Public Pensions: When the Money Runs Out

23Dec/1013

Public Pensions: When the Money Runs Out

O HAI NYT! Thanks for getting around to covering the Prichard situation! These people haven't gotten any pension checks since Fall 2009, by the way:

This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.

Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

Prichard first came on my radar back in October 2009. We first saw Prichard on this blog back in April, and had updated on their status in October:

What I want to know is if there’s any money in the pension funds at all. Pensioners seem to think they’ll get paid, but who knows how long that will last. One quoted said that there’s at least 600K in the fund.

Uh, that’s not a lot of money if you’ve got over 100 pensioners to pay for the rest of their lives.

In any case, the pensioners of NJ, IL, and CA should keep an eye on this. Because their time will be coming, too.

So hello the rest of the world. The obvious lesson to other underfunded pensions is mentioned as well:

“Prichard is the future,” said Michael Aguirre, the former San Diego city attorney, who has called for San Diego to declare bankruptcy and restructure its own outsize pension obligations. “We’re all on the same conveyor belt. Prichard is just a little further down the road.”

So yeah guys. Those arguments that the government is gonna have to pay all those benefits? If there isn't anything there to prepare to fulfill that promise, I wouldn't count on it.

So, for those pension plans that haven't fallen off the cliff yet (and let me say - not all plans are dire. It just so happens the largest ones are in a very bad place), perhaps there's still time. But I believe it's a little late to be waking up to reality.

Ask the pensioners of Prichard. The warnings had been there.... and nothing was done. And now nothing is what they have.

Meep

Meep is a member of the Irish Catholic mafia, having a suspiciously high number of green-eyed, red-haired friends. While she doesn’t have red hair herself [except when she goes into the sun (rare for any vampire)], she does have green eyes. She’s a raving Papist and is a life actuary on the side [i.e., she counts dead people]. An amateur pain-in-the-ass [willing to go pro!], she likes covering retirement, mortality, math, and education issues.

Tagged as: public finance, public pensions Leave a comment

Comments (13) Trackbacks (5) ( subscribe to comments on this post )

Enoch_Root
December 23rd, 2010 - 07:53

I’ll be honest: I love this topic. Mostly because it is a comeuppance long in the making and will be fun to watch.

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- Tough Love
  December 23rd, 2010 - 14:12
  
  If any “protection” comes into play (via fed bailouts, etc.) when (not if) these Plans fail, that protection should CERTAINLY not be greater than what the PBGC would pay out in identical circumstances in a Private Sector Pension Plan failure…. ala the steel/airline industries.
  
  To put that in perspective, the year California policeman retiring with 90% of final pay after 30 years would likely see an 80-90% REDUCTION in his/her pension.
  
  Now THAT would be well deserved comeuppance for their extreme greed!
  
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Enoch_Root
December 23rd, 2010 - 07:53

Kind of like watching a car wreck in slow motion.

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- Thorgina McSaladtosser
  December 23rd, 2010 - 10:01
  
  The problem is many of the union pensioners are all for going “full speed ahead”, regardless of the outcome. If Sixty Minutes, that aired this past Sunday, didn’t scare the stuffing out of people, then nothing will. Unions have been playing “chicken” with state and local municipalities for years. It looks like this year nobody’s going to blink.
  Thank G_d I don’t owe anyone a cent.
  
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Meep
December 23rd, 2010 - 10:06

I don’t find this funny at all.

I first started looking into this topic b/c I worked in annuities and was pissed off at the disparity of how pensions were treated vs. annuities [annuities were at a big disadvantage.... but the probability of promised annuity benefits actually being paid looked way higher to me]. I got in a lot of heated arguments with some pension actuaries.

They argued that government didn’t go out of business. They argued that the taxpayers were an infinite well of dough, so if the pension funds went tits-up, it would still be okay. We had these arguments before the super-meltdown in 2007/2008.

I thought actuaries would be at risk, because it’s always fun to blame the pencil-necked geeks. But actuaries did tell municipalities they had to contribute more, and actuaries did not tell them to get into exotic deals that these funds had no business entering [one of the reasons for Prichard's downfall]. The corruption that was involved in asset-side shenanigans and benefit-side sweetening had little to do with actuaries.

So all I can do is yell WAKE UP! GET READY! GIRD YOUR LOINS! GET REAL!

As I said, many municipal plans are probably fine. As long as they had good governance and didn’t get greedy. But Chicago isn’t fine. Illinois isn’t. New Jersey isn’t.

There are going to be major failures, and it’s going to be too much for the feds to bail out. Forget about “the kids/grandkids” paying for this — it’s China, and they’re not going to be interested in it any more than U.S. taxpayers. Esp. since China has a nasty demographic problem of its own.

