Detroit is not alone -- all public pension funding underreported

I often post thoughts about our denial of Detroit's contributions to its own decline. I do so mostly to counter the prevailing wisdom that Detroit just ran into some bad luck. We did have a lot to do with our woes.

But upon leaving the boxing ring here, I had to admit that the problems with public pension funding is not solely a Detroit problem. We were the canary in the coal mine. The mine is about to explode -- and we should not just be calling for the banks to pay their fair share of what they stole from the cities, but also calling for fundamental reform of public pensions.

A number of articles discuss this lately, but here I present an article from the liberal perspective: NYT: Detroit Emerges From Bankruptcy, Yet Pension Risks Linger

The obvious problem is that nobody wants to make the changes necessary. Taxpayers don't want to see their rates go up 10% or more. And public employees and their unions sure don't want to see pensions go down 10% or more. But either or both may be required. Or Detroit will see round 2 of bankruptcy -- even if the banks pay their fair share and the economy recovers.

Yes, here is a much better analysis of why public pensions are so consistently underfunded: http://dealbook.nytimes.com/2014/10/...-pension-plan/

Summary: government rules for public pensions allow it, contrary to what they require for private pensions. And auditing firms encourage it.

The biggest difference between Detroit and other places is that other places still have a tax base large/wealthy enough to make up the pension shortfalls, if/when push comes to shove.

I think taxpayers in Chicago would be more willing to take on a 10% or more tax increase to cover the pension shortfalls [[given how great of a city it is and how relatively well the city's government functions) than the few remaining taxpayers in Detroit.

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Originally Posted by iheartthed

Yes, here is a much better analysis of why public pensions are so consistently underfunded: http://dealbook.nytimes.com/2014/10/...-pension-plan/

Summary: government rules for public pensions allow it, contrary to what they require for private pensions. And auditing firms encourage it.

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How do we change these rules to be 'reasonable'?

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Originally Posted by 313WX

The biggest difference between Detroit and other places is that other places still have a tax base large/wealthy enough to make up the pension shortfalls, if/when push comes to shove.

I think taxpayers in Chicago would be more willing to take on a 10% or more tax increase to cover the pension shortfalls [[given how great of a city it is and how relatively well the city's government functions) than the few remaining taxpayers in Detroit.

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Sure, the yuppies in Near North would probably be happy -- maybe a little less so on the South Side.

I find it troubling that you only think the problem is lack of money. Is the way we account for public pensions and let municipalities under-fund as outlined in the article acceptable to you? Or should we just toss cash at this problem.

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Originally Posted by Wesley Mouch

How do we change these rules to be 'reasonable'?

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Make this illegal:

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A steadily growing payroll is an important element of Gabriel Roeder’s widely used funding method. A big part of any pension actuary’s job is to forecast a plan’s future benefit costs, then devise a contribution schedule that will fully fund the benefits over time. There are many ways to do this, and Gabriel Roeder’s method relies on assumed steady payroll growth. It calculates an employer’s required annual contribution as a level percentage of its payroll. This “backloads” the contributions so that they may not cover the plan’s true costs in the early years, but will rise automatically later as the payroll grows.

If the payroll shrinks, however, the required contributions will skyrocket as a percent of payroll, placing an extraordinary burden on the city and its tax base. The federal pension law that bars companies from using this method is not binding on states or cities, however, and virtually all of them use it.

In Detroit, Gabriel Roeder combined this funding method with a schedule to pay off shortfalls over a “rolling” 30-year period. This meant, in effect, that the 30-year period restarted every year at “Year 1,” or the low end of the rising contribution schedule. The high end was always put off into the future.

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The main problems are that municipalities are allowed to make questionable assumptions about rates of return on pension investments and future employee contributions and they are allowed to defer required contributions. There is also a lesser problem of allowing investment in assets that are not readily valued.

It wouldn't be hard to make rules regarding these things, but up until now that hasn't been done because it would annoy people now, instead of later.

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Originally Posted by Wesley Mouch

Sure, the yuppies in Near North would probably be happy -- maybe a little less so on the South Side.

I find it troubling that you only think the problem is lack of money. Is the way we account for public pensions and let municipalities under-fund as outlined in the article acceptable to you? Or should we just toss cash at this problem.

