Pension Funding: Why Your Town is Going Broke

Michigan Capitol Confidential ^ | 6/22/2016 | Tom Gantert

[MichCapCon]

Just 13 percent of the local governments whose retirement systems are administered by a statewide entity have set aside enough money to pay the pensions promised to their workers.

The Municipal Employees’ Retirement System (MERS) administers pension systems for 728 local cities, villages, townships, agencies and more. But only 97 of those systems have adequately funded their pension obligations, according to the operation’s most recent report that covers up to Dec. 31, 2014.

Local government employees covered by MERS are owed some $12 billion worth of retirement benefits — but their employers have not set aside enough to cover the full amount. Taxpayers in those communities on the hook for $3.5 billion worth of unfunded liabilities.

MERS administers benefits for just over 29,000 municipal retirees, who receive $53.4 million a month in pension payments. The broadly defined term “municipalities” include not just cities, villages, and townships but also district courts, senior centers, regional medical centers, district libraries, local fire departments and more.

Underfunding at some of its largest members is much worse than the average.

Battle Creek (66.6 percent funded), Holland (66.0 percent), Calhoun County (63.5 percent), Port Huron (62.7 percent), Midland (60.2 percent), East Lansing (58.1 percent) and Flint (48 percent) are some of the larger government employers that have not set aside enough to cover their pension promises.

"This is pretty typical of (government) pension systems, and sadly this is in better shape than a lot of pension systems," said Chris Douglas, the chair of the economics department at the University of Michigan-Flint. “MERS looks to be about 70 percent funded. Illinois' state pension system, on the other hand, is only 40 percent funded with $111 billion in unfunded pension liabilities."

Douglas said the Chicago pension system alone is $20 billion in the hole.

"Pensions are going to be a huge issue nationally," he said. "Unfunded pension liabilities are estimated to be as high as $4 trillion. In 2015, the Treasury Department collected $1.5 trillion in income taxes. Thus, to close the pension funding gap, you would have to divert all income taxes toward pensions for nearly three years straight. I don't know how we'll solve this problem."

[1Old Pro]

"I don't know how we'll solve this problem."

Only one way to solve it, when a Ponzi scheme goes bad it must fail - in this case the solution is default. These pensions could never have been paid, they were too rich to begin with - it was a Ponzi scheme to help get politicians elected.

[Organic Panic]

As long as the last taxpayer has two pennies to rub together the government won’t be broke.

[pepsionice]

Around six years ago in California....at one of the public university operations....the chief of security retired. She was set to collect around $140,000 in pension (as I remember the story). The person who replaced her...was just a temp, and he was set to retire in twelve months.

So a year would pass, and the hiring committee went back to the retired gal (with $140,000 a year in pension from the university), and hired her to come back. Yes, she was collecting a regular salary of roughly $175,000 and the $140,000 in pension. I just sat there reading through this and wondering how the ethics committee could have just agreed this was acceptable.

[Scott from the Left Coast]

The only taxpayers that are truly not broke - above water - are those that are so wealthy that they have already purchased the politicians. So where the politicians think they will get any money...well, they better keep the printing machines well charged.

The headline is incorrect as well. These jurisdictions are not “going” broke...they’ve “gone” broke.

[Opinionated Blowhard]

The thing that gets me about public pensions is the outrageous lack of accountability. The reason we have such troubles is because politicians kept increasing the pension and other retirement benefits without a thought about who was going to pay for it or how much it would cost the taxpayer on an on-going basis. Now they are locked in as “rights” and the court would probably deny any attempt to reduce them. The politicians who voted for pension increases need to be put in jail.

[alternatives?]

Three options to fix:

1) raise taxes.

2) reduce benefits by inflation

3) increase the death rates of retirees

[dragnet2]

Government employees and their unions are literally choking off Middle America. And once again, this is all brought to us by the evil extreme corrupt in government.

[stars & stripes forever]

Many politicians collect more than one government pension, because they have been in the system all their lives. That adds as up as well.

[dragnet2]

Wrong.

There are much better solutions.

[justlurking]

"Pensions are going to be a huge issue nationally," he said. "Unfunded pension liabilities are estimated to be as high as $4 trillion. In 2015, the Treasury Department collected $1.5 trillion in income taxes. Thus, to close the pension funding gap, you would have to divert all income taxes toward pensions for nearly three years straight. I don't know how we'll solve this problem."

Social Security has the same problem, but not for the same reason: contributions have been made, it just hasn't been enough. Economic assumptions made back in 1983 turned out to be too optimistic.

Excess taxes were loaned to the federal government (as provided by the original law, not by any subterfuge), and it's now being paid back. This chart is from 2014, but it gives you an idea of the problem:

http://www.heritage.org/~/media/images/reports/2014/08/bg2936/bg-socsec-oasi-chart-1-600.ashx

(Sorry, you'll have to click on the link -- the image is apparently generated dynamically, and I can't insert it in this posting)

The orange parts are benefits being paid in excess of Social Security taxes. So, the Trust Fund is being redeemed, and that redemption comes out of the general fund, increasing the deficit. The net effect is conversion of the Trust Fund (special obligation bonds held by Social Security) into regular Treasury bonds held by investors.

