Is this story familiar? Chicago sued by pensioners

[BankruptcyGuy]

Chicago has passed MODEST pension reforms, set to take effect Jan 1. Pensioners have now sued, alleging that those cuts violate the Illinois Constitution. The provision in question, by the way, is almost word-for-word Section 24 of the Michigan Constitution.

http://www.chicagotribune.com/news/l...216-story.html

When the IL Supreme Court holds the cuts violate the State Constitution [[which they will, the IL SC already ruled that modest cuts to health care benefits violated the IL Const), Chicago will have three choices:

1. Raise taxes to pay for these pensions [[unfunded pension liabilities, as of 2012, were approximately $37.2 BILLION). Query whether the local economy can stomach a tax hit that high.

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

2. Cut services.
3. File for bankruptcy.

I believe the Germans call this "schadenfreude."

[Scottathew]

Chicago has a HUGE unfunded liability issue.

People who were promised pensions need to be taken care of the best we can, but we need to wipe out the concept of pensions from society.

Pensions are poison. Poison for businesses and governments that go bankrupt because of them. Poison to people who rely on them but have them taken away.

We need to switch everything over to 401Ks, so that people can OWN their retirement, not have it owed to them.

[DetroiterOnTheWestCoast]

Chicago has a HUGE unfunded liability issue.

People who were promised pensions need to be taken care of the best we can, but we need to wipe out the concept of pensions from society.

Pensions are poison. Poison for businesses and governments that go bankrupt because of them. Poison to people who rely on them but have them taken away.

We need to switch everything over to 401Ks, so that people can OWN their retirement, not have it owed to them.

Retirement benefits, including pensions, are earned, as are any other types of compensation. The 401[[k) is a poor substitute for a pension, since many many many companies with 401[[k) plans provide nil for a match.

[Scottathew]

Retirement benefits, including pensions, are earned, as are any other types of compensation. The 401[[k) is a poor substitute for a pension, since many many many companies with 401[[k) plans provide nil for a match.

That's why I'd like to see people that have been earned them get them, but we must stop the madness with new hires.

The 401K is an excellent substitute. It's an investment option that is flexible, has tax benefits, and is owned by YOU, not owed to you.

A company match would be nice, and is something that unions can bargain for in place of these unsustainable pensions.

Folks ought to be paid when they perform the work. That's the safe way to compensate someone. Promising to pay someone DECADES after the work is performed is dangerous. It's dangerous for the company, and dangerous for the person relying on their earned income, and hoping that the promise will be fulfilled decades later.

[DetroiterOnTheWestCoast]

That's why I'd like to see people that have been earned them get them, but we must stop the madness with new hires.

The 401K is an excellent substitute. It's an investment option that is flexible, has tax benefits, and is owned by YOU, not owed to you.

A company match would be nice, and is something that unions can bargain for in place of these unsustainable pensions.

Folks ought to be paid when they perform the work. That's the safe way to compensate someone. Promising to pay someone DECADES after the work is performed is dangerous. It's dangerous for the company, and dangerous for the person relying on their earned income, and hoping that the promise will be fulfilled decades later.

A well funded defined benefit plan, with employer and employee contributions actuarially determined, and prudently invested, is designed to pay benefits for decades after a person retirees. Its just that plan sponsors, whether public or private, play games with the funding. What is risky for society is to shift 100% of the retirement contribution obligation to employees living paycheck to paycheck, with their only option a non-guaranteed 401[[k) plan [[most likely with hidden fees).

And I've actually spent a career administering those plans, seeing first hand the hidden conflicts of interest from service providers and the big investment firms, and seeing how inadequate the benefits can be for the average person.

[CassTechGrad]

The city of Littletown Michigan has 125 citizens and elects a new mayor.
The newly elected Mayor establishes a Department of Public Beautification.
The mayor hires all citizens to be part of the new department for $1.00 a year each. They all agree.
The citizens form a labor union and ask for a $100,00.00 a year pension payable for life after 1 year of service.
The Mayor agrees.
After I year and I day of service, all citizens retire.
The city cannot pay and files for bankruptcy.
The courts say the state is responsible for all public pension obligations
The citizens of Littletown all move to Florida and live a comfortable retirement for the rest of their lives.
Happily ever after. The American Dream

[Packman41]

To DetroiterOnTheWestCoast:

Are you in California? Since you’ve been you’ve been administering these plans your entire career, then can you explain how this happened?

http://www.sacbee.com/news/politics-...le3507521.html

“The California State Controller John Chiang dropped a political bomb the other day ….unfunded liabilities” – the gap between assets and liabilities for current and future pensions – exploded from $6.3 billion in 2003 to $198.2 billion in 2013.