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- Enoch_Root
  December 23rd, 2010 - 10:19
  
  The China angle is interested, to be sure. But I still find it [if not funny] entertaining.
  
  I like it when scams and scammers at the trough get it in the pooper. I’m just saying.
  
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Algy Moncrief
December 23rd, 2010 - 19:00

Cities can declare bankruptcy under federal law, but states cannot. So, what about the DB plans that are backed by states? Will those retirees with contracted retirement benefits eventually just take possession of state property? Maybe we have gotten too wrapped up in contracts in the US. Alot of companies are hurting, maybe we should give the mortgage companies the ability to raise interest on our mortgages thay have issued, rewrite those contracts unilaterally. Sure it would hurt a bit if we all had to pay a few hundred more each month, but what about shared sacrifice in this recession?

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- Charles
  December 24th, 2010 - 00:09
  
  I keep trying to make this exact point. The US Constitution protects contracts. You cannot unilaterally change them. The US Supreme Court has ruled under the anti-cutback rule that you cannot go in after the fact and take value away from a pensions that have already been earned. States cannot go bankrupt.
  Instead of feeling all this rage, the private employees should organize to get back what many of them already had, a defined benefit plan.
  If private employees would wake up and quit being led along like sheep to the slaughter, they should realize it is their employers and Wall St. that have ripped them off for any security in the future. Public employees did not cause any of this.
  
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  - Meep
    December 24th, 2010 - 08:54
    
    Protects contracts?
    
    O RLY?
    
    Illinois has been having trouble fulfilling current vendor contracts. This is =operating=budget= stuff. Some vendors have stopped supplying Illinois b/c they realize that their very short-term contracts might not get fulfilled.
    
    If the short-term obligations are not being fulfilled, what is the likelihood that the long-term stuff will be protected?
    
    Do you really want to bet on that?
    
    There is what =should= happen, and there is what =will= happen. The public unions need to shut up about the =shoulds= and start protecting themselves. Look to Europe. Look to Prichard. They have been given warning and they need to be taking the danger seriously now.
    
    If the plan is to try to sue money into existence, I’m telling you that’s not going to work. They need to keep a sharp eye on their funds. They need to keep an eye on what is promised and what promises can actually be fulfilled. Individuals need to be prepared – not a good idea for both people in a married couple, for example, to work for the govt. Need to diversify sources of income. Need to have personal savings. Etc. etc.
    
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    - muni-man
      December 24th, 2010 - 11:08
      
      Many of these plans will fail. Contractual agreements will be abrogated or ignored. Unions will be decertified (a definite must going forward) to prevent unions from buying off pols. The basic problem with all these plans is that they are ridiculously expensive for taxpayers. That’s why they haven’t been funded properly – the taxes required would be confiscatory to do so. In big municipal plans the taxpayer-to-employee full-funding ratio is anywhere from 6x to as much as 10x. The 55-yr. old teacher getting a $50K pension over 25 years would need to cough up just over $700K to buy an annuity yielding 5% that would provide that stream of payments. With COLA’s, the amount would be over $900K. Wanna bet that teacher MAYBE paid $60-$70K into the plan over their entire career. So Joe Taxpayer is supposed to cough up the rest, say $8 or $9 for every $1 Mary Quite-Contrary put in. They ain’t even close to being worth it – NO WAY, NO HOW. Watch what Christie does in NJ. He’s simply telling them if they don’t make the major concessions he wants, he ain’t gonna contribute one damn dollar into the plans going forward. He’s already stiffed them in 2010 and will do it again in 2011. If every state followed his lead, the problem would be solved.
      
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  - Fl_Actuary
    January 5th, 2011 - 09:02
    
    I am not understanding why Private employees who are mostly in 401(k) arrangements are at fault for Public employee pension plans.
    
    Or better yet, why having the private sector in a Defined Benefit plan would alter the funding levels of Public plans?
    
    For the most part, Private plans are considerably better funded than Public plans. It is odd that the Feds stepped in to make sure that was the case in the private sector, but not the public.
    
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Dan Collins
December 24th, 2010 - 12:09

We like the cut of your jib, muni-man. Also, your spinnaker.

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Goldenfoxx
December 26th, 2010 - 09:46

This subject also bleeds into social security. I know a man who is 102 and has been collecting SS for over 40 years and has collected several times over what he has paid into it. I can believe how stupid the politicians and pensioners, because the chickens have come home to roost and the pensioners always thought it was going to be there. Just wait for the austerity measures to kick in and we’ll see the riots here just like in Greece and Ireland. If anyone here lives in the city, you might want to make plans to move into a less populated city or even into the country. Learn some self sustaining skills, become dependent on yourself instead of others. We’re headed into some awesome times – by that I mean some scary times. No one will get out of this unscathed. Be prepared!

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