This will continue until the Trust Fund is exhausted. Originally, it was supposed to be sufficient for 75 years, but starting in 1988, the window has been growing shorter, with only a short reprieve in the early 2000's:

http://www.heritage.org/~/media/images/reports/2014/08/bg2936/bg-socsec-oasi-chart-2-825.ashx

The latest Social Security Trustee's report puts the exhaustion of the Trust Fund in 2034. But, this graph (made in 2014) projects the trend to instead place it in 2024.

What will happen when that occurs? By law, Social Security can only pay benefits that can be funded by incoming Social Security taxes. For now, the Trust Fund is allowing them to maintain the current benefit level. But, the Social Security's own projections say there will be a 21% shortfall in 2034, slowly increasing to a 27% shortfall in 2089. That means that absent any intervention by Congress, that's how much benefits will be reduced.

What would Congress have to do right now to fix the problem? From the Trustee's Report:

1. revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.62 percentage points (from its current level of 12.40 percent to 15.02 percent, a relative increase of 21.1 percent);

2. scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of 16.4 percent applied to all current and future beneficiaries, or 19.6 percent if the reductions were applied only to those who become initially eligible for benefits in 2015 or later; or

3. some combination of these approaches would have to be adopted.

[alternatives?]

Such as?

You can cut other government programs to help fund pensions but that isn’t going to make up the shortfall or happen.

[dragnet2]

You live in cave? You’re on, and or connected to the government payroll too in one form or another?

1. Ban abolish all government unions at all levels.

2. Reduce the size of government by millions of bureaucrats all all levels.

3. For those who remain, slash and reduce the retirement pensions and benefit government employees at all levels.

4. Eliminate all unnecessary government programs at all levels.

5. Sell and or lease thousands of government properties/facilities to those who actually produce and contribute.

6. Transfer tens of millions of acres to private interest, as long as it’s stipulated this only applies to legitimate Americans.

There are hundreds more ways to save many billions annually. All these things need to be done, regardless, even in a good economy with zero debt. The solutions have been voiced millions of times. And what happened in the past several decades? Government at all levels only became, larger, more costly, more controlling, and all encompassing.

This would only be the start of taking our country back from this loser leadership and their disciples of decline and debt.

[Robert357]

The solution is actually fairly simple and politicians know what it is and are working hard to implement it.

The solution is to cause massive inflation in a way that doesn't increase what the government agencies owe. That way they will repay their “pension obligation” with near worthless money.

The key is to first make sure that pensions are not indexed to a “real” or “fair” inflation index, but if they are to one that is under the control of the government. The next step is to encourage moderate, but ever increasing levels of inflation. Gradually (frog in a pot of hot water) increasing the degree of inflation until the dollars are not worth much.

If you listen closely to what is going on at the Federal Reserve they are adjusting interest rates so as to “manage inflation.”

Inflation steal from a generation of savers so that governments can give “money” to those who don't save.

[no-s]

let's limit that to increasing the death rate of gov't retirees vs *all* retirees...heheh that's pretty dark...

I'd like to see the taxpayers at the head of the line if we start selling away federally held assets. Those pseudo-bonds held by Social Security should probably be converted to surplus federal assets, e.g. land and mineral rights and buildings and nuclear weapons and space probes and such.

As far as the unfunded pension liabilities go, if there was some collusion or conflict of interest in the founding of the liability (and we should be pretty strict that even the unexplained appearance of such is sufficient to damn them) the obligation should be discharged. This means that obligations created generations ago with questionable appearances would be difficult to explain, so they would have to vaporize. We could create special retirement facilities for "golden-age bureaucrats" in remote areas (on indian reservations?) who don't have an alternative place to go

Wow, That's pretty ugly, but then I've paid over a $1 million in taxes in my lifetime, so I have a feeling it's not going to come out nice no matter how I put it...

[alternatives?]

1) Doesn’t do anything about existing obligations. It will take a long time to help.
2)It would be nice (but I don’t see it happening).
3) I think the courts would rule this unconstitutional. I believe they have in Illinois
4) This is basically the same as 2)
5) Could actually help. You sell the property and then local governments would collect property taxes.
6) Better to sell. Giving the government is sealing off more and more property in the west it would require a change in direction

[alternatives?]

It’s not just former government employees. A faster death rate helps bail out private pension plans and social security balances as well.

Do you think Obamacare was designed to help us all live longer?

[nascarnation]

Good observation.
Every year sliced off the lifespan is HUGE for SocSec and Medicare financials.

[dragnet2]

You completely evaded the questions. Most inquisitive.

I’ve heard your rebuttal a hundred times by assorted insider frauds and those on the payroll.

“It won’t do anything, It’s too hard, too difficult, it won’t do any good, it would be nice but it’s not going to happen, it won’t completely solve these country killing issues which are all sponsored by those in government”.

No sale.

[shotgun]

In Washington State they refer to this as the “Retire-Rehire Program” and it was intended for teachers.

We had a 32 year Police Sgt retire (PERS 1 with all the special benefits) and then rehire as the local code enforcement office. One day he was cop and the next day he was working in the planning department.