What Will Cities Do To Solve Their Pension Problems?

As pension funding crowds out important functions of local governments like police and fire protection, roads and even streetlights, many municipalities have begun shifting towards 401k-type accounts for new employees.

Capitol Confidential has examined the most recent Comprehensive Annual Financial Reports (CAFR) of Michigan’s 100 largest municipalities. Of the 10 municipalities with the lowest funding ratios for their pension systems, only two of them have begun shifting employees away from the defined benefit pension system.

Lincoln Park has only put away 32 cents on the dollar for its pension obligations. It began offering the option of a defined-contribution plan or a hybrid pension plan to new employees in 2004. The city now operates under an emergency manager and representatives declined to comment.

According to the reports, Burton (39 percent), Romulus (45 percent), Norton Shores (54 percent), Hamtramck (54 percent and has an emergency manager), Genesee Township (55 percent) and Jackson (55 percent) still have an open defined-benefit system. Bloomfield Hills (51 percent) is attempting to close its system to new employees and issue bonds to pay down its debt.

The city of Walker, which is 57 percent funded, closed its system to new employees in 2005 and is paying down its debt. Plymouth closed its plan around 2001 and shifted employees to a generous 401k – it has a funded ratio of 49 percent, but is making payments and paying down liabilities.

Suzanne Moreno, treasurer for the city of Romulus, said they have shifted new hires outside of public safety officers to a defined-contribution plan. The city also trimmed benefits for pension plan members.

“We have put contract initiatives in place for new hires going forward for both pension and retiree health care, effective January 1, 2012,” Moreno said. “Employee contribution amounts have increased, multipliers have been reduced and eligible wages for calculating final average compensation exclude overtime.”

Patrick Burtch, city manager for Jackson, said the upfront costs have delayed them shifting.

“For example, closing plans with higher than average benefit levels or instituting hybrid plans only serves to increase the amount of funds the city needs to subsidize from general operating funds,” he said. “That, coupled with reduction in work force, means we will have significant short term complications.”

These “transition costs” happen only after cities rack up unfunded liabilities. Proponents of shifting employees to a new plan argue that they can be taken care of in a fiscally responsible way and that leaving the system open allows for new liabilities.

James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, said this shows the importance of shifting employees before the problem becomes too big.

“The cost of a pension system includes uncertainty about the future,” Hohman said. “That some cities have only saved 50 cents for every dollar of benefits promised to members speaks to the danger of keeping these plans open.”

The state has attempted to incentivize cities, villages and townships to address their unfunded liabilities. One of the criteria for extra state revenue sharing is to create an “unfunded accrued liability plan,” listing what liabilities exist in the local unit, what the unit has done and what it plans on doing to address these liabilities.

A 401k, defined-contribution plan is a pay-as-you-go system and retirement plans cannot be underfunded. In contrast, defined-benefit pension systems have routinely racked up unfunded liabilities in Michigan and around the country.

There is proposed legislation in the Michigan State House that would help with this shift. House Bill 4804 would, according to MichiganVotes.org, "establish that counties and local governments may adopt an ordinance that prohibits granting employees a conventional 'defined benefit' pension (rather than a 401k), and if such an ordinance is adopted, prohibit government employee unions from making this issue a subject of collective bargaining."

“Citizens of communities with underfunded pension plans elected representatives who chose not to fund the plans in the past through taxes or spending cuts. The voters who elected these representatives are ultimately accountable for the actions of the representatives, including the failure to set aside funds. The work was performed by employees resulting in an obligation for the employer to fulfill its contract to pay compensation according to the terms agreed to by both parties when the employee performed the work. The voters are obligated pay for the decisions they made in the past, and benefited from, by fulfilling the pension contracts and either pay higher taxes or accept a lower level of government services. To do otherwise would say contracts have no meaning, theft is permissible, and there is no free market.”

yours is the most intelligent description of the problem I have seen. I hope you have your asbestos suit on
. There are a fair number of FReepers who were burned by the decisions of politicians to “kick the can down the road” by not funding the pension contributions when they were due.

