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Here Come the Pension Lawsuits?
Bloomberg
Businessweek reports, Baltimore
proposes pension reforms; unions against:
Baltimore
Mayor Stephanie Rawlings-Blake has proposed several changes to the
pension system for police officers and firefighters.
The city
faces a $121 million budget deficit, and that number would balloon to
$185 million without pension reform. Rawlings-Blake says the city can't
afford the cost of maintaining the current system.
Under the mayor's plan, officers and
firefighters would be forced to work 25 years, instead of 20, before
they can retire with full pension benefits - about half their salary.
The change would apply to officers and firefighters with less than 15
years of service.
The city police union opposes that change,
saying it violates officers' contracts. The police and firefighters'
unions have sued the city over its handling of the pension system.
The
unions are not taking this sitting down. Julie Scharper of the
Baltimore Sun reports,
Police, fire unions sue city over pension:
Baltimore's
police and firefighters' unions filed a lawsuit against the city in
federal court Thursday, contending that officials "knowingly
underfunded" their pension plan over the past decade — ignoring the
advice of financial experts hired by the city.
The lawsuit
threatens to introduce a protracted and costly legal battle into the
emotionally charged debate about altering the retirement benefits paid
to public safety officers.
If officials do not make drastic
changes to the pension system by July 1, the city will owe $65 million
that it cannot pay.
Union leaders, who stress the dangerous and
grueling nature of police and fire work, have resisted the pension
changes that the city has proposed, saying they constitute a violation
of their contract.
"Some in
city government are portraying this as a crisis," said Bob Sledgeski,
president of the firefighters union. "This has been long, ongoing
neglect on the part of the city to follow their own experts' advice.
That's not an accident, and 10 years does not a crisis make."
City Council members, led by Helen L. Holton, chairwoman of the
taxation and finance committee, have been scrambling for a solution to
the pension problem before the fiscal year ends June 30.
Scores of police and firefighters have
threatened to resign or retire if their benefits are significantly
diminished. But city officials, grappling with a $121 million overall
budget shortfall, say they cannot pay much more than the currently
allotted $101 million pension contribution, although the city's
required obligations would be about $166 million if no changes are made
in the way benefits are calculated.
The lawsuit, filed
Thursday, names the mayor and City Council, pension board members, city
finance director Edward J. Gallagher and public safety pension system
director Thomas P. Taneyhill as defendants. In it, the unions allege
that from 2003 to 2008, pension board members and city officials
disregarded repeated recommendations by actuaries to reduce the pension
fund's assumed rate of return because it would have forced the city to
contribute millions more to the plan.
Is this
one of many lawsuits over mismanaged pensions? I think so. But the
reality is that both the city and the unions will need to concede
something as they try to resolve this issue. During times of fiscal
restraint, there isn't much of a choice.
»
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The issue with any valuation of pensions, mutual funds, etc. is that people contributed real CASH and that cash no longer exists.
Instead it is shares of companies and bonds, etc.
Given the obvious sovereign debt crisis and the fact that these debts will not be repaid, we are in the middle (or beginning) of a massive monetary reorganization.
No one can accurately state how funded or unfunded a pension is or, actually, what a particular pension fund is worth simply because the values the pension plans/mutual funds publish as being their "current value" is stated in terms of "dollars."
But the pension plan/mutual fund does not hold "dollars,". And if they actually tried to convert to dollars, they would find that all that "cash" that was invested simply is not there.
Yeah, this sounds trite and uninformed until you think about it and ask yourself what is a share of Apple worth against the backdrop of a sovereign debt crisis and a historical context that suggests Apple isn't really going to dominate the world, has about $30/share cash and doesn't pay a dividend--and the local grocery won't let you pay for anything with a share certificate.
However much some will hate to admit it, the unions are correct: this is a contractual violation. Would anyone here not object to their company unilaterally altering the terms of their pension plan or 401k? "Remember that money we promised you to induce you to become our employee, and to ensure your loyalty? Too bad!"
I absolutely disagree. Changing pension formulas happens on a regular basis in private companies. I had my own cash-balance plan halted about two years ago. Of course, my company is obligated to pay anything accrued (or vested, as I left recently) under the old formula, but going forward I wouldn't be accruing new benefits.
The same thing applies here. The unions have a case if the cities are unilaterally changing the terms of vested payouts. If instead, the cities are changing the future formula, I see no problem at all. Unless it's on paper, the contractual "right" to no pay cuts or benefit changes is an unreasonable assumption.
I'd feel a lot more for these folks if they were raking in salaries commensurate with the private sector. However, Vallejo, which declared bankruptcy last year under the weight of pension and salary obligations to policemen and firefighters, still pays firefighters on average $180,000 per year (net of pension and medical benefits) and hasn't adjusted the 3 at 50 formula for existing hires. No, I don't think these are jobs monkeys could do (although I could care less whether paramilitary-style SWAT drug raids require skill as they're a senselessly overused, violent, confrontational tactic), but these guys make as much as plenty of doctors, lawyers and professors.
