Battle Over Huge Costs of Public Pensions

[stjr]

We are not alone.  Interesting article from the NY Times.  Coming to a town or state near you probably... like Jax? Florida?

Battle Looms Over Huge Costs of Public Pensions
By RON LIEBER

There’s a class war coming to the world of government pensions.

The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.

The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.

At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.

The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.

So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?

Consider what’s going on in Colorado â€" and what is likely to unfold in other states and municipalities around the country.

Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.

This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.

Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”

But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.

The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. “If something didn’t change, we would have run out of money in the foreseeable future,” he said. “So no one would have been paid anything.”

Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?

After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.

And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.

The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before.

But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years.

Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.

No one disputes these figures. Instead, they apologize. “All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”

Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.

Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of Buyapension.com. A woman would need at least $928,000, because of her longer life expectancy.

Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?

If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.

If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it.

And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl.

“We have to do what unions call givebacks,” said Mr. Lamm, the former Colorado governor. “That’s the only way to sanity. Any other alternative, therein lies dragons.”

http://www.nytimes.com/2010/08/07/your-money/07money.html?hp=&pagewanted=print

[spuwho]

Don't do what Illinois did.

They financed the whole shebang using bonds.

So rather than taking on the retirees, or taking on taxpayers, they just simply floated it and put it off for a few more years.

It's the curse of our country, no will!

[Miss Fixit]

Jacksonville voters must insist that our next Mayor and city council address this issue.  A combination of cuts in current plans and a dramatic overhaul of pension plans for new hires is absolutely necessary.

[Dog Walker]

It is, in most respects a very well run organization, and in comparison to the nightmare administrative clusterhumps of non consolidated City County governments, it is an admirably streamlined operation.

Anyone of our older posters can attest that the general professional quality of our LEOs has increased since Consolidation.  They are better educated, better trained, and in general more cosmopolitan.  Compared with cities like Dallas, Montgomery, and in large measure--the actual city of Los Angeles, this improvement is noticeable.  This improvement can be solely credited to the fair wages of a couple of generations of cops.

Stephen,

You are correct on both counts.  Don't forget, because of the higher wages (not high, higher!) that are paid now and a better pension plan, the Sheriff's office has been able to raise the educational requirements for officers as well as the other standards.

Both the Duval County Sheriff's Office under Dale Carson and the City of Jacksonville Police were notoriously corrupt and boneheaded.  Our current Sheriff's Office is far superior in every way although much larger.

[spuwho]

Arguing over anything Dick Morris says is an exercise in overused breath. It will not gain you anything, its an argument you will never win and for every retort or alternative you come up with, he will have a deeper more pronounced position.

Arguing with Dick Morris is like trying to argue with a Trek fan at a Trek convention. He lives for politics and he is in love with dissecting every moment, just as a Trek fan does with every episode.

[9a is my backyard]

I thought part of the problem, at least locally, was that pensions had a guaranteed rate of return.  If the market provides that rate, great.  If not (see: current economy), then the government has to make up the difference.

[CS Foltz]

One better stephen............close JTA down completely and bid the functions out! Send everyone out the door and shut it down......then we might  be able to get some rail going............just mho!

[stjr]

I have no problem paying public employee's of any kind appropriately and fairly.  The problem is determining at any given point in time what that is.  The best way to do this is to pay using "market based" rates.  I think the concern today is that, with their pensions, many public employee's compensation packages are out of alignment with the current market and need adjustment.

Pensions exacerbate this because they are very long term commitments that might be at the market when offered decades or years ago, but are not at the market now.  Most pensions were offered making assumptions that life expectancy would also be far shorter than it has ended up being when the payouts come do (same problem, in part, with Social Security).  So, the first item on the table should be "Do we need to make a market based adjustment to our compensation package for new employees hired?" (Even Social Security is raising its retirement age for the rest of us so no one should be immune.)

The issue further raised in the article posted is "If you stand to bankrupt the payor, is it a wise thing to negotiate a settlement that keeps them solvent and continues to provide you half a loaf or so versus no loaf?".  That's a business decision and one that every company or employee trying to collect a "debt" from a "debtor" has to make everyday.  There are no guarantees in this world, period, and no one should ever believe they have one despite what someone tells them to the contrary.  In other words, be self reliant and have a Plan "B".  Things do go wrong in life.

So, if the solvency of the CoJ is on the line, the unions have to look at that.  They also need to consider that their members are possibly being compensated above the current "market" (which is not other "public employees", but the labor market at-large) for their services.  They may also have to weigh, as a union, to they have more members making a little less, or less members making a little more.

