Government Spending

Terrifying Picture of City Pension FUBAR Coming Soon to Your Hometown!

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Here's some news from a tale of municipal (and, hence, taxpayer!) woe from the toddlin' town of Cincinnati, which just earlier this week decided it was so flush with cash that it could afford to toss hundreds of millions of dollars down the craphole on a freaking streetcar. The topic today is one that is playing out in basically every city hall in the country. And every state capitol building. And at Social Security. It's We Are Out of Money, public-sector pension edition.

Our story thus far: Cincinnati's public employee retirement system is mired in a Gulf spill-sized ocean of red ink. The powers that be spent the past nine months figuring out just how bad the situation is, and yesterday they had a public meeting about the man-made disaster. Let's listen in, via the Cincinnati Enquirer's account:

Without substantive changes, the $2 billion system could see a projected $1 billion long-term shortfall balloon to $1.5 billion within five years….

Even if the plan achieves what many see as wildly optimistic investment returns, it still could lose up to $30 million a year. Not recommendations that, to avert those doomsday scenarios, City Hall might be asked to come up with an immediate cash infusion of as much as $439 million or nearly double its annual payments….

Retirees are understandably freaked that their benefits are going to be cut, but it's worth asking how Pete Rose's hometown and so many others got in this suicide squeeze. Travel back to the 1990s, when the system was "flush with money."

At that time, the city enhanced the annual cost of living increase retirees receive, added vision and dental benefits to health coverage, raised a death payment to cover funeral expenses from $2,000 to $7,500 and increased a so-called "benefit multiplier," the percentage of salary that city employees earn toward their pensions for every year of service.

Those changes increased the pension system's costs, an issue that has become more problematic amid soaring health costs, increasing life expectancies and a shrinking city workforce that now has only one city employee paying into the system for every 1.46 retirees drawing benefits from it.

Other factors that have dug a deeper financial hole include $574 million in investment losses in 2002 and 2008, changed assumptions about prospective earnings and expenses, and inadequate city funding—the latter being, contrary to many retirees' belief, a negligible element in the overall picture.

So what you want to do, Cookie Puss? How you gonna fix the system? The first thing to note is that the city's hands are somewhat tied in terms of screwing with core pension benefits. Which means that the costs will ultimately not be borne by the retirees but by future retirees in the system and, ultimately, taxpayers.

Task force member Chris Stenger, a retirement consultant, told council members the city has "four levers available" to bolster the pension fund—the annual contributions by City Hall and city workers, benefit changes and a potential one-time cash infusion.

The task force's report offers dozens of potential options based on variances in each of the four factors. Annual city contributions, for example, could range from the current 17 percent of payroll up to 31 percent, while cash infusions could be between $53 million and $439 million. A higher cash infusion would lower City Hall's yearly payment, and vice versa….

[City council members] went to lengths at the meeting to stress that legal protections—and compassion—will insulate most retirees from reductions in their basic pension. Retirees could, however, be affected by higher health costs, reduced annual adjustments and cuts or elimination of the death benefit.

Whole story here.

For a million different reasons, this is a horrible situation, particularly for folks living on a fixed income.

But you know what? As we've noted here, the public sector at all levels already enjoys better compensation and job security than the private sector (this is something that even former California Speaker Willie Brown understands). It's time for the public sector at all levels of government, to have its benefits come into line with those of the private sector. Which means that public sector workers need to shoulder more of the burden for their benefits. And that benefits are going to be cut. And they ought to be cut now. And city councils and state legislatures should have the cojones to change whatever laws they need to to make this happen. The alternative is to keep shoveling public money into systems that are every bit as zombified as Japanese banks. It is the height of irresponsibility for governments to squeeze taxpayers ever tighter to pay for super-sweetened benefits for the relative few.

