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Fort Worth Pension Bubble Ready to Blow Up?
Mitchell Schnurman of the Star-Telegram reports, Fort Worth pension bubble will blow up in our faces (HT: Robert):
To understand why Fort Worth's pension system is such a financial disaster, look at one month's list of recent retirements.
In January, a 53-year-old policeman retired with an annual benefit of $90,312 for life, plus $256,000 in a lump sum payment. Another policeman, 57, got almost $74,000 annually, plus $313,000 in a lump sum. A 54-year-old firefighter got an annual pension of $90,130, plus $178,000 in cash.
These are not typical cases, but they're not rare, either. The shocking takeaway from the 22 retirees is that they stand to earn significantly more from their pensions than they earned on the job.
With an average age of 50 for the police and 54 for the firemen in this group, they're likely to spend more years in retirement than they worked. An analysis for the City Council, presented in July, projected that the retiring policemen would collect $3.1 million in pension pay.That's a stunning number, almost twice as much as their career earnings, and it more than compensates for the fact that city employees don't get Social Security or a 401(k)-type account. It's worth stating again: In retirement, many will get more money than they made on the job, and for more years.
You don't have to be an actuary to know that this pension plan will end badly. The technical phrase is "trending toward insolvency."
Except that the city is on the hook for all the promised benefits. Taxpayers will have to pony up hefty contributions for years, even generations, and the city may have to cut services to afford it. The pension for city employees is currently projected to pay out $432 million more than it brings in over the next 30 years.And that's the optimistic scenario. If investment returns average 7 percent, rather than the dreamy 8.5 percent in the assumptions, the unfunded liability could approach $1 billion.
The pension will require $60 million in city funds next year, and it's already a drag on a strapped city budget that has to close swimming pools and libraries and impose furloughs. Every year, the pension hole grows, because the benefits keep piling up."This is the elephant in the room," Mayor Mike Moncrief told the council in late July. "Not only for this budget, but for all the budgets to come."
For decades, most private companies have moved away from pensions, because they were simply unaffordable, and added or enhanced 401(k) plans. Traditional pensions remain primarily in the public sector. And like Fort Worth, scores of cities and states face overwhelming liabilities, and their promises have to be kept.
Councilman Carter Burdette is right to say the only solution is to increase contributions and reduce benefits. But the city keeps being told that it can't cut benefits, because it's blocked by contracts with fire and police, a state constitutional amendment and rulings from the attorney general.
"All we're left with is going to taxpayers and saying, 'You're going to have to pay more, more, more,'" Burdette said at a June budget session. "It's time we quit that game and we do something."
The city manager appointed an ad hoc committee to look at the pension problem. It had a few businessmen, but most were employees -- a mix of police, fire and general workers. Imagine they had a little conflict?
They recommended that the city contribute an additional 6 percent of employee pay into the plan. (In their defense, if my employer wanted input on saving my retirement, I'd say the same thing: Put in more money!)
The committee said the city should evaluate the idea of sharing the higher contribution with employees, although it acknowledged that a majority of the 6,600 plan participants would have to vote for the increase. Fact is, pumping in more money won't close this gap anyway, because pension payments will keep outstripping contributions and investment gains for ... infinity, according to a city projection.
How did this happen? City employees, led by police and firefighters, steadily won more benefits, enabling them to rack up outsized pensions. City leaders agreed to the sweeteners to win contracts (and elections) and avoid bigger raises. That's a seductive path for everybody, when the bill isn't coming due for years -- and can be passed on to taxpayers.
One of the worst moves was to raise the assumed rate of return on the plan's assets. By lifting projections for investment gains, you can justify about anything. In 1990, Fort Worth increased its estimated returns from 7 percent to 10.23 percent annually. Banking on a bigger gain, it cut contributions from the city and employees -- and simultaneously enriched the benefits.
Can you say pension bubble?
The multiplier went from 2 percent for each year of service to 2.5 percent. (Six years later, it was increased to 3 percent, which means that working 33 years at the city equals a pension of 99 percent of pay.) Early retirement was also granted, plus minimum benefits.
In 1997, overtime was added to the compensation base. Two years later, a cost-of-living increase was guaranteed, plus a more generous formula for base pay. In 2002, a new benefit allowed employees to start collecting pensions while still working full time and funnel the money into a separate account.
