A pension war is brewing, and it's likely to pit state and municipal employees against citizens who foot the bill for government pension plans with their state tax dollars.
While employees of most companies have watched their 401(k) plans, and their retirement hopes, shrivel in the bear market, public employees have been smiling. They've been promised lucrative pensions, which have increased over the years as cities and states negotiated labor contracts. Now those public employees are about to find out they are not immune from the ravages of the stock market.
The Center for Retirement Research at Boston College estimates that state pension plans have losses greater than $865 billion, a loss of nearly 40 percent in just the past year. Add those current losses to the fact that many municipalities have gotten away with under-funding those pension plans for years, and you have trouble brewing.
Now, the double-whammy of stock-market decline and lower tax revenue in this recession is causing state and local governments to take a second look at how they will fund those promises.
The options are few. Tax hikes, whether income or property or sales tax increases, will be hard to pass in this economic slowdown, as well as counterproductive. Will the voters stand for cutbacks in services, from snow removal to education funding? Or will cities ask public employees to make up the gap with a combination of benefit cutbacks or increased plan contributions?
All those choices are political dynamite, which may explain why state legislatures have been so slow to face reality.
And they're forecasting that states are unlikely to be able to keep those promises: "We conservatively predict a 50% chance of aggregate under-funding greater than $750 billion and a 25 percent chance of at least $1.75 trillion in under-funding."
The site has highlighted losses in California's public pension plan (CalPERS), which invested heavily in residential real estate, a mistake that wiped out nearly a third of the state employees' pension plan. Bad planning and huge promises helped force the city of Vallejo, California, into an unusual Chapter 9 bankruptcy last spring, partly to renegotiate labor contracts and pension promises.
It's a hot issue in every state. Kentucky reports a $30 billion gap in pension funding. Connecticut and Massachusetts have highly publicized state budget woes. And the stories keep coming. One of this week's PensionTsunami headlines: "Macomb County, Michigan, faces layoffs without $10 million in cuts to pensions and health benefits!"
Pension-accounting rules add to the problem. The riskier the assets in the pension plan (stocks are considered riskier than bonds), the higher the anticipated return they can use to make the plans look solvent. That encouraged many plans to become overweight in equities in the past few years.
The little-known Chapter 9 of the bankruptcy code allows cities to reorganize and renegotiate all contracts and promises. Chicago attorney James Spiotto of Chapman and Cutler says the law can be murky: "There are varying levels of protection, ranging from strict constitutional rights to general statutory provisions, that might allow for some renegotiation of benefit levels in light of adverse conditions affecting the pension fund."
For the best rates on CDs, mortgages, savings, credit cards and more, enter your ZIP code at BankingMyWay.com.