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That is what underfunding means--you aren't putting in enough money to pay for what you are planning to spend. That doesn't mean the accounting is correct. It is not. But "lack of money" is the exact problem. The reason you fix the accounting is so that people have to put in enough money, so that there isn't a lack of money.

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Originally Posted by mwilbert

That is what underfunding means--you aren't putting in enough money to pay for what you are planning to spend. That doesn't mean the accounting is correct. It is not. But "lack of money" is the exact problem. The reason you fix the accounting is so that people have to put in enough money, so that there isn't a lack of money.

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I should have used the word 'under-estimated', not 'under-funded'. The estimation drives the funding.

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Originally Posted by Wesley Mouch

I often post thoughts about our denial of Detroit's contributions to its own decline. I do so mostly to counter the prevailing wisdom that Detroit just ran into some bad luck. We did have a lot to do with our woes.

But upon leaving the boxing ring here, I had to admit that the problems with public pension funding is not solely a Detroit problem. We were the canary in the coal mine. The mine is about to explode -- and we should not just be calling for the banks to pay their fair share of what they stole from the cities, but also calling for fundamental reform of public pensions.

A number of articles discuss this lately, but here I present an article from the liberal perspective: NYT: Detroit Emerges From Bankruptcy, Yet Pension Risks Linger

The obvious problem is that nobody wants to make the changes necessary. Taxpayers don't want to see their rates go up 10% or more. And public employees and their unions sure don't want to see pensions go down 10% or more. But either or both may be required. Or Detroit will see round 2 of bankruptcy -- even if the banks pay their fair share and the economy recovers.

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Thank you for posting this. Those who live in other cities who think they don't have this problem are merely whistling past the graveyard. It's there, and in huge, huge numbers.

The folks in Chicago are NOT happy about extra taxes to pay for pension shortfalls. Chicagoans [[I was one, temporarily) view their government like Wayne County on steroids--recall that Chicago was under a federal court order [[the Shakman Decree) to stop handing out jobs as political favors. It only slowed that process.

Take a look at this article:

http://www.chicagobusiness.com/artic...kely-to-double

Now, look at the chart. The $250 million tax increase was to shore up the municipal and laborers' pensions [[there are five pension funds in the City). Look at the GIANT gaps in the teacher's pension fund [[not state-wide, unlike Michigan). The Crain's estimate was another $200 million for police and fire, and maybe another $450 million for teachers. That's $900 million just for the City pensions.

When you add in Cook County, the unfunded pension liability for Chicago is $37 billion. That's just unfunded pension obligations. For the entire state, it's $131 billion, and don't forget that the City of Chicago is the cash cow for the state.

Illinois has the same constitutional provision as Michigan [[Section 24, which we all wrote about). The State of Illinois passed health care benefit cuts and very modest pension benefit cuts in the last two years. The Illinois Supreme Court ruled that the health care cuts were unconstitutional [[?!?!?!), meaning that the pension benefit cuts were as well. The IL SC has basically told the state to go back and raise taxes in amount to fund those benefits. I'm not sure that's even mathematically possible.

It's not a Detroit issue. Our nearest big-city neighbor is going to have to make some tough decisions, and very, very soon.

Wesley and BKGuy, don't forget the other huge gorilla in the room for Chicago, retiree health care and other benefits.

That, more so than the restructuring of the pensions, was the big win for Detroit in the bankruptcy with respect to its former employees.

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Originally Posted by Eber Brock Ward

Wesley and BKGuy, don't forget the other huge gorilla in the room for Chicago, retiree health care and other benefits.

That, more so than the restructuring of the pensions, was the big win for Detroit in the bankruptcy with respect to its former employees.

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Can you please clarify what was a 'big win' for the City?

If you're saying that the savings in health care/other was nearly as large as the actual pensions, I'd like to hear about that. There's not been much real information put forward about the real, final impact on retirees.

Wesley, before the bankruptcy, the C of D pension fund gave me a monthly check of around 2k [[after 29 years, during which I contributed 5% of my pay).

However, they were paying BC-BS $800 a month [[and change) for health care insurance for me and my wife [[$250 a month was taken from my check as my contribution). Now they are paying $115 a month for a much-reduced program with BC BS.