Are you kidding? That kind of thing has been happening in the private sector since there's been a private sector! Why should these lazy bastards get a pass?
Well if contractually the US government had to pay AIG bonuses, the unions have a case fighting for their rights.
Police and firefighters are egregiously overcompensated. A monkey could do these jobs. Fire them all, cash out their pensions and tell them to open IRAs like everyone else. Then hire a bunch of replacements at a market rate (would probably be about 1/4 of what we are paying now).
These government employees are just like the rest - they work very little and get paid very much. They are sheltered from market forces by their unions. The only difference is that they get to hype the phony "hero" aspect of their jobs and enjoy free Hollywood PR, so taxpayers have tended to give them a pass. I hope that is com ing to an end.
Literally, a monkey could do these jobs.
"Literally, a monkey could do these jobs."
Really? Have you ever been with cops going into a drug raid or firefighters fighting a blaze while trying to save lives? What a silly, ignorant and insulting comment.
As someone who can't even begin to count the number of family and friends employed as NYPD officers and FDNY firefighters, a monkey actually could do these jobs
A monkey could pump solars 24/7, too.
Merkel's having similar problems with Opel’s unions.
And wait till unions hit China:
http://www.theglobeandmail.com/report-on-business/chinese-labour-unrest-spreads/article1597361/
I wonder if any of the proposed adjustments to pensions involve any changes for those already retired. The only "remedies" to the public pension problem ithat I've seen is forcing those already working to pay more and/or accept reductions in benefits. Why aren't current retirees being asked to shoulder some of the pain? I would also like to add that California seems to be a special case -- most government workers don't make that kind of money or get that generous a pension.
It's a super-sticky issue. I'm no lawyer, but I seem to recall that there is legislation from long ago that essentially makes pension payments sacrosanct (Leo?).
While I totally agree with the posters saying you can't get blood from a stone, my feeling is that it will actually take new legislation to undo this particular knot. The sooner it lands in the courts, the better--this ridiculous situation cannot be allowed to fester.
BTW, the "hazardous" nature of these occupations is also a canard that needs to be put to rest. Being a cop is roughly as dangerous as being a mail carrier, and quite a bit less dangerous than the pizza delivery business. It's pretty fucking hard to argue with someone who carries the full authority of the State and is empowered and encouraged to use lethal force with impunity, whenever the spirit moves them...
Pensions have a problem because the expected long term return from investments has been pegged at 8% plus or minus. Inherent in that estimate is long term return from equities of 10%, private equity of 10 to 15%, and bonds flattish.
I think we can see the difficulty in the current (post 2008) environment of achieving those returns. Today maybe 2% to 3% for bonds, flat for equities and high single digits for PE. Think the new number should be 5% to 6%.
A second problem I have noticed is unions tend to use "union approved" consultants, who tend to steer monies toward "union favored" managers. If you look at the roster of their typical managers, it makes one scratch one's head. I think you know what I mean.
"Union approved", meaning the head cheeses at these unions got their kickbacks from these pension consultants/charlatans peddling crappy advice. It's revolting seeing how many bad consultants are winning mandates in the US. Can anyone spell RICO?!?!?
The truth is the promised pensions and benefits cannot be paid, and thus will not be paid. Everything else is a footnote to that fundamental fact. Painful confrontations with reality, dead ahead. Followed by various degrees of grieving before acceptance.
"Painful confrontations with reality, dead ahead."
Right Ned,
Reality, (the not made for TV version) will not be widely accepted.
"the unions allege that from 2003 to 2008, pension board members and city officials disregarded repeated recommendations by actuaries to reduce the pension fund's assumed rate of return because it would have forced the city to contribute millions more to the plan."
I need more data here. Were the actuaries the ones the city retained, or some other outsider? Did the city have surpluses that could've gone towards the pensions from '03-'08? I know for sure that the city's tax revenues have been in the dumper for at least the last 3 years.
It's not clear, but I am assuming that retiring w/50% of pay would be the pensioner's last year of pay and not 50% of the avg salary over that time, which could be quite a difference.
What is certain is that within the 20 years that worker is there, the city has to be able to make investments that will return no less than 50% of final salary for that worker for the rest of his life--which is very significant since this guy's "retiring" at about age 45-50, which means a retirement burden of some 20-30 years. I can see why private businesses dumped defined benefits as soon as they could.
My question is: if the police/firefighters win, what do they really get? Are there funds they can expropriate from the city back into the pension funds? Is there E&O insurance for stupid politicians? All city workers would be against any budget cuts, since those would probably include firing workers. What then, raise taxes? Sales taxes w/in the city would be defeated by folks buying elsewhere. Property taxes based on out of whack assessments would cause flight from the city (like that's not already happening). Would the city be able to 'renegotiate' the contracts via a bankruptcy court?
Whether they have a 'case' won't be an issue after municipal bankruptcy. You can't squeeze water from a stone.