Moreover, that startling number assumes that pension systems will see asset earnings of about 7.5 percent a year – a number that some are beginning to see as unattainable.

If a 7.5 percent discount rate, which is also used by the giant California Public Employees’ Retirement System and many local systems, is too high, the current $198.2 billion debt in Chiang’s report is [greatly underestimated.]

State and local governments’ contributions nearly tripled between 2003 and 2013, from $6.43 billion a year to $17.5 billion, while those of employees nearly doubled, from $5.2 billion to $9.1 billion.”

So, even though, the government’s contribution nearly tripled and the employee’s contributions nearly doubled the underfunding has grown by $192 BILLION in ten years.

Do they not have actuarial studies? Or invest their money prudently on the west coast? Or both?

Maybe you could clear this up for us.

[Scottathew]

The city of Littletown Michigan has 125 citizens and elects a new mayor.
The newly elected Mayor establishes a Department of Public Beautification.
The mayor hires all citizens to be part of the new department for $1.00 a year each. They all agree.
The citizens form a labor union and ask for a $100,00.00 a year pension payable for life after 1 year of service.
The Mayor agrees.
After I year and I day of service, all citizens retire.
The city cannot pay and files for bankruptcy.
The courts say the state is responsible for all public pension obligations
The citizens of Littletown all move to Florida and live a comfortable retirement for the rest of their lives.
Happily ever after. The American Dream

It sounds crazy, but it's a mere exaggeration of the truth.

[Wesley Mouch]

A well funded defined benefit plan, with employer and employee contributions actuarially determined, and prudently invested, is designed to pay benefits for decades after a person retirees. Its just that plan sponsors, whether public or private, play games with the funding. What is risky for society is to shift 100% of the retirement contribution obligation to employees living paycheck to paycheck, with their only option a non-guaranteed 401[[k) plan [[most likely with hidden fees).

And I've actually spent a career administering those plans, seeing first hand the hidden conflicts of interest from service providers and the big investment firms, and seeing how inadequate the benefits can be for the average person.

I'm sure you're right. It can be done well.

But it obviously isn't being done well.

So we live in this imperfect world, where the genie is out of the bottle. We owe the money, but we don't have the money.

What do we do now? Just saying that it should have worked doesn't tell us what to do today. Do we just suck it up and give the pensioners everything and leave the city as a carcass?

[Packman41]

To DetroiterOnTheWestCoast:

I have a follow up to my question about government/municipal pension plans in CA, I am now curious about private sector plans.

I understand that the PBGC is a federal agency created in 1974 under ERISA to protect pension benefits in private-sector defined benefit plans. Yet the PBGC is in trouble, with a projected long-term deficit of $42.4 billion. In fact, the PBGC itself puts its odds of going bust by 2025 at 90%. If private plans are doing so well and are watched by actuaries and they invest their assets prudently, then how could the PBGC possibly go bust in about 10 years?

BTW, when the PBGC takes over a dead pension plan they cut benefits [[no health coverage) and only pay out an annual maximum of $12,870 [[after working 30 years) with no cost-of living.

Maybe you were not aware, but just last week it was announced that a number of union-sponsored, multi-employer plans will be able to petition the Treasury to cut member’s benefits to up to 110% of the PBGC guarantee, or $14,157 annually. These unions did this because they want to avoid the fate of the PBGC. If they relied on the PBGC to help them out, that “help” could be gone in 10 short years.

So what are all those actuaries and prudent investment advisors doing wrong? Just curious.

[CassTechGrad]

"The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby. Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities."

Sooooooooooooooooo, based on this, if Littletown is not responsible for its pension plan to its former employee’s, then every city can just purposely underfund the plan it has with it's union employs and claim bankruptcy.

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[animatedmartian]

"The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby. Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities."

Sooooooooooooooooo, based on this, if Littletown is not responsible for its pension plan to its former employee’s, then every city can just purposely underfund the plan it has with it's union employs and claim bankruptcy.

Unfunded =/= underfunded.

Unfunded pensions are pensions which the city has already set aside costs for but does not yet have the funds to pay them. However, they must have them funded by the time the pensions become payable as stated in the contract between the city and the union. In the case of Littletown, the mayor basically agreed to an unreasonable contract but is still obligated to pay them.

Underfunded pensions are a violation of the contractual agreement. If the city has not allocated the funds necessary to pay for the pensions by whatever point in time specified by the contract, the union can sue. The Littletown citizens are entitled to that pension since the mayor agreed to it. Doesn't matter whether they worked pretty hard or very little, the mayor agreed to pay them.

