The pensions problem extends beyond Atlanta (Updated)

Kasim Reed has been quite active since taking office as Atlanta’s mayor last month, and one of the most important task forces he put in place — on the city’s exploding pension costs — releases its first public report today. There’s every indication that Reed understands this knot has to be untangled before the city can act substantially on any other area.

The panel will report on the current state of the city’s pension plans and will outline some possible paths forward. It will not, however, make recommendations about those possible paths forward. That’s a political question that has to be decided by Reed and the City Council.

That debate will certainly be a raucous one, with taxpayers pushing for reducing the city’s commitments while employees try to keep as much of what they have as possible. The taxpayers are right, because the city simply can’t keep the promises it made to employees when it increased benefits in 2001 and 2005.

Atlanta is far from the only city having this fight. Every day I get an email from PensionTsunami.com with references to news stories about public pension problems, and every single day there are about a dozen links. Most of them are in California (in part because that’s where PensionTsunami.com is based) but the problem is widespread.

Reason.com’s Nick Gillespie explains that it’s no coincidence that so many governments happened to get their pension plans wrong. The problem is with the model:

The basic bargain about public-sector work, hammered out decades ago in a very different world, is supposed to be: You give up status, upward possibility, and compensation now for job security and payoffs later in retirement. That has never really been true and is certainly less so now. Yes, public-sector jobs ofer more security than their private-sector counterparts, but compensation is also higher on average and the benefits, especially in retirement are gold-plated to the nines. That bargain, which is unsustainable economically, is going to hit the rocks. The only question is: Who is going to pay? Taxpayers or the public-sector workers?

I don’t have numbers on total compensati0n for Atlanta’s police, firefighters and general employees (the city has a separate plan for each group). But I have written before detailing that the city’s pensions are richer than even those for retired Marines, and that pension benefits are the least flexible form of compensation and thus the biggest strain on the budget.

Check back later to see what the panel reports. Update following this afternoon’s meeting, in bullet-point form:

  • The city of Atlanta has been putting 13 percent more each year, for the past 10 years, into its three pension funds. In spite of this, its unfunded liabilities have been growing by 21 percent a year — from $321 million in 2001 to $1.5 billion in 2009.
  • If nothing is changed, within five years the city will be spending more on employee pensions than it does on police (currently is the largest category of expense).
  • The unfunded liability is even larger — $3 billion — if we add the potential liability for retirees’ health benefits. Government accounting rules may soon change to require cities to recognize this.
  • If that accounting change had been in place for 2009, the city’s required annual payout for retirees’ benefits would have soared from the already sky-high $145 million a year (20 percent of the overall budget) to $239 million, or almost half the budget.
  • The growth in annual pension payments has occurred in large part because of poor investment performance (which accounts for 27 percent of the increase). But well over half the increase is due to the benefit changes in 2001 and 2005 and the number of employees retiring earlier than previously assumed.
  • On that last point, the city’s actuaries previously assumed that only 47 percent of police officers and firefighters would retire by age 55; over the past 10 years, the actual rate has been 90 percent.

As I said before, the question now is how to move forward. These figures make it extremely difficult to see how Atlanta can keep the status quo on pensions and keep its head above water.

***

Find me on Facebook.

82 comments Add your comment

Kyle Wingfield

February 22nd, 2010
11:07 am

LA, dewstar and whoever else piles on from time to time: Consider this a pre-emptive warning:

The pointless bickering and name-calling has once again risen to intolerable levels. I have been a little slack in policing it lately because I’ve been spending a lot of time at the Legislature and away from my computer. With a two-week break from the session starting today, I am going to tighten things back up.

The first instance of name-calling will result in a one-week ban. Responding to name-calling, or celebrating someone else’s ban, will also result in a one-week ban.

I am mostly talking about pointless, irrelevant trash-talking which LA and dewstar specialize in…but I reserve the right to act on any other excessive bickering.

There has been a good bit of substantive exchange in between the taunts, and that’s what I want us to focus on here.

You have been warned.

Jess

February 22nd, 2010
11:30 am

Most government pension plans are “final pay” plans. This means when a person retires, their pension is a percent of their final pay. This is the most expensive and least controllable type of plan available. It opens the door to granting huge raises or promotions in the final year of work, and as is the case with government, to adjusting pensions outside the plan guidelines.

Most companies went to a career average pension system in the nineteen seventies because of their need to predict future cost, and because payments reflected ones entire career, not just the last year or few years of ones career. Of course as many now know, even these plans have now been largely replace by a 401K plan which is pay as you go from a companies point of view, and does not create a future unfunded liability.

Governments, however, are still stuck in the 1960s and 70s programs which are almost impossible to fund because actuaries have a devil of a time predicting cost. On top of that, most governments have funded their programs at the bare minimum, which means any economic downturn which affects their investments puts them in and underfunded position.