The private sector has been shifting to defined-contribution retirement plans for decades now, ever since 403(b) and 401(k) plans came online. This is a better solution for all sorts of reasons, not the least of which is that it allows businesses to easily budget for future liabilities: They don't have any. Their contribution (if they make one at all) is made every pay period, period. They don't have to worry that five, 10, or 50 years down their line they're going to be on the hook for billions of dollars. And employees get more control and knowledge of what their retirement is actually going to look like, which lets them plan accordingly.

A number of public-sector pensions have already started doing this. There's always the question of stranded costs—what to do with folks in the existing system? The traditional answer has been to steal from the relatively poor and young, which is no way to build a forward-looking society, that's for sure. Ohio's own State Teachers Retirement System started offering a 403(b) plan about a decade ago and it diverts half of the state's matching contribution to pay for current beneficiaries. Which totally sucks for people still paying into the system. Such compromises may be inevitable and the sooner we all come to grips with the pension problem that is everywhere, the better.

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  1. So what you want to do, Cookie Puss?

    Ooh, a Carvel reference. Well done.

  2. It’s We Are Out of Money, public-sector pension edition

    We can’t hear you!
    [fingers in ears]
    La-la-la-la-la-la!

  3. You should really check into Fort Worth too! Poor Ohio. I wonder what’s going to happen to it.

    1. It’s going to run to Uncle Sugar for a bailout, of course. Ohio is a swing state, is it not?

      1. Can one state annex another? Maybe Ohio should split in 2- shifting all the debt into one of its halves. Then south Ohio could declare bankruptcy!

  4. SOUTH BURLINGTON ? South Burlington officials are grappling with potential service cutbacks, layoffs and tax increases in the wake of Wednesday’s public disclosure of its “seriously under-funded” pension plan.

    Looking back, they are wondering how municipal investments went wrong, and why administrators kept the City Council in the dark about shortfalls that apparently began in 2005, if not earlier.

    Read more: http://www.burlingtonfreepress…..z0vpUA4MDu

  5. So what you want to do, Cookie Puss?

    Carousel at 65?

    1. The coming Newtcare death panels should just include public pension obligations in the cost/benefit equation, you know, to keep things in context.

  6. My state rep was going door to door the other day and I think she was hoping to spend about 12 seconds on my front porch before moving on. She was not so lucky.

    About five minutes after she showed up, she said that the state is looking to move to a defined contribution plan for state employees. I told her that if she could pull that off she’d have my support. She also told me that I was the first person to talk to her about this stuff.

  7. But the streetcar is an investment! It will create jobs! And it’s green!

    1. monorail.

  8. The retiree demographics are just stunning. 1 worker for every 1.5 retirees? Social Security is around 1 worker for avery .3 retirees so Cincinnati has 5 times the number of retired people than they should. How the fuck did that happen?

    1. The young people leave for better job prospects and the old people stay. It’s a problem in a lot of rust belt towns.

    2. Just remember that there’s a difference between “retiring with a full pension” and “retiring”. I bet that it only takes 5 years to be pension eligible. That’s part of what makes those numbers radically different than a program like Social Security, which uses the whole nation as the worker pool.

      Still, that number is nothing to brush off.

      1. I put 3 years in as a federal employee before I burned out. If put in 2 more at any point before I retire I qualify for a retirement benefit and health coverage. So 5 years of work would result in a retirement of health care coverage for me and my wife and at least some pension benefit.

  9. Fixed contribution, not fixed benefit.

    I know Im repeating myself, but the way to avoid getting into this situation is so fucking obvious that it annoys me.

    1. and Sage beat me to it.

      1. I’m skeptical that WA state is going to do it – the unions own this state.

        1. I just like you forcing the issue with your rep. Actually happen? Thats a different story.

        2. Do the unions own the whole state or just the wet half?

          I’ve been wondering how hard it would be for Eastern Washington to petition to become part of Idaho. They probably wouldn’t want it.

  10. As the liberal next to me at work says, we need to stop “giving” so much money to the rich.
    Why don’t we just put Karl Marx’s likeness on the dollar bill?

    1. I agree, why are we giving so much money to the rich? They have so much already! Finally someone understands that we should spread the wealth around.