The so-called DROP funds can total hundreds of thousands of dollars. This is on top of a pension that pays close to 100 percent of pre-retirement income -- on a base that police and firefighters often inflate with overtime.
Most Americans can only dream about such a nest egg. Social Security replaces about 40 percent of pre-retirement income for an average worker. Add in a 401(k) and personal savings, and many are fortunate to get to 75 percent of their earlier income.
And if they quit working in their mid-50s, they'll never get close to that threshold.Fort Worth employees do not participate in Social Security. But the January retirees had an average pension that was twice as high as Social Security's $29,000 maximum, and they started collecting it 10 years earlier. In the private sector, taking a pension before age 65 usually carries a steep discount, often by half.
In the Fort Worth plan, general employees don't do nearly as well as police and fire. They have much smaller pensions and lump sums.
Averages can be misleading. January may have been an exceptional month for police and fire retirees, and they don't always live to their expected age. But taxpayers should be cynical about a different average from the Fort Worth Employees' Retirement Fund. It says the latest average pension payment was less than $31,000 annually, with both fire and police under $48,000.
But many of those retirees worked before overtime was included in the formula; before the DROP benefit was added; and most important, when the multiplier was less than 3.
That's the scary secret about Fort Worth's pension. In real time, in today's world, the numbers are even worse than people imagine.
As pension gaps loom larger, some of the worst problems can be found in city and municipal pension plans. I rarely talk about them, but know all too well the pension woes that lurk behind these city pension plans. I would consilidate them and tighten up their governance, but even that won't solve the deep structural problems that plague these plans.
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It may hurt a bit but, roll em over to a 401k like the rest of us. Put's things in a rather different perspective, and expected rate of return.
There seems to be a common pattern in all of these plans: (a) maintaining the defined benefit plans throughout the 1970's through 2000's, even as nearly all such plans were eliminated in the private sector do to the mathematical certainty of their unsustainability, (b) major sweetening of the plans combined with simultaneous cutting of contributions in the 1990s as the stock bubble reached full heights, (c) postponing the day of reckoning through the period 2000-2010 through a variety of measures including maintaining unrealistic assumptions regarding long term rates of return, a short term enhancement of revenues courtesy of the property bubble and increased property ax revenue, and use of various ponzi-finance borrowing schemes.
Its worth noting that its not just the unions that stood to gain. The pensions available to those serving for even a limited number of terms as alderpersons or supervisors in major cities and counties can be mind boggling. Milwaukee County is a good example. Huge enhancements to the public employee benefit system were enacted circa 2000. Even though these were later proven to have been enacted with fraudulent fiscal impact estimates formulated through a conspiracy by several County officials, the contracts are still viewed as inviolate, with taxpayers legally obligated to pay benefits most residents can only dream of.
Milwaukee County is a good example of another part of the pattern, selling $400 million in pension obligation bonds in 2008 paying 6.2% interest over 20 years to cover the projected actuarial deficit at that time, on the assumption of annual 8% gains. This was the brainchild of the conservative who is now the leading candidate for governor, and is promising to apply similar forms of financial innovation at the state level.
What amazes me is how little has been done over the past 10 years when the nature of the crisis and the need for action became obvious. In fact, the response has primarily been to use ponzi-finance schemes such as the persion obligation bonds that will likely make the problem worse by an order of magnitude. Its clear that the rights of taxpayers are at least equal to the rights of government employees, but we still haven't quite reached the point where a City proposes doubling the property tax rate to address its pension problem, while a series of articles are printed in the local papers highlighting $100,000 payouts to 50 year olds. It will be interesting to see the standoff between several thousand homeowners protesting against proposed property tax increases, perhaps violently, facing off against several hundred police who are the primary cause for the proposed increase.
Nothing changes until the speeding bus hits the embankment, bloody bodies all over the road, crying and gnashing of teeth. We're about there.
More commentary on the topic
http://globaleconomicanalysis.blogspot.com/2010/09/fort-worth-texas-inso...
whatever happend to "public service", now it is "public entitlement".
Even worse in California. Website dedicated to $100K+ public pensions -- http://database.californiapensionreform.com/
Voters/taxpayers have slept while politicians raced to give away fictitious funds.
EXPEDITION ROBISON FOR ALL!!!
