THIS IS FROM DIFFERENT ARTICLES I READ ON THIS SUBJECT
Voters in Cincinnati last week soundly defeated a ballot initiative, which would have overhauled the pension system for public workers, leaving the city without a plan to deal with $872 million in unfunded liabilities. The Cincinnati initiative would have turned the public pension system into a 401(k) style-plan and require the city to pay off its unfunded liabilities in 10 years. It failed 78 percent to 22 percent, an example of the opposition that cities face when trying to tackle the politically sensitive issue of funding retirees’ benefits. More and more cities, counties, and even some states will face the harsh reality of having to fix their pension systems or deal with a Detroit-style bankruptcy.
A study by the Pew Center earlier this year looked at 61 cities — those with populations over 500,000 plus the largest city in each state — and found a total gap of $217 billion between pension and retiree healthcare obligations and the funding saved to pay those costs.
According to Pew, those cities had a total pension liability of $385 billion, with 74 percent funded, leaving a $99 billion shortfall. The situation regarding retiree healthcare benefits in those cities is far worse, with a total of $126.2 billion of liabilities that are only 6 percent funded.
Pension funds have “hidden the results with dubious financial reporting.”
He cites as just one example Detroit, which claimed as late as 2011 that their pension funds were 80 percent fully funded. New auditors found a $3.5 billion shortfall, a hole that pushed the city into bankruptcy.
Here are the top 10 cities with the lowest percentage of funding for pension liabilities
City Total Liability % Funded
Charleston, W. Va. $270 million 24
Omaha, Neb. $1.43 billion 43
Portland, Ore. $5.46 billion 50
Chicago, Ill. 24.97 billion 52
Little Rock, Ark. $498 million 59
Wilmington, Del. $364 million 59
Boston, Mass. $2.54 billion 60
Atlanta, Ga. $3.17 billion 60
Manchester, N.H. $436 million 60
New Orleans, La. $1.99 billion 61
Equally startling, Pew found numerous cities were woefully unprepared to finance healthcare benefit obligations. Thirty-three cities had set aside nothing to pay for this bill coming due,” the research noted. Cincinnati was not among the cities ranked.
The country’s 250 largest cities saw spending for pensions increase to 10 percent of their general budgets in 2012, an increase of 7.75 percent since 2007, according to The Wall Street Journal. Illinois state’s budget for the next 20 to 25 years will go toward paying pension bills, consuming 16 to 24 percent of the state’s general revenue fund annually.”
States like Illinois, which has saved just 43 cents to cover every dollar of what it needs to pay 350,000 retirees and 500,000 current workers who are counting on pension checks.
Steven Stanek, “I would say from what I have seen the worst are Illinois, California, West Virginia, Oklahoma, New Hampshire, Louisiana, Alaska, Connecticut — all make the list,” said Stanek.
State Budget Solutions said that state public employee retirement promises are under funded by $4.1 trillion nationally. In addition, the report concluded that when combined, state public pension plans are just 39 percent funded.
The study found the five most poorly funded states are Illinois (24%), Connecticut (25%), Kentucky (27%), and Kansas (29%), along with Mississippi, New Hampshire, and Alaska tied at 30% funded.
for years the methodology used to rate public pension systems in the states has been too generous, allowing states to spin a rosier picture than reality truly reflected.
The generosity of the standards resulted in decisions this year by the Governmental Accounting Standards Board and by Moody’s Investors Services to change the way they calculate state burdens.
“GASB and Moody’s have joined a chorus of financial economists and other observers warning that pension funding practices are dangerous for both taxpayers and public employees alike,”—Cory Eucalitto
California: San Jose Mayor Chuck Reed announced in early October he would support a ballot measure for November 2014 that would amend California’s Constitution to allow local governments to reduce pension expenses associated with their current employees. Richard Dreyfuss suggests several reforms are needed to avoid going off the fiscal cliff, including prohibiting issuing new bonds to refinance existing liabilities.
