Federal, State and Local Government Pension and Health Care Plans
Editor's Note- This article will be devoted to dealing with only this issue for governmental pension and health care plans. To see more on this issue as it relates to corporate America, please see our article, "Corporate Retiree's Health-Care and Pension Plans"
Because of the importance of the issue of the deficit in the Pension Benefits Guaranty Corporation and the growing numbers of companies that are walking away from their pension obligation we have started an article on "The Pension Benefits Guaranty Corporation (PBGC) and Corporate Bankruptcies".
(1/25/12)- Just as corporate America switched from defined benefits pension plans to 401(k) plans for its employees, federal, state and municipal governments are making the same changes as they attempt to lower their pension obligations.
The latest state to go down this path is New York, where Governor Mario Cuomo (Dem.) presented such a plan as part of his 2012-2013 budget. His proposed switch could save the government $79 billion over 30 years.
Rhode Island was the most recent state to move part of its work force into 401(k) plans. State employees would be given the option of contributing at least 4% of their salary, up to 7% if another 3% is matched by the state. They could cash out earlier than other employees who have to work as long as 10 years before becoming eligible for benefits.
The governor also proposed a new benefit tier that would raise the minimum retirement age to 65 from 62 and require workers with higher salaries to contribute as much as 6% into their plans. Most workers now pay a range of zero to 3%.
(12/26/11)- Jefferson County, Alabama and Central Falls, R.I. have gone down two entirely different paths in their dealings with their respective bondholders, and it has meaningful implications for their retirees. Both are now undergoing bankruptcy proceedings under Chapter 9 of the Bankruptcy Code, but other than that similarity, their methodology of dealing with its creditors is sharply different.
Jefferson County has determined that the bondholders of some of the community's debt obligations will not be paid when it is due, even though the bonds are "general obligation" bonds. General obligation bonds are deemed almost sacrosanct, so when looking back at history, there have been very few general obligation bond defaults.
In reality, the bondholders really hold "warrants" not bonds, so this presents an interesting diversion in the matter.
In the case of Central Falls, R.I., retired firefighters and police officers voted in favor of cuts to their pensions, which amounted to about 25% over the next five years. A minimum of 75 retirees had to support the proposed cuts, but at last count at least 82 of them had approved the decreases.
Rhode Island state legislators had passed a law earlier this year that put bondholders first in line among all creditors of municipalities in the state. The retirees agreed not to challenge the state law as part of the agreement.
The deal with the retirees included a proviso that called for the state to appropriate about $2.6 million to help them deal with their pension shortfalls. Without the state aid, the cuts would be as much as 55% for many of the retirees. Their pension benefits vary widely, from about $4,000 to $46,000 a year, depending on their final salary, years of service and other factors.
Central Falls' retirees do not participate in Social Security.
The new agreement also reduces the annual cost-of-living adjustments and requires retirees to start contributing towards the cost of their health-care benefits.
There are those who argue that the Central Falls cut in pension benefits is the better route to follow, because if you go the Jefferson County route, the interest rate costs for all state and local borrowing will go up as a result of the "greater risk" that bondholders are now faced with.
(11/23/11)- Both houses of the Rhode Island legislature, meeting in a special session on November 17th passed a pension overhaul bill that will rein in state workers' benefit costs, and will even effect the pensions of retired workers.
Earlier this year, the state had enacted 4 milder pension changes, leaving retirees unscathed. Public employees' unions have sued, arguing that those previous cuts were illegal, and they are likely to challenge the new cuts as well.
In Detroit, Mayor Dave Bing called for drastic changes in pension and health care benefits for municipal workers citing the dire financial straits that the city found itself in. Layoffs and give-backs will be required or else a state emergency board will take over operations of the city. Increased premiums for health care coverage will also be needed.
(11/2/11)- State tax revenue climbed 10.8% during the quarter ended in June according to a report released recently by the Nelson A. Rockefeller Institute of Government at the State University of New York at Albany. Even with the increase, tax revenues still are 5.5% less than for the same period in 2008. That is the major reason why you continue to see layoffs and cutbacks on the state governmental level.
Tax increases, such as new or higher taxes and fees have added about $8 billion, or 3.5% to the second quarters numbers.
State sales-tax collections increased 2.9% in the second quarter, compared with the same quarter last year, which is less than half the first-quarter pace, and the slowest growth rate since the first quarter of 2010.
Local property taxes fell 1% in the second quarter compared with the same quarter in 2010, the third quarterly decline in a row.