In the case of Detroit, the city took out loans to cover all unfunded pension obligations. In fact, the unions were just about to sue the city because the pensions became underfunded. However, under Michigan law, it's illegal for cities to borrow more than 10% of the of the total assessed value of private property within the city. Detroit circumvented this law to acquire the loans to pay for such pensions. Years later, the city is unable to pay interest payments on these loans and then declares bankruptcy.

In Illinois, cities cannot directly file for bankruptcy. Much like Michigan, cities that become financially distressed get a financial manager who then takes the necessary steps to balance the budget.

Detroit is a special case in which it did something illegal [[and also cut city services to the bone) to put itself into bankruptcy which I'm sure wouldn't occur in Chicago.

In our Littletown example, a FM would come in and basically cut all city services. Though since all 125 citizens left for Florida, it probably isn't that big of a deal anyway. Though obviously the city has to get tax revenue from somewhere in order to function.

[Hermod]

Pensions and pension funding would be simple if there were no inflation and no one ever got promoted or got a raise. The problem is the guy that started as a minimum wage weed cutter and thirty years later is head of public works. His pension will be based on his salary as the big boss while his contributions include those years of cutting weeds. As a result, his opension dwarves his contributions and matching contributions. Most government retirees draw out as pension all of their total contributions in the first two years of retirement. How do you fund for this?

[BankruptcyGuy]

Unfunded =/= underfunded.

Unfunded pensions are pensions which the city has already set aside costs for but does not yet have the funds to pay them. However, they must have them funded by the time the pensions become payable as stated in the contract between the city and the union. In the case of Littletown, the mayor basically agreed to an unreasonable contract but is still obligated to pay them.

Underfunded pensions are a violation of the contractual agreement. If the city has not allocated the funds necessary to pay for the pensions by whatever point in time specified by the contract, the union can sue. The Littletown citizens are entitled to that pension since the mayor agreed to it. Doesn't matter whether they worked pretty hard or very little, the mayor agreed to pay them.

In the case of Detroit, the city took out loans to cover all unfunded pension obligations. In fact, the unions were just about to sue the city because the pensions became underfunded. However, under Michigan law, it's illegal for cities to borrow more than 10% of the of the total assessed value of private property within the city. Detroit circumvented this law to acquire the loans to pay for such pensions. Years later, the city is unable to pay interest payments on these loans and then declares bankruptcy.

In Illinois, cities cannot directly file for bankruptcy. Much like Michigan, cities that become financially distressed get a financial manager who then takes the necessary steps to balance the budget.

Detroit is a special case in which it did something illegal [[and also cut city services to the bone) to put itself into bankruptcy which I'm sure wouldn't occur in Chicago.

In our Littletown example, a FM would come in and basically cut all city services. Though since all 125 citizens left for Florida, it probably isn't that big of a deal anyway. Though obviously the city has to get tax revenue from somewhere in order to function.

I am not sure that your distinction between unfunded and underfunded has any statutory support. Pension funds are separate entities that hold assets. Sometimes those assets are stocks, bonds, or real estate. Sometimes they are IOUs from the government obligated to fund them. The latter had, as you'd guess, questionable legal underpinning.

The COPs were not the only reason Detroit filed for bankruptcy. They were only a small portion of Detroit's overall debt.

Illinois has a statute that allows for the creation of an emergency commission, but only for cities under 25,000. They have no emergency manager law or PA 436 equivalent.

[hewettbr]

can we all just agree that pensions will never work and they are the root of most issues. Private 401k with employee contribution match is about as good as we will now safely get these days.

[Packman41]

can we all just agree that pensions will never work and they are the root of most issues. Private 401k with employee contribution match is about as good as we will now safely get these days.

Yes, any fair-mined person would agree that pensions [[defined benefit plans) are not sustainable.

And so would the authors of this Forbes magazine article from last January: http://www.forbes.com/sites/realspin...-127-trillion/

“ federal unfunded liabilities are estimated at near $127 Trillion, which is roughly $1.1 million per taxpayer and nearly double 2012’s total world output.”

So, agreed.

[Wesley Mouch]

Yes, any fair-mined person would agree that pensions [[defined benefit plans) are not sustainable.

And so would the authors of this Forbes magazine article from last January: http://www.forbes.com/sites/realspin...-127-trillion/

“ federal unfunded liabilities are estimated at near $127 Trillion, which is roughly $1.1 million per taxpayer and nearly double 2012’s total world output.”

So, agreed.

Disagreed. There's nothing fundamentally wrong with the idea of defined benefit pensions. If funded as earned, and invested responsibly, they can pay out a good pension at reasonable cost. Same with a 401k. You can't underfund contributions, mismanage, and then overpromise benefits.

Defined-benefit pensions don't work when you defer contributions, steal the cash, and then provide full benefits at any age after 8 years of work.

