay for his own funeral?

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  1. He “knew” that Roosevelt would lead the U.S. out of the Great Depression, so he invested heavily in U.S. stocks following FDR’s election, making a forture of about $30 million in 2009 dollars. Moral: buy stocks now!

  2. Cinci blows, Cleveland ROCKS!

  3. How did Keynes pay for his own funeral?

    With sunk capital?

  4. City and state pensions are so screwed that it is scary. The retire-at-fifty pension schemes that mostly only exist in the public sector anymore simply have to go.

    My grandmother has been collecting a public pension for over FORTY years. I love the woman with all my heart, but she has robbed the city blind.

  5. I love the woman with all my heart, but she has robbed the city blind.

    She did not rob them. They offered and she accepted.

  6. HEB,

    Maybe Chad’s GM was on the committee making the offer. 🙂

  7. robc,

    Now there is a possibility that I did not think of!

    But the real robbers here are the elected government officials who voted this in or voted in the system that allowed it.

  8. “But the real robbers here are the elected government officials who voted this in or voted in the system that allowed it.”

    And who are the dumb sunsabitches who keep electing them?

  9. And who are the dumb sunsabitches who keep electing them?

    Normally that would be voters. In some places they don’t count for much.

  10. And who are the dumb sunsabitches who keep electing them?

    A short note on the failure of politics. 3 years ago, my local school board poormouthed and claimed service cuts were imminent without a tax hike. So many people showed up at the meeting to bitch everything had to be postponed and rescheduled. Once nobody showed up to the rescheduled meeting, the board passed the tax cut. The next school board election was canceled because nobody ran against any of the incumbents. Yay democracy.

  11. Err, that should be passed the tax hike, not cut. Not enough coffee yet.

  12. If you want to see munincipal pension plan fuck stories, come to Detroit.

  13. If you want to see munincipal pension plan fuck stories, come to Detroit.

    I’ve been to Detroit to visit friends and seen the wondersqualor and the glorydilapidation firsthand. I also enjoy following the stories of y’alls lovely city council and local politics. It makes me feel better about the Barry years when I lived around DC.

    Anyhow, you seem like a bright guy, J sub D. Why the fuck do you still live there?

  14. Why the fuck do you still live there?

    I bet J sub has Detroit’s job.

  15. I bet J sub has Detroit’s job.

    I thought the residents all filled the job on a temp basis. Get enough money for a 40, let the next guy take a turn.

  16. Don’t be so hasty to damn defined benefit plans. There are excellent business reasons to offer a defined benefit plan over a defined contribution plan, starting with the management of your workforce. When do older workers with 401(k)s retire? When the market is doing great and you’d like to keep your talent and hire additional workers. When do they not retire? When the market sucks and you need to downsize. And don’t even think about laying off your oldest, most expensive workers of declining productivity – you’ll be in court that afternoon.

    I personally prefer (but only slightly) having a DC plan because I am a savvy investor and will take care of myself. But most people suck at investing and will be bitching about SS being too little to live on in retirement because they invested 3% of their salary every year in freakin Treasuries. And guess what the re-election seekers will do?

    Also, DB vs DC isn’t a libertarianism test – we’re talking about what a corporation chooses to offer its workforce.

    Anyway, I have lots more to say, but I guess nobody’s gonna see this at this point. I’ll try to catch one of these “DB sucks” comments a little earlier next time, because there’s a lot of bad info out there.

  17. Don’t be so hasty to damn defined benefit plans.

    Meh. Color me unconvinced.

    Defined benefit plans leave you dependent on someone else for your retirement. Defined contributions plans, you own the assets of. If your DB company goes belly up, there goes a big chunk of your retirement (yeah, theoretically it should be fully funded; ask the auto company workers about that one). If your DC company goes belly up, your retirement is untouched.

    DB plans are the retirement plan of choice for people who don’t mind being dependent. DC plans are for people who are more into owning property.

    If your company is going great guns and you don’t want people to retire, you’re going to have to pay them to stay. You might lose a few more DC employees, but not many; the DB employees are leaving on a date certain regardless of how the company fares.

    If your company is struggling and you want to lay people off, the only thing standing in your way is overreaching government regulation. If regulation gives DB plans an edge in some situations, well, that edge is a market distortion, and nothing to crow about.

  18. Now wait just a goshdarn minute. The Reds are doing pretty well so far this year, and tonight they’re handing the Cardinals’ heads to them again.

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