      I don’t get what you are saying about Karl Marx, though. I like my money just the way it is, thank you very much!

      1. Seeing as how our form of gov’t is now the exact opposite of what G. Washington fought for we should at least honor the person who is the philosophical father of our current gov’t.

  11. It is the height of irresponsibility for purpose of governments to squeeze taxpayers ever tighter to pay for super-sweetened benefits for the relative few.

    Fixed

  12. This issue should be fresh fodder for Tea Partiers and local Libertarian Party groups. You’ll win lots of friends among the voters/taxpayers by taking on the town councils over pension obligations.

    I just learned the other night that my township probably will have to raise taxes and sell off land in order to meet funding requirments for the cops’ plan. It seems there were eight retirements this year and six of them used the same doctor to cite “disability.” Under their contract, they get 100% pay for retiring with a disability while those who aren’t disabled get “just” 2/3rds.

    Conservatives and libertarians paid no attention back when these plans were being implemented. (Too busy worrying about who was sucking off the prez or if Harry Browne’s campaign was overpaying staffers.)

    Maybe one good thing will come out of all this: more of the public might realize that the health of our economy directly affects the value of pension plan trust funds, and will – one hopes – be less inclined to support legislation and regulation that destroys the free market.

    1. Are those the same cops who shoot dogs and arrest the wrong suspects when investigating a domestic complaint?

  13. This is one reason I am violently opposed to any federal bailout of failed cities or states. I just cannot abide the thought of my tax dollars going to pay some retired California city manager’s $700K per year pension.

  14. The underlying economic, political and other assumptions that led to the creation of these practices are no longer true, if they were ever true to begin with. Unfortunately, many of the so called “solutions” are based on many of those same assumptions. Solutions based on faulty assumptions will have no real effect and probably only work to prolong and worsen the pain than to actually fix anything.

  15. As far as I’m concerned, these stories reveal what I would consider a flaw in the whole concept of pension funds public and private.

    The private pension funds tend to be in better shape, since they are required to adhere to tougher accounting standards, but if you look at GM or many other exmples, the reality is that by the time workers actually reach retirement age, the pension fund is in trouble for various reasons. Either overly optomistic projections were made to try to skimp on contributions, or promise higher benefits, or the fund has been “borrowed” from in order to finance operations when the company (or government) was in trouble. This is certainly true for social security and the public pensions.

    There’s a problem with the notion of deferring payment for work, by providing a pension fund later in life. I’d consider this fundamentally a problem of the fact that the pension fund is run by people who have interests other than the individual’s. They also serve the interests of the corporation or the state. And those interests are always to spend money NOW. There’s a big stash of money lying around, and there are *always* reasons to spend it. And there are always justification – it will always be paid back later, when Amazing Economic Plan #2076 finally pays off, and we all get filthy stinking rich.

    The reality is that the only way to secure a reitrement FOR REAL is to save your own money. Yes, sometimes individuals have trouble saving for the future. Obviously, so do governments. If an individual does choose to save, nobody can take the money away, it won’t be raided to pay for stimulus packages or company loans. Pension funds merely give the individual a false sense of security, and place the purse strings in the hands of people who don’t necessarily have his best interests at heart.

  16. http://obm.ohio.gov/SectionPag…..fault.aspx

    Ohio is sitting on over $20 bil. What’s the big deal?

  17. Those city pensioners rollin’ in the taxpayers’ doe are the same city employees, who after every time the city fails to deliver a service, you have an encounter with to look for a remedy on the issue, a city employee, with their hands on their hips, fail to remedy the broken service. Ex: If in a life-threatening situation, don’t call EMS, take a cab to the nearest ER if you wanna live.

  18. My private pension, after 24 years of service, is a fixed, no COLA, pension that is about 1/3 my last years salary. The only health benefits my retirement company provides is that I can buy into the group plan for my wife and I at around $1000 per month (we are pre-Medicare age). So, retired from one company, I’m still working at another company to cover healthcare costs.

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