I have no animosity toward any union employee or "public servant" job holder. They negotiate for the best deal they can get and sometimes those deals have to be reversed due to financial difficulties. There is no reason to get worked up about any of it. There will be winners and losers in all negotiations and settlements. What's new there? We make the best we can of it and move on. Anecdotal reports of individuals is always welcomed because it brings the debate down to a human level, devoid of politics and law. That's where the final results settle anyway. It's going to get worse before it gets better so buckle up.
i would agree if these essential employees were not allowed to basically extort their salaries and pensions by threatening to strike and not allowing replacement workers.
i have 2 immediate family members currently drawing pensions from their first 25 year stint as cops/firemen, and of course getting full pay and building their second pension by switching municpalities (same job, same responsibilities, no loss of seniority) at age 47.
there's a reason pro football players in canada quit to become firemen.
(and let's not even discuss that they all work so few hours that they have FULL TIME contracting jobs on the side)
glad my family is benefitting, but jesus, what an outrageous rip off.
funny thing is, my siblings often refer to me as 'the rich one'. When i explain to them that the PV of their pensions is probably close to equal to my own net worth they don't get it.
well the engineer (private sector) does, but the cop and fireman don't.
then again, the latter 2 barely got through high school so i guess that's not unexpected.
i wonder if any of these guys even have a clue as to how valuable their pensions are? I bet they don't even know...
This is for Seagull and the Bug: That's how the systems evolved. I have a friend in his late 70s who is collecting retirement from the Navy, the Postal Service, a City retirement plan, and some other thing I forget. That's the way it was laid out and he is taking advantage of it. It's not a second thought for him. It was part of his retirement plan. He doesn't get a lot but it's more than enough. I can guarantee you when he was in the Navy the pay sucked! His stint with the USPS was a low-paying job as well. The attraction to staying with each was the retirement. Today the civic employees get good pay today as well as the retirement benefits. The system has become perverted and it will reverse. Takes time, a few demonstrations, a few legislative bitter pills, etc.. But it will change. Some municipalities or States may go bankrupt... so be it. That will be the consequences of bad decisions. I just am saying that the process is going along as it should.
i see your point rocky, but still disagree.
IF these public sector employees could be fired or replaced then I'd say they are offered a deal which they can take or leave and good for them.
but reality is the union leaders show them (my brother has told me of speeches given by travelling union leaders from other police districts, some even from the USA) that by going on strike they can demand basically anything they want.
If police can go on strike, and we can't replace them, theoretically they can demand ANY benefits package, and politicians have to agree, as anarchy is the other option.
take away their closed shop and i will never say another word about them being over paid.
I'm with you Bug. I get your point Rocky - that individuals are merely negotiating the best possible deal for themselves. And that the system will correct itself over time.
The entire premise of public sector unions is flawed. Why should the government have to essentially negotiate with itself? And the reality is, if these were not closed shops, demand for the positions would be much higher.
And we haven't even discussed how hard it is to have any of these employees (even teachers) fired or removed for poor performance. High pay, great benefits, job security, etc., etc.
The government employee is the new protected class...
It will correct over time -- painfully and at great economic expense.
That takes the fun out of Firefighting or Police work. Sorta.
Suppose a town or city raises taxes so much to fund your retirement from police and fire that no one stays to live there, leaving behind vacant homes that become havens of crime.
You would want to retire early too after a few weeks or months fighting the dark forces taking over your town while your own retirement is being debated and possibly eating up by moths and rot because the tax payer base is not present.
Let's say... that you are a Fireman or a Policeman working for a town or city WITHOUT any kind of Pension. However, there may be money in place as a percentage of your total income earned but not more than a percentage of annual revenue earned by the city or town for your entire department.
You will have the satisfaction of knowing you will get something, but not to be greedy or looting and the citizens of your town and city will be happy knowing that thier town or city is doing well and taxes will be more or less stable year to year.
I live in a town now that is replacing the entire 90 year old water system. Such a replacement will result in a doubling of my montly water bill in three years exactly. If my town is not able to repay the bonds or loans when it matures to pay for these water system replacements, fire and police will suffer for it.
I may or may not stay to live here and worry about it. We will see.
There was a time you served the people as a Fireman or Policeman, for the joy of it rather than for the possible looting and pillaging of the Pension system when you do retire from such work.
Most everyone else working hourly wages dont ever expect a pension from anyone. So. No issue there.
HELP ME fellow ZH members.