The problem is political, not financial.

[Packman41]

So how is that theory of “funded as earned, and invested responsibly” actually working out in the REAL world?

In the State of California [[example I wrote about in post #7 above) only 22, that is 17%, of the 130 state pension funds are funded at the 80% or better level. And this is when they make the unreasonable investment assumption of 7.5%. If they used a more reasonable assumption the number of “healthy” funds would decline quickly. BTW, if you drop the investment rate to just 6.2% the amount of underfunding about doubles.

So, when the VAST minority of pension funds are “unhealthy” the real facts trumps theory.

The PBGC [[their own admission) will be broke in 10 years. Again, not so good in reality.

When the Federal unfunded pension liability is $127 Trillion, then you need to get real.

And don’t get me going about the “political” aspect. Wasn’t it a week ago that we found another three perps guilty of bribery and conspiracy in the two Detroit pension funds?

Frankly, between all the convictions and incarcerations of Monica, Beasley, Zajak, Mayfield, Anderson, Shumake I’ve actually lost count on the number of folks stealing from the pension funds. And you think Detroit is different than any other city?

So yeah, pensions MAY work out “in theory,” but in the REAL world not so much.

[hewettbr]

So how is that theory of “funded as earned, and invested responsibly” actually working out in the REAL world?

In the State of California [[example I wrote about in post #7 above) only 22, that is 17%, of the 130 state pension funds are funded at the 80% or better level. And this is when they make the unreasonable investment assumption of 7.5%. If they used a more reasonable assumption the number of “healthy” funds would decline quickly. BTW, if you drop the investment rate to just 6.2% the amount of underfunding about doubles.

So, when the VAST minority of pension funds are “unhealthy” the real facts trumps theory.

The PBGC [[their own admission) will be broke in 10 years. Again, not so good in reality.

When the Federal unfunded pension liability is $127 Trillion, then you need to get real.

And don’t get me going about the “political” aspect. Wasn’t it a week ago that we found another three perps guilty of bribery and conspiracy in the two Detroit pension funds?

Frankly, between all the convictions and incarcerations of Monica, Beasley, Zajak, Mayfield, Anderson, Shumake I’ve actually lost count on the number of folks stealing from the pension funds. And you think Detroit is different than any other city?

So yeah, pensions MAY work out “in theory,” but in the REAL world not so much.

Exactly, plus assuming 7-8% is ludicrous. The concept is only a theory, 401k or other private plans are just as effective and far safer. The idea that a pension is an investment anticipating high returns and being promised based on that high return makes no sense financially. The whole idea is idiotic because the markets are a gamble.

If i could go to the casino and be gaurenteed i leave with 10% more every visit i would quit my job today and go every day. That sounds pretty dumb doesn't it?

[Danny]

There is no way that City of Chicago will go into Bankruptcy! The corrupt Alderman Board got it under control.

[Cincinnati_Kid]

401K plans aren't the end all be all either. It puts more onus on the contributor, and with the high costs of everything else just to survive, some may be inclined not to contribute as much in their plan, as needed. As someone mentioned, not all companies offer a match to what you contribute, not mention the wariness or concern that these companies do their due diligence, and don't engage in corruption and charge ridiculous fees for maintaining it

[BankruptcyGuy]

Disagreed. There's nothing fundamentally wrong with the idea of defined benefit pensions. If funded as earned, and invested responsibly, they can pay out a good pension at reasonable cost. Same with a 401k. You can't underfund contributions, mismanage, and then overpromise benefits.

Defined-benefit pensions don't work when you defer contributions, steal the cash, and then provide full benefits at any age after 8 years of work.

The problem is political, not financial.

Except that you are fundamentally relying on the credit of the contributor in the future. When a company fails, the payments the company was obligated to make in the future obviously are not, and the pension is short. As long as parties are willing to accept that risk, fine, but that puts a bunch of working people's eggs in the basket of the company they worked for. New 401k rules prohibit required investment in company stock--pensions are effectively the same thing.

In the public sector, there was an assumption that public entities could always raise taxes to cover pension shortfalls. I think that's been soundly disproven.

Poor investments, failure to fund current liabilities, promising now what you can't deliver later--all problems that impacted Detroit pensions. 401ks seem like the better choice because they shift the responsibility for those issues from the company to the investor. I think it does pensioners a disservice to rely on politicians.

[CassTechGrad]

New Littletown, Flordia. A nice place to live.

[Willi]

Transparency, audits, holding managers accountable and handing out serious penalties for mismanagement

People need to see the books, often, fully open, by complete 3rd party outsiders

None of the crap, "we audit ourselves", that has to stop completely and forever. Outside audits.