(10/12/11)- The results of a survey that was recently released by the National League of Cities shows that for the second year in a row, property tax collections are projected to fall. The estimated drop this year of 3.7% is a result of lower tax assessments catching up with the devastated real estate market.
Sales tax revenues are projected to increase this year, according to the survey, but income tax collections are also expected to drop as unemployment, lower wages and stock market weakness show up negatively for the tax system revenue side of the equation.
Nearly one third of the cities are laying off workers, and more than half have canceled or delayed infrastructure projects. This will be the 5th straight year of overall declining revenues for the cities.
One of the report's authors, Christopher W. Hoene, director of the Center for Research and Innovation at the league of cities, said that it is a question that is still up in the air as to whether or not the worst is over. "The question is, are we going into the low point or are we emerging out of it".
(9/7/11)- A lawsuit was filed in federal court on behalf of New Jersey's hundreds of thousands of teachers, firemen, police officers, state and local employees challenging the law signed by Governor John Christie in June. The new law required the workers to contribute more annually to their pension fund, eliminated for the foreseeable future automatic cost-of-living increases, and required newly hired employees to work longer before being entitled to full pension benefits.
The new law also halted temporarily the unions' ability to bargain health-care benefits for its members by creating a panel to set policies, which will likely cost the majority of workers more money. In affect, the new law abrogated the contractual rights won by the employees through collective bargaining procedures with the state over the years.
Financial experts estimate that New Jersey has under-funded its pension obligations by about 38%, which is the major reason the fund is in so much difficulty.
With both Ohio and Wisconsin passing similar legislation, this is just the first salvo in a legal battle that will resonate through the legal system in the coming years.
(8/11/11)- Detroit city officials announced that the city had reached an agreement with union officials representing it police officers that confirms an arbitrators ruling in April under which 1,500 higher ranking police and firefighters would no longer get a cost-of-living adjustment to their benefits and would see a cut in the rate at which they earn benefits.
These same city official estimate that the agreement would save the city about $100 million over the next 5 years.
Detroit spent about 25% of its $1.2 billion general fund this year on pensions for union and nonunion members. The city currently has 11,000 workers and 22,000 retirees. It reduced its work force by 10% in the last four years, while its pension and health-care costs rose by 40%.
(7/26/11)- Earlier this year, pension funds in Colorado and Minnesota curtailed annual-cost-of-living increases as called for under their pension agreements. In the case of the Colorado pension fund, the bill reduced the pension system's annual-cost-of-living increase from a fixed rate of 3.5% to a maximum of 2%. The new law also increased the amount that both the employees and employers had to contribute to the pension plan. There was no increase at all for retirees.
So far state court judges in both Colorado and Minnesota have upheld the curtailed annual-cost-of-living increases. More states have indicated that they intend to go down this path.
The average state pension system has 1.9 current workers per retiree, according to the National Association of State Retirement Administrators, a trade group for directors of statewide retirement systems.
In Rhode Island, 67 cents of every $1 contributed to the pension system by employees goes to cover the fund's $6.3 billion unfunded liability, not to their retirement according to Gina Raimondo who oversees the state's $6.4 billion pension fund.
(5/4/11)-Connecticut officials estimated last week that the state surplus for the current year was growing by $300 million and the revenue estimates for the next fiscal year are up by $282 million.
The U.S. Treasury now projects that it will only have to borrow $142 billion between the April through June quarter instead of the earlier amount it had projected which was $299 billion. The present debt ceiling, which is set at $14.29 trillion, will be reached on May 16th.
Because of this increased income, the Treasury will, through extra ordinary measures, be able to hold off through August, instead of its earlier estimate of July before breaching this level. These steps include suspending programs under which the government borrows money from pension funds for federal employees and then pays interest to these funds.
Once a new debt ceiling has been set, this money plus interest must be repaid. The increased revenues from tax receipts is further indication that the country is gradually regaining its footing from the recession of 2008.
(5/3/11)- As cash strapped state, city and local officials look for ways to effectuate savings, retirement and pension plan cutbacks are coming to the forefront. Just as corporate America has created two-tier pension plans for its workers, and has switched from defined-benefit pension plans to 401(k )plans for their employees, government officials are looking to make the same type of changes to pension plans for their employees.
An arbitrator in Detroit, Thomas W. Brookover recently ruled that the city of Detroit could legally reduce the rate at which police lieutenants and sergeants earn pension benefits from 2.5% of their salary per year to 2.1%. Please keep in mind that the average pension for retired police officers in Detroit is not especially high at $28,501 per year.
Mayor Dave Bing of Detroit said that he would seek to have new employees covered by 401(k) plans instead of defined benefit plans, which are more costly to the city.