I'm running for city council in an Ontario municipality. The employees are members of a provincial pension plan called OMERS - currently with a 6-billion dollar shortfall (about $15,000.- per employee) - in our jurisdiction (like most) the taxpayer will get creamed. The last council also fell in love with the arts (I love the arts) and signed onto a very expensive new Center for the Performing Arts but - basically as a free venue for a well known regional theater company. Can you send me the experiences in your community with public sector pension issues AND with your local performing arts facilities. I don't want to clog up ZH so can you use
gary AT ward-7 DOT ca help me bring financial sanity back to my community.
Tyler - if you read this - could you give it a top spot for a few hours..
Leo's touching faith in the inviolability of pension "laws" and "promises" notwithstanding, these unsustainable pensions will be cut down to size, and for the current recipients, as well.
The shoe will suddenly be on the other foot: politicians and officials will simply become unelectable without a promise to fix the system. Yes, like everything else in America, this will be a king-size court battle, all the way up to the SCOTUS, I imagine. At that point these ridiculous arrangements will be judged to be unconstitutional, and in any of a number of ways.
The greedy debasement of what were once honorable public callings is shameful, and will not soon be forgotten. I can't wait for the payback!
"inviolable" runs into the problem that people can simply leave--who do the unions collect from? The next Congress will not be bailing them out.
Unfortunately, as I have read, the courts have generally UPHELD the agreements. They are contracts after all. There might be some unconstitutional aspect if they bankrupt the municipality, but I doubt it.
They will only get unwound in the coming Great Reset.
We're all greedy and selfish - until we can't be. Don't blame the unions, blame the politicians who have only their interests at heart. Scum.
you as public service worker as justification for humble public servant. works until it doesn't i guess.
Commander, I do blame the unions and the politicians. The municipal employee unions are nothing more than organized plunderers. You can't tell me that with all the federal, state and city work safety and labor laws that there is still a need for them. We pay property taxes in Texas and the game over the years has been to sanctimoniously keep the "rate" about the same and let the appraisals keep climbing. It is only recently that appraisals are levelling off and even declining. If anything will cause the reckoning, it will be the decline in revenues from property taxes.
Agreed GH, And also here in Tx there is a large coalition to do away with property tax. Led by former candidatefor governor Debra Medina.I've been behind this for awhile now. As long as there is a property tax we will always be renters.
http://www.wetexans.com/lets-start-taking-names/
She blew it with the 9/11 truther business. I was solid for her till she decided not to throw her Infowars contingent under the bus.
Living in Texas, it is easy to see that part of the problem is that the municipalities which negotiate with the unions really haven't had any reason to put up much of a contest. When negotiations get tough, the unions scream to the media and the local politicians cave, over and over again. It is much easier to agree with the unions than to really represent the citizens. After all, as long as local peace prevails, why not postpone the reckoning? It's been easier to let the appraisal boards hike up the valuations over the years anyway.
I've got a Lg. city firefighter friend who says that, although still dangerous, the job has become much less so over the previous decades due to more stringent building codes and regulations.
He plays a lot of basketball and talks about his retirement booty. No problem with that, but he works 2 days a week/48 hrs. straight.
The deal has gotten better and the risk has gone down. His words.
When push comes to shove, these contracts will be broken, either by legislative amendment or bankruptcy.
Rock meet hard place. Vampire parasite public 'servants' are about to find out that turnips really aren't filled with blood, despite what the politicians promised.
These pensions promises will be broken as soon as the politicians are forced to vote tax increases to pay for them, trust me on that. So this is all nice for those who have been on the defined benefit "gravy train", but this will all end badly (and I say that with the awareness that these are people who often risked their lives for us and are to be rewarded, within the limits of affordability.) An unfunded promise, even to nice people, is still an unfunded promise.
but these promises are fully funded. with debt. and therin "lies the rub" yes, yes? in other words "what would you do with your own personal police force."
how many of them actually risk their lives. no more than a construction worker, commerical fisherman. Granted they do but I'll bet the % is pretty small.
To hell with the pensions. Look at the wage imbalances. Stick a fork in it. This country is done. No one with a brain will do an honest day's work to support this shit.
Let's start a drugs cartel!
we already have many. called Merck, Pfizer, etc....
Quit school and become a fireman.
fireman/looter..whats the diff?
Gives a whole new meaning to that song, "Burning Down the House."
My in-laws, both retired one a FF the other a teacher. I will say this neither one of them will carry on a two second conservation about this subject, or the economy in general. They actually think the dreamworld they are in will go on forever.