He believes the new pension plans should be funded as they are earned, to avoid burdening future employees and beneficiaries.
Dreyfuss is clear in stating that any reform is going to be politically unpalatable.
“The necessity for real reform is problematic for policymakers, who must deal with a workforce resistant to the loss of guaranteed monthly pension benefits; and for political constituencies, including government workers and their allies.
The bankrupt city of San Bernardino and its largest creditor, the California Public Employees’ Retirement System (Calpers), are set for a showdown over the city’s $17 million in pension arrears. an attorney for the Calpers – America’s largest public pension fund with assets of $277 billion – said San Bernardino cannot be allowed to get away with failing to pay the pension fund for an entire year.
San Bernardino stopped paying Calpers its $1.2 million bimonthly employer’s contribution for 12 months after it declared bankruptcy in August 2012. Calpers says the city in Southern California owes $17 million, plus growing interest, late fees and penalty payments. “Calpers can’t have cities financing their bankruptcy cases by just stopping making payments,” Michael Lubic, an attorney for Calpers, told Reuters. “You can’t make not paying Calpers cheap and easy, because then it creates this tremendous incentive for other cities to file for bankruptcy and stop meeting their obligations.” San Bernardino stopped paying Calpers, while Stockton has kept current on all payments to the fund.
In the city of Detroit’s bankruptcy case, the question of whether pension benefits can be cut is also a central issue in an ongoing eligibility proceeding. Calper administers benefits for over 3,000 city, state and local agencies, or nearly 3 million people. Many California cities are struggling to meet soaring pension costs.
Less than two years after exiting bankruptcy, the city of Vallejo, California, is again facing a budget crisis as soaring pension costs, which were left untouched in the bankruptcy reorganization, eat up an ever-growing share of tax revenues. Vallejo’s plight, so soon after bankruptcy, is an object lesson for three U.S. cities going through that process today – Detroit, Stockton and San Bernardino, California – because it shows the importance of dealing with pension obligations as part of a financial restructuring, experts say.
All three current bankruptcies are considered test cases in the titanic battle between Wall Street and public pension funds over whether municipal bondholders or current and retired employees should absorb most of the pain when a state or local government goes broke. “Any municipal bankruptcy that doesn’t restructure pension obligations is going to be a failure because pension obligations are the largest debt a city has,”—Karol Denniston. Vallejo has remained committed to delivering on the pension promises it made to its employees.”
Calpers is the largest pension system in the United States and serves many California cities and counties. It has long argued that it has a much wider responsibility than managing pensions for individual cities. It says state law mandates that it is the custodian of the entire fund, and as such is unable to renegotiate pension rates that cities have agreed to with their workers. They filed for Chapter 9 bankruptcy protection in 2008 with an $18 million deficit. The only major expense the city did not touch was its payments to the $260 billion California Public Employees Retirement System. Now city leaders say that growing, and unexpected, costs to Calpers are putting its post-bankruptcy budget under enormous strain. The city budget shows a deficit of $5.2 million for this fiscal year, and that is set to rise to $8.9 million next year unless significant cost savings can be found. “Vallejo made a conscious decision under enormous pressure not to mess with Calpers. That is a decision coming home to roost.”—David Skeel
“How can a city break away from Calpers and still retain employees when other jurisdictions have a pension plan?” Dan Keen, Vallejo’s city manager, said the only way for the city to meet growing pension costs is to get more concessions from city unions – contract negotiations are underway – and to cut services further. Keen said options were to slow or freeze hiring and make other cost cuts. Gomes, the city’s vice mayor, said of Calpers: “It’s the biggest part of my city’s problem. I don’t know any city that can afford it.”
Sources—jennifer hickey, cnbc, pew, barrons, wsj, Chicago sun times, heartland institute, state budget solutions, gasb, moodys, dreyfuss, tim reid, reuters, lucy Nicholson, calpers, h=johathan weber, lisa shumaker newsmax, david skeel, dan keen,