The city of Oakland California laid off one-tenth of its police force last year after failing to win concessions on pension costs.
(4/29/11)- According to the latest data from the Pew Center on the States, on average, state pension plans had 75% of the assets needed to cover the long-term benefits owed to government workers, based on fiscal-2010 data from 16 states that had reported so far. The average state pension fund was 78% funded in fiscal 2009, based on the numbers for all 50 states, compared with 84% in fiscal 2008 according to the Pew data.
New York was 101% funded, the only state with a pension surplus in fiscal 2009, while Illinois, at 51%, was the least funded. In 2010, at least 19 states passed legislation to reduce pension benefits, and several state lawmakers have proposed additional cutbacks this year.
Asset values at state and local pension funds increased 35% from March 31, 2009, when the Dow Jones was at its low point up through the end of 2010, according to the National Association of State Retirement Administrators. The Dow is up about another 8% this year, so slowly but surely the worst of the shortfall for pension plans may be behind them.
(10/13/10)- Two recent news headlines brought to the forefront some of the difficulties faced by federal, state and local governments, and how they are dealing with the problem. The September monthly employment numbers from the Labor Department showed a decline of 159,000 government employees, and a total unemployment rate of 9.6%.
The governments are shedding their employees in order to be able to better deal with the massive deficits they face.
The second news item contained the fact that the State of California finally passed its $126 billion dollar budget after being late by 99 days in doing so. That state is faced with a $19 billion deficit. The deal to pass the budget included changes in the states pension system, which has become a major burden for California.
Under the change, employees hired after November 1 would receive pension benefits set to pre-1999 levels, the year in which the state gave huge pension benefits increase to its employees.Governor Arnold Schwarzenegger signed the budget, which was 100 days late when he signed it.
(9/17/10)- Last year, Minnesota replaced its previous pension formula, which increased retiree benefits annually based on investment gains and inflation with a flat 2.5% increase.
In May, the state lowered that increase for some retirees and eliminated it for others, until the pension plans are 90% funded (a level that could take decades to reach). A Minnesota court is considering a lawsuit brought by some of the state's current retirees who are receiving benefits under the older pension formulas, seeking class- action status. In the lawsuit, the retirees are seeking to have the revamped plan declared illegal as a violation of their rights under the old plan.
Similar cases are pending in South Dakota and Colorado.
(8/21/10)- The Securities and Exchange Commission (SEC) accused the state of New Jersey of securities fraud for falsely claiming it had been properly funding the state's two largest pension funds while selling billions of dollars of state bonds.
This was the first time an SEC action was instituted against a state, while the only other suit was against the city of San Diego over the handling of a public pension fund. The commission had announced in January that it had set up a special unit looking into public pension disclosures
In accepting a cease-and-desist order to settle the matter, the state accepted without admitting or denying the findings. No penalties were imposed, No individuals were named in the order.
The action involved 79 separate bond offerings totaling $26 billion form 2001 to 2007. The two pension funds cited in the action were the $34 billion Teachers' Pension and Annuity Fund and the $28 billion Public Employees Retirement System. There are currently about 689,000 employees and retirees covered under the New Jersey plans
There was a surplus in the plan in 2003, which has now grown to an under-funding of about $3.8 billion now.
The commission said that from 2001 to 2007, the state claimed to have money set aside in a " benefit enhancement fund' as part of a "five-year plan" to pay for new benefits for teachers and general state employees. In fact, the fund was an accounting illusion.
"Hopefully, it (this action) will send a message to other states or local governments, "Elaine C. Greenberg, chief of the SEC's municipal securities and public pensions unit, said in an interview
A New York Times article in April 2007 by Mary Williams Walsh brought the matter to the attention of the authorities.
(7/8/10)- With many state and local governments finally facing up to the fact that their pension obligations are overwhelming, many of them are taking steps to deal with the problem.
Unions and employees' associations in states such as Vermont, Iowa, Minnesota, Colorado, Wyoming and California have supported rollbacks not just for new hirees, but for current and retiree union members also, in order to try to avoid furloughs, layoffs and even insolvency for their pension plans.
In California, a recent agreement between the state and 4 of its unions curtailed benefits for about 37,000 of its workers.
The state legislatures have attempted to get higher monthly contributions from employees to their pension plans, a later retirement age and lower cost-of-living adjustments for current and retired workers.
In Mississippi, state workers will be contributing 9% of monthly-earned wages, up from 7.25% beginning July 1. Nine state legislatures have voted to reduce benefits, increase monthly contributions or both for current workers and in some cases, retirees also.