These are my real-life figures. I would call that a big win for the City; a kick in the behind for me. Fortunately, wife and I are enjoying good health in our late 70's.

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Originally Posted by Wesley Mouch

Can you please clarify what was a 'big win' for the City?

If you're saying that the savings in health care/other was nearly as large as the actual pensions, I'd like to hear about that. There's not been much real information put forward about the real, final impact on retirees.

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Not just "nearly as large," but much larger! The city, by the Freep's estimate, shed about $3.8 billion in health care costs, but only about $1.7 billion in pension costs.


http://www.gannett-cdn.com/-mm-/a7a7...hartpresto.jpg

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Originally Posted by Ray1936

Wesley, before the bankruptcy, the C of D pension fund gave me a monthly check of around 2k [[after 29 years, during which I contributed 5% of my pay).

However, they were paying BC-BS $800 a month [[and change) for health care insurance for me and my wife [[$250 a month was taken from my check as my contribution). Now they are paying $115 a month for a much-reduced program with BC BS.

These are my real-life figures. I would call that a big win for the City; a kick in the behind for me. Fortunately, wife and I are enjoying good health in our late 70's.

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In my book the bolded sentence in that post carries more weight than anything printed in the papers.

Ray, you benefit from Medicare too, I hope?

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Originally Posted by Jimaz

Ray, you benefit from Medicare too, I hope?

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We do, Jim. After I retired I worked for 17 years as Security Chief at a local hospital and got all my ss/medicare quarters in. Wife and I both worked all our lives and I'm relieved to note that we're in decent shape. The BC-BS plan was a Medicare Advantage plan, as is this greatly reduced temporary plan.

Alas, I know of many of my old colleagues who are not so fortunate at this stage of the game.

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Originally Posted by Ray1936

We do, Jim. After I retired I worked for 17 years as Security Chief at a local hospital and got all my ss/medicare quarters in....

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That's great. It's astounding how much Medicare covers. It's frightening to imagine seniors living without it.

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Originally Posted by Ray1936

Alas, I know of many of my old colleagues who are not so fortunate at this stage of the game.

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So they don't have Medicare? That's what's frightening. That's just wrong.

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Originally Posted by Jimaz

That's great. It's astounding how much Medicare covers. It's frightening to imagine seniors living without it.

So they don't have Medicare? That's what's frightening. That's just wrong.

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Police and Fire employees didn't [[don't) contribute to Social Security. You need 10 years [[40 quarters) of contributing to SS to be eligible for Medicare.

Ray, I swear that you and my father-in-law covered some of the same ground. What medical center? And what years were you on the force?

I don't know how many 65 and over are inelligible for Medicare. There are some. They are currently getting a $115 stipend to buy Obamacare, best as I know.

I'm hearing some horror stories of those who became disabled on the job, and are having a heck of a time with the C of D in getting their medical needs -- as a result of on-the-job injuries -- paid.

State and local governments were permitted to exempt themselves and their employees from the provisions of Social Security and Medicare.

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Originally Posted by BankruptcyGuy

Police and Fire employees didn't [[don't) contribute to Social Security. You need 10 years [[40 quarters) of contributing to SS to be eligible for Medicare.

Ray, I swear that you and my father-in-law covered some of the same ground. What medical center? And what years were you on the force?

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On the job as a sworn officer 1959 - 1984. I was a cadet [[civilian employee) from 1955 - 1959. Moved to Las Vegas on retirement and took the Chief of Security job at Desert Springs Hospital in Vegas. Reason for moving? Wife and I don't do winter very well. Never did. We go back to Michigan every year to visit with family and old friends. And I guess all our friends are, indeed, old............... :)

Not exactly new info. People been reporting on the Pension Issue for years already

http://bridgemi.com/2012/04/teacher-...-billion-hole/

In 2010, the Pew Center on the States published “The Trillion Dollar Gap,” a report blaming the nation’s policy-makers for “failing to make annual payments for pension systems at the levels recommended by their own actuaries; expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and providing retiree health care without adequately funding it.”

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Originally Posted by Hermod

State and local governments were permitted to exempt themselves and their employees from the provisions of Social Security and Medicare.

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Actually, they still are as with quasi-gov't entities like mental health authorities, airport authorities, etc.