[Timkin]

One better stephen............close JTA down completely and bid the functions out! Send everyone out the door and shut it down......then we might  be able to get some rail going............just mho!

If only.....

[NotNow]

I have no problem paying public employee's of any kind appropriately and fairly.  The problem is determining at any given point in time what that is.  The best way to do this is to pay using "market based" rates.  I think the concern today is that, with their pensions, many public employee's compensation packages are out of alignment with the current market and need adjustment.

Pensions exacerbate this because they are very long term commitments that might be at the market when offered decades or years ago, but are not at the market now.  Most pensions were offered making assumptions that life expectancy would also be far shorter than it has ended up being when the payouts come do (same problem, in part, with Social Security).  So, the first item on the table should be "Do we need to make a market based adjustment to our compensation package for new employees hired?" (Even Social Security is raising its retirement age for the rest of us so no one should be immune.)

The issue further raised in the article posted is "If you stand to bankrupt the payor, is it a wise thing to negotiate a settlement that keeps them solvent and continues to provide you half a loaf or so versus no loaf?".  That's a business decision and one that every company or employee trying to collect a "debt" from a "debtor" has to make everyday.  There are no guarantees in this world, period, and no one should ever believe they have one despite what someone tells them to the contrary.  In other words, be self reliant and have a Plan "B".  Things do go wrong in life.

So, if the solvency of the CoJ is on the line, the unions have to look at that.  They also need to consider that their members are possibly being compensated above the current "market" (which is not other "public employees", but the labor market at-large) for their services.  They may also have to weigh, as a union, to they have more members making a little less, or less members making a little more.

So what is  the "market" pension?  What are the Police & Fire pension benefits in Miami, Tampa, and Orlando?  How do they compare to Jax? 

The Jax Police & Fire Pension is 73 years old.  There have been a lot of ups and downs in the economy.  Why do you think that it is suddenly "unsustainable"?

[stjr]

So what is  the "market" pension?  What are the Police & Fire pension benefits in Miami, Tampa, and Orlando?  How do they compare to Jax? 

NotNow, we have been through this before on another board and I anticipated your question here in my comments.  The comparison is NOT to other plans of public employees, but to TOTAL compensation (salary AND benefits together) in the marketplace AT LARGE (i.e. across all employment opportunities available in the private AND public sectors that compete for the services which the subject personnel offer and qualify for).

It is a clear trend in the private sector that the subject type of pension now offered public employees is quickly vanishing in the market based private sector.  This suggests that if the public sector was more market based, pensions would be following the same course.  As the NY Times article posted suggests, there has, to date, remained a large differential in the public vs. private sector approaches to pensions and the time may be upon us for the public sector to make a larger move in the direction of the private sector. 

I am merely suggesting, as the article does, that public employee unions may have to come to terms with this as the private sector taxpayers are arriving at the conclusion public employees shouldn't be receiving benefits that give them compensation in excess of what some believe is the market rate. 

I can not tell you the degree of any actual discrepancy but am only suggesting that both the union and CoJ need to take this into account in their negotiations.  At present, the union appears to want to wish this issue away and I think that may be unrealistic.  Again, this has less to do with FAIR pay than, perhaps, the existence of MORE-than-fair pay.

The Jax Police & Fire Pension is 73 years old.  There have been a lot of ups and downs in the economy.  Why do you think that it is suddenly "unsustainable"?

Again, I gave two answers to this when I posted above.  One, the market for these candidates for these jobs has shifted below current package levels.  And, two, actuarial assumptions previously made may need to be updated and revalued. Both of these considerations occur in the private sector or a company will not remain competitive.  Just look at the auto industry that failed to tackle this issue in a timely manner (not just pensions, but also lifetime medical care).

There is no evidence to support your claim that the pension plan was based or built around a 'lifetime expectancy', and you can provide no evidence to support your second claim that the men and women who are part of the pension are living significantly longer than they were expected to live in 1968.  Nor is there any evidence that even if they were that the pension plan would be affected, since it does provide for their widow(er)s and families and has anticipated payouts after the death of the pensioner from its inception.

Any such claim is just supposition.  No matter how reasonable it might sound, it is factually unsound, and given the additional information regarding surviving family members is actually ludicrous.

Stephen, I suggest you talk with a pension consultant.  A pension is a life annuity, as a rule, and it certainly is based on actuarial calculations of life expectancy.  And, don't tell me life expectancy hasn't changed over the decades.  As I pointed out, it is one of the same problems plaguing Social Security and Congress has already started moving the needle for people your age from 65 to 67 with discussion underway to increase it to 70.  The only supposition here is one you are implying:  That employees have pensions that stop paying when their original actuarially determined amount runs out.  And, I highly doubt that.