(6/28/10)- Can state and municipal pension funds legally reduce pension benefits that were promised in writing to their retirees? The answer to this question that is now pending before the court system will have far reaching implications for all state and municipal pension funds.
Pension funds are faced with the possibility of not having enough funding to pay the benefits that were promised to their retirees. One way to deal with this situation has been to reduce the benefits for newly hired workers, and also to increase the amount that all workers must contribute to their pension funds.
Earlier this year, pension funds in Colorado and Minnesota curtailed annual-cost-of-living increases as called for under their pension agreements. In the case of the Colorado pension fund, the bill reduced the pension system's annual-cost-of-living increase from a fixed rate of 3.5% to a maximum of 2%. The new law also increased the amount that both the employees and employers had to contribute to the pension plan. There was no increase at all for retirees.
On a federal level, there was no increase in social security payments to beneficiaries this year, since the formula for the increase actually showed that there should have been a decrease in payments.
The Minnesota lawsuit came after the state legislature passed a bill in May that reduced retirement benefits from a 2.5% annual increase to between 1% and 2% depending on the pension fund.
Both Colorado and Minnesota have been hit with lawsuits by retirees, so we will just have to wait and see how this matter plays out.
(4/17/10)- According to a study by the Center for State and Local Government Excellence and the Center for Retirement Research only 43% of the state and local pension plans had assets totaling at least 80% of their liabilities, compared with 54% in 2008.
Experts recommend public sector pensions maintain a funding level of at least 80%. The study found that this was the lowest level of funding in the last 15 years. Of 71 pension plans that submitted contribution figures so far, 39 reported not paying their full pension bill.
New Jersey's governor has proposed not making any of the state's $3 billion contribution because of the state's $11 billion deficit. Virginia has proposed contributing only $1.5 billion of its $2.2 billion contribution and Connecticut's Governor Jodi Rell is delaying contributing its $100 million required amount.
(3/24/08)- As of last week, at least 25 states were expecting budget shortfalls for the 2009 fiscal year, according to the Center on Budget and Policy Priorities, a liberal research group in Washington that tracks state budgets. It is the largest number since 2002, when 37 states were forced to cut their budgets.
The largest of the state budget deficits is faced by California, which is looking at an estimated $14.5 billion plus deficit. The outlook is for these deficits to increase because of the combination of weak consumer spending resulting in lower sales tax revenues; weaker real estate markets resulting in lower property tax revenues coming into state treasuries; a lower stock market in which the Dow is down about 8% as of this date which in turn means lower capital gains for most individuals and the precipitous drop in earnings from companies in the financial sector of the economy.
New Hampshire, which has never had a state income tax is considering imposing one for the first time in its history. Most states are looking at cuts in their spending, with education costs in the forefront of the cutting process. Many of the services to the residents of the community will be cut back on to a greater extent.
It does not take a wise guru to recognize the fact, that just as corporate America has cut back on the health-care benefits, and retirement plan benefits of their employees, the federal, state and local governments will also be making some severe cuts in these areas also.
(3/13/08)- Corporate America has had to face up to the under-funding of companies' pension and health care plans, and whether they like it or not, the same is now true for federal, state and municipal plans.
At the request of Senators Max Baucus, Democrat of Montana, and Charles E. Grassley, Republican of Iowa, the chairman and the ranking Republican of the Senate Finance Committee, the Government Accountability Office (GAO) looked at a sample of about 70 public retirement and health care plans.
Congress has very little authority over how state and municipal governments handle their pension accounts, but in the hope or avoiding a disaster before it occurs, this matter is being looked into.
As a practical matter the actuaries who set the "assumed rate of return" for a pension plan play a key role in determining whether or not a pension plan has a realistic chance of being properly funded. One of the problems with pension fund "assumed rate of returns" is that if a higher rate is assumed, the lower the present contribution is that has to be paid into the plan. This potential conflict of interest is true whether we are looking at a corporate pension plan or a governmental pension plan.
According to the report from the GAO less than half of the states are setting aside their required yearly contribution amounts. Some of the states that have been failing to contribute what their auditors said was required to be contributed are New Jersey, Illinois, Pennsylvania and Kentucky.
In some states, including California and New York, public employees have successfully sued to force governors and state legislators to appropriate the proper amount.
Unlike pensions, which are funded in advance, health care for retired public workers is handled on a pay-as-you go basis. This methodology will lead to disasters down the road. With health care costs rising, the GAO predicted that health costs could start to snowball causing "daunting fiscal challenges."
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By Allan Rubin
updated January 25, 2012
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