This is where most private and government plans are today….underfunded. I think it’s reasonable to assume that many of these plans will go belly up, and if rescued it will be with tax dollars. This plus the looming Social Security and Medicare collapses is why it scares people so when this government proposes huge new entitlements.

It’s an old saying, but appropriate……. if you find yourself in a hole the first thing you do is stop digging

Churchill's MOM

February 22nd, 2010
12:03 pm

Wing Boy, glad to see you retaking control of the board.. thanks..

JDC

February 22nd, 2010
12:45 pm

Why do I never hear about military pensions? The complaints always seem to be about people in civil service jobs. Does the military no longer operate with their 20/30 year retirement defined benefits plan? If so, why don’t we ever hear about plans to privatize that?

Williebkind

February 22nd, 2010
12:45 pm

Thats too bad Kyle! I love it when conservatives censure people’s disagreements because someone else thinks it is uncivilized. I guess rugged Americans have no place in your aristocracy! So I may be the first to receive the censorship by the Nobles that populate AJC.

Williebkind

February 22nd, 2010
12:47 pm

Or maybe you are not a conservative after all! A liberal in conservative clothing! The very ones that caused the conservatives to pull away from the republicans. Aha! A liberal in disguise!

Kyle Wingfield

February 22nd, 2010
12:53 pm

If anything, Williebkind, I think my reputation is probably that I let too much go, not that I censor too much. I’ll still allow the whole range of viewpoints. But there is nothing worthwhile about two readers bickering back and forth, discouraging others from participating.

Kyle Wingfield

February 22nd, 2010
12:54 pm

JDC: I’ve never seen any suggestion that military pensions are financially unsustainable.

TGT

February 22nd, 2010
12:57 pm

GM and Chrylser provide the lesson here:

General Motors’ and Chrysler’s obligation to nearly 700,000 retired employees’ healthcare and pension funds was the most significant contributing factor to their bankruptcy earlier this year. Do you think this conclusion is far reaching? Roger Lowenstein, columnist for Bloomberg News and author of the 2008 book While America Aged, doesn’t think so—at least when it comes to GM.

The thesis of Lowenstein’s book was that “many decades of inflated pension and health-care benefits forced the company to redirect its free cash flow to retired workers. As a result, there was little or nothing left for the shareholders.”

Lowenstein notes that, “In 2003, GM sold $13.5 billion in bonds—one of the biggest debt offerings ever—and plowed the money into its pension fund. Then in 2007, after the UAW went on strike, GM agreed to funnel more than $30 billion into a special trust for retiree health care.”

He concludes, “It was as if the company had secretly been sold and now belonged to the retired workers and their dependents.” Of course, with the Obama administration’s takeover of Chrysler and GM, Lowenstein’s “as if” proved all too literal. With the companies restructuring, the UAW now owns 17.5% of GM and 55% of Chrysler.

This is becoming an issue in virtually every state across our union. Consider N.J. Governor Christie’s recent comments on this matter:

“One state retiree, 49 years old, paid, over the course of his entire career, a total of $124,000 towards his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments over his life and nearly $500,000 for health care benefits — a total of $3.8m on a $120,000 investment. Is that fair?

A retired teacher paid $62,000 towards her pension and nothing, yes nothing, for full family medical, dental and vision coverage over her entire career. What will we pay her? $1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime. Is it “fair” for all of us and our children to have to pay for this excess?”

Kyle Wingfield

February 22nd, 2010
1:03 pm

Making matters worse, TGT, I’m told that Georgia is the only state that constitutionally forbids municipalities from declaring bankruptcy. So there is no structured legal process for cities and counties to work out these kinds of problems when they become crushing.

Williebkind

February 22nd, 2010
1:06 pm

I do believe that pensions except for the military should be market based. I mean investments like the 401k paid by the employee. Federal retirees make a butt load of money and have superior health benefits. I find this disturbing and needless. If you get paid a reasonable paycheck then you should afford your healthcare and retirement.

@@

February 22nd, 2010
1:13 pm

I dropped in on Paul Ryan’s site a coupl’a days ago. First words out of his mouth?

“The government cannot fulfill the promises it’s made to you.” I sighed with relief.

Of course, for those who rely on government for their meager existence, it would likely be bad news with grumbling to follow.

scrappy

February 22nd, 2010
1:18 pm

Has the city at any point, recently I guess, borrowed from the pension fund? Is this part of the reason for it being underfunded now?

neo-Carlinist

February 22nd, 2010
1:19 pm

does the expression “your mouth is writing checks your body cannot cover” mean anything? I know this is old news, who gave politicians the right to “trade” anything (as in, civil servants trade salary and status for job security and a sweet pension, etc.)? these pensions are nothing more than political patronage. the private sector workforace has seen its retirement (401K, Rot IRA, etc.) vaporized by malfeasance and unchecked risk taking on the part of corporate American, yet it is assumed (promised?) that public servants are not exposed to the same malfeasance and risk? give me a break.