I do not think that the Pension Fund is in any position to bankrupt the payor.

The tight city finances are totally the result of sprawl and low taxation rates.

Public employees, particularly police and fire, are usually deployed on a per capita basis from my understanding.  And, in Jax, we have long had lower per capitas than comparable communities from statistics I recall seeing over the years.  So, how this "urban sprawl" concept enters into your thinking is a mystery to me.

As to financial ills derived from low taxation rates, we agree.  I always thought it was inappropriate to lower the millage rates automatically every year and for the State to undermine the tax base with caps and increased exemptions knowing that everyone has a rainy day and government is no different.  Excess revenues should have been banked in a savings account.  To the extent a reasonable market based compensation package is unaffordable, we agree this needs to be corrected.  Of course, if the taxpayers continue to revolt, then, as you say, they need to be reminded of the consequences of doing things on the cheap.

Like many issues, this is one of the problem and its solutions likely falling somewhere in the middle of all the rhetoric.  Pensions are probably too rich versus the market and the taxpayers need to step up and pay what really is the market if they aren't already. I suspect when the dust settles, that is exactly what will happen.  We'll see.

[NotNow]

stjr,

We have covered this subject previously, and my arguments stand.  Jax Police & Fire Pension is a "high risk" fund and comparing it to civilian funds is comparing apples to oranges.  Police Officers and Firefighters are sometimes disabled or killed, and these pensions service them in disablement or the survivors.  Civilian funds don't do that.  Like military service, police and fire work is not conducive to aging, and men and women 55 or older oftentimes can not do the job.  There is a reason that Police & Fire pensions are specifically separated in Florida State Statute.  A 401(k) style fund will not work in this instance.

While there may be plenty of persons who want to be firemen or police officers, there is an acute shortage of qualified candidates.  There are strict requirements and qualifications which disqualify most applicants.  If you want to lower the educational, physical, or integrity requirements, please spell out what you would do.

My answer to some of your argument then, is that it is not completely understood by some what is "fair" since private and "high risk" compensation does not directly compare.  Some also don't know what is required to begin and complete a law enforcement career in Jacksonville.

I am not a pension expert.  But life expectancy of police officers and firefighters is less than that of the public.  Also, the city recently redirected one of the revenue sources for the Police & Fire Pension.  State statute required a portion of traffic fines support the retirement of Officers but the COJ recently negotiated that revenue stream to the State.  The revenue was NOT made up to the pension fund even though the COJ was compensated in other ways.  Also, COJ does not currently pay SS tax.  If the JSO is placed on the Florida State Retirement System (Law Enforcement), then the Officers will pay less (0% to retirement, 6.5% to SS v. 7% to retirement and 0% to SS now) and the COJ will pay more (6.5% to SS, and whatever the required percentage is to FSRS).  That is the retirement that every other Sheriff's Office in Florida is using, and it is the one that the Mayor and other big wigs in the COJ get as well.

Neither the Police nor the Fire unions have any control over the Police & Fire Pension Fund.  The Fund is not part of the contracts which are negotiated every two years.  Fund negotiations must be made through the pension board.  While I am not familiar with the legalities, the fund MUST provide certain benefits.  There are State Statutes that apply to the Fund.

As for taxation rates, they should be compared with comparable cities just as the compensation and retirement should.  In Miami, Tampa, and Orlando compare the combined property taxes with the consolidated taxes here.  Compare the Officers per capita that you mention.  And you also must compare the compensation and retirement package as well. 

I'm OK with solutions in the "middle".  The FOP offered a three year status quo contract.  No raises and no benefit changes for three years.  I would call that "middle" ground.  I would be thrilled if the pay and pension benefits were placed in the "middle" of a survey of Florida's 5 or 10 largest city Police & Fire pay & pension packages.  Or just use the same State retirement fund that the Mayor and other COJ big shots get.  Wouldn't that be "reasonable"?

[9a is my backyard]

I thought part of the problem, at least locally, was that pensions had a guaranteed rate of return.  If the market provides that rate, great.  If not (see: current economy), then the government has to make up the difference.

Well thats a bit tricky.

Its actually set up so that instead of pulling the entire cost of the pension plan straight from the tax coffers, the Pensions are set up to be administered from a fund which invests.  These investments make profits.  Any profits that are made by the fund are actually deducted from what would be paid from the tax monies.  In good years, the taxpayers don't pay nearly as much, in bad years they can pay the entire amount (plus any losses).  If there is a substantial profit then the pensioners get to keep the extra money.