I have come to despise politicians. It seems they get co-opted right after they get reelected

” However, tell that to the GM senior bondholders who should have been paid first when the O regime came in. Contracts can and have been broken. Frequently, via bankruptcy — occasionally, by a court.”

In the GM case the government made the union pensioners whole but failed to fully back the management pensioners. In private industry in the 1980’s, many of the leveraged buyout deals by people such as Milken were partially financed by pension funds which were cleaned out by the Wall Street private equity firms who then took the companies through bankruptcy allowing them to pocket the pension money and offload the pension obligations on the government insurance fund. After these sham bankruptcies the firms were recapitalized. Employees with of these companies having pensions above the maximum insurable by the government were stiffed. A prime example is the senior pilots of the airlines who collectively lost millions in benefits while the attorneys, consulting firms, and investment bankers walked away with millions if not billions in fees.

This theft of pensions to benefit Wall Street speculators was done with the approval of the courts, the Justice Department, and the knowledge (i.e. acquiescence and approval) of politicians in both political parties. Plus, the speculators received special tax loss carry forwards on the paper losses of the bankrupt companies and once the companies started recording earnings after bankruptcy and the tax breaks the private equity owners were taxed at capital gains rates, not corporate tax rates (i.e. carried interest). I totally lost any respect for private equity firms and Wall Street during this period. It was criminal.

“Please stop comparing the private sector to the public. There is no comparison. The public sector is organized crime which requires the private sector to pay protection money or face consequences.”

Not all public sector employees are unionized, particularly in the South, yet many of those states also have significant unfunded liabilities. This is not the fault of the employees. It is a conscious decision of politicians and the bureaucrats they hire to manage the government. Living in North Carolina I do no perceive bureaucrats at the state or local level being held hostage to what you refer to as the “organized crime” of the public sector. In this state unions have little influence over the legislature, public pensions are almost fully funded, and during the financial crisis of 2008, wages of state employees were actually cut by the legislature.

Most private sector employees do not have a formal written contract. When I speak of “contract” with respect to private sector I speak to the implicit agreement when an employee goes to work for an employer. The conditions of the contract can be changed during the term of employment and often are. At the time the conditions of employment are changed the employee can accept the changes or leave the firm. However, the compensation agreed to up to the point of the formal change of conditions must be paid for labor performed.

For example, an employer cannot change wages and other compensation for past services. If I am paid every two weeks at a rate of $10.00 per hour, an employer cannot hand me a paycheck this week paying me at a rate of $8.00 per hour. The pay reduction applies only to wages after the announcement of the reduction, not past wages owed.

Similarly, if went to work for a company in 1970 and was told in addition to wages I would receive a pension worth 50% of my ending salary if I worked 20 years, I am owed that pension if I fulfilled the 20 years service and the company did not modify the terms of the pension plan during that period. That is the contractual relationship between an employee offering labor and an employer compensating him/her for that labor. This applies to any employee, public or private.

When your benefits were changed as a private employee the employer did not take anything away from you with respect to wages and benefits earned up to the time the benefits were changed. When your pension was changed to a 401K your accrued benefits to that point in time were rolled into the 401k, not taken away from you. Since the accrued benefits were not taken away, you did not incur a loss on the labor hours you had given the company to that point in time. When the company changed the rules you were free to leave. If you stayed with the firm when it reduced or changed benefits, by staying you were agreeing to the new terms of the employee/employer contract.

With respect to public sector employees campaigning, funding or electing bosses you are suggesting they are responsible for the actions of their bosses. Not all public employees belong to unions, not all belong to the same party, not all campaign for political candidates and not all vote. Furthermore, even if public employees acted 100% in unison with respect to elections (which they don’t), there are many times more non public employee citizens voting in elections than employees of the government affected by an election. If public sector employees are truly extorting the private sector, businesses and individuals comprising the private sector have the right to organize and with superior numbers elect representatives who will change the rules governing compensation of public employees going forward. What they do not, and should not, have the right to do is reduce compensation for work already performed under terms to which both parties agreed.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.