There will probably be one additional step before the "water from a stone" point. Judges will force municipalities to raise taxes to whatever level is necessary to fund public worker pay and pensions. Then the tax base collapses.
Right. Well said.
The Millionaire Cop Next Door | Forbes | 06.01.10
It is said that government workers now make, on average, 30% more than private sector workers. Put that fantasy aside. It far underestimates the real figures. By my calculations, government workers make more than twice as much. Government workers are America's fastest-growing millionaires.
Doubt it? Then ask yourself: What is the net present value of an $80,000 annual pension payout with additional full health benefits? Working backward, the total NPV would depend on expected returns of a basket of safe investments--blue chip stocks, dividends and U.S. Treasury bonds.
Investment pros like my friend Barry Glassman say 4% is a reasonable return today. That's a pitiful yield, isn't it? It is sure to disappoint the scores of millions of baby boomers who will soon enter retirement with nothing more than their desiccated 401(k)s, down 30% on average from 30 months ago, and a bit of Social Security.
Based on this small but unfortunately realistic 4% return, an $80,000 annual pension payout implies a rather large pot of money behind it--$2 million, to be precise.
That's a lot. One might guess that a $2 million stash would be in the 95th percentile for the 77 million baby boomers who will soon face retirement.
That $2 million also happens to be the implied booty of your average California policeman who retires at age 55. Typical cities in California have a police officer's retirement plan that works as follows: 3% at 50. As the North County Times of Carlsbad, Calif., explains:
That does not include health benefits, which might push real retirement compensation close to $100,000 a year.
Who are America's fastest-growing class of millionaires? They are police officers, firefighters, teachers and federal bureaucrats who, unless things change drastically, will be paid something near their full salaries every year--until death--after retiring in their mid-50s. That is equivalent to a retirement sum worth millions of dollars.
If you further ask the question: How much salary would it take to live, save a build a $2 million stash over a 30-year career, the answer would be: somewhere close to $75,000 more than the nominal salary, if you include all the tax bites associated with earning, saving and investing money.
In other words, if a police officer, firefighter, teacher or federal bureaucrat is making $75,000 a year, she is effectively making twice that amount. …
http://blogs.forbes.com/digitalrules/2010/06/the-millionaire-cop-next-door/
Sickening...
"the average federal bureaucrat makes twice as much as the average working taxpayer. Add the value of benefits like health care and pensions, and the gap grows even bigger."
http://www.washingtonexaminer.com/opinion/Want-to-get-rich_-Work-for-fed...
Meet The 8,074 New York Transit Workers Who Earn More Than $100,000http://www.businessinsider.com/mta-salaries-2010-6
Are Government Workers Underpaid? No (greater total compensation than private-sector workers)
http://www.freerepublic.com/focus/f-news/2530841/posts
Good idea, quit your over paid gravy train Goverment Job and sue the bastages for all they are worth.... NOTHING is what they are worth because they are under funded. Now you have no job and no pension.
That was my thought, go ahead and walk then lose in court because it's a funding issue. Can you sue someone (and win) for ineptitude? Get in line. I'm sure there's plenty of people who would like to be cops right now, get a gun, chase bad guys in a cool car and if you survive retire at 50. Last I heard there was a little unemployment problem?
The teacher's union will be next...
Leo, I think I would have appreciated more pungent editorial comment on your part in this article. That would be more in keeping with the tone of ZH. You essentially laid out the facts and in essence did not take a position.
You have highlighted this problem before, yet I imagine that every situation is different. How did Baltimore get to this point? Who is responsible? How should they solve it?
Mitchman
Read Shedlock he despises unions.
http://globaleconomicanalysis.blogspot.com/
True, I am too tired these days to get into long winded commentaries. The problems at most of these US pension funds is essentially the same. Inexperienced or incompetent staff, taking bad advice from crummy pension consultants who never managed a dime of pension monies. Focus is on obtaining some ridiculous return instead of protecting and preserving wealth.
Having said this, the solutions require tough political decisions, and everyone, including the unions should be ready and willing to concede something. The unions also have to take responsibility for the mismanagement of the pension fund. There are serious governance gaps at these funds, and stakeholders must share responsibility.
It would be great, when you do have the time, to see you address the leadership and structural issues in a longer, more thorough piece like so many of the others that we see on Zh. It may not be possible for you to do so because of your "real" job, but the system truly needs leadership and restructuring and your voice should be heard.
Thanks for your reply. If you ever want to have a serious discussion about solars. I am happy to have one since I work financing the industry.
Thanks, will take you up on that offer. Cheers.
Every municipality is in the same boat as Baltimore vis-a-vias public employee pensions....union lawsuits, protests and strikes will all be part of the USA's "road to Greece"
I was thinking the same thing. What happens when everyone sues a bankrupt entity? That is like suing the homeless that collect rat droppings...you get balls of lint if you are lucky.
That is like suing the homeless that collect rat droppings...you get balls of lint if you are lucky.
Say Wha???