It would have been more straightforward to simply pay the pensions outright, but this gave the policeman's union the ability to perform even better than the City could afford at the time, if they invested wisely.  It simultaneously cut the amount that the City would have to pay, so long as the fund performed.  And for decades the fund has performed pretty well.  As a result the city saved money.

No one complained when the profits from investments cut the amount of money that taxdollars had to fill.

Does that make any sense?

Any pension money, if it is really going to be a pension is 'guaranteed', or its useless.

Letting the union invests and then deducting the profits from the amount due (and the formula is a little more complex, but that is basically how it works) isnt doing anything more than letting the cops keep more if they have a good year, and then stepping up and paying the amount due if they have a bad year.

It saves the taxpayers money in most years.

However, now that the economy has crashed, and everyone is broke, including the city, they want to frame the argument that the cops are somehow demanding that taxpayers kick in something extra, which they would not be otherwise entitled to.

I believe this argument to be morally wrong, and that simply the attempt at reframing the argument is cynical at best, and outright sidewinding at worst.

If we want to save money, transfer a few hundred million from those work creating sprawl bastards at JTA.  The problem is the amount of land area that has to be monitored, and we would be cutting off our nose to spite our faces if we didnt stop the real problem and reward the working solution.

Stephen, thanks for clearing up my confusion.

Wouldn't it help to save the additional money during years where the fund profits and put that in a rainy day fund for times like right now?  Not only does that make the fund more stable, it makes payments more consistent and, one would think, make it easier for the recipients to develop their financial plan for the future. 

While I agree with stjr that these pensions should be giving 'more-than-fair compensation,' is there a police or firefighter with a great salary?  It could just be an inaccurate perception, but they're always portrayed as being underpaid.

I also thought part of the reason for pensions was to draw workers to public work since they pay isn't usually as good as it is on the private side but the benefits (pension, healthcare, etc) tried to make up for that.  I guess this may not be true since pensions used to be common on both the public and private side and the private sector has mostly dumped them (minus executives it seems).

[civil42806]

I thought part of the problem, at least locally, was that pensions had a guaranteed rate of return.  If the market provides that rate, great.  If not (see: current economy), then the government has to make up the difference.

Well thats a bit tricky.

Its actually set up so that instead of pulling the entire cost of the pension plan straight from the tax coffers, the Pensions are set up to be administered from a fund which invests.  These investments make profits.  Any profits that are made by the fund are actually deducted from what would be paid from the tax monies.  In good years, the taxpayers don't pay nearly as much, in bad years they can pay the entire amount (plus any losses).  If there is a substantial profit then the pensioners get to keep the extra money.

It would have been more straightforward to simply pay the pensions outright, but this gave the policeman's union the ability to perform even better than the City could afford at the time, if they invested wisely.  It simultaneously cut the amount that the City would have to pay, so long as the fund performed.  And for decades the fund has performed pretty well.  As a result the city saved money.

No one complained when the profits from investments cut the amount of money that taxdollars had to fill.

Does that make any sense?

Any pension money, if it is really going to be a pension is 'guaranteed', or its useless.

Letting the union invests and then deducting the profits from the amount due (and the formula is a little more complex, but that is basically how it works) isnt doing anything more than letting the cops keep more if they have a good year, and then stepping up and paying the amount due if they have a bad year.

It saves the taxpayers money in most years.

However, now that the economy has crashed, and everyone is broke, including the city, they want to frame the argument that the cops are somehow demanding that taxpayers kick in something extra, which they would not be otherwise entitled to.

I believe this argument to be morally wrong, and that simply the attempt at reframing the argument is cynical at best, and outright sidewinding at worst.

If we want to save money, transfer a few hundred million from those work creating sprawl bastards at JTA.  The problem is the amount of land area that has to be monitored, and we would be cutting off our nose to spite our faces if we didnt stop the real problem and reward the working solution.

The obvious solution to that is to never enter into a contract with a guaranteed rate of return.  8% was insane, but I guess after the internet run up and housing bubble, people look for that.  Few companies other than the Government have a traditional retirement plan any more.  The old concept of the annuity built up over time is pretty much out the window in most places.  Other than government agencies and even the feds have reduced theres through the FERS plan ,with most expected to come from 401ks with government matching funds.

[stjr]

OK, Stephen, once again you are the expert on the subject and silly me for disagreeing with you.  I have said my piece on this subject and its clear you have no interest in understanding the subtleties of it.  All issues are black and white, there are never two sides to a coin, and you are always right and one day I'll figure it out.  You have all the answers, o' great wizard of all knowledge.  Anyone who should disagree with you is just making "suppositions" and how can that compete with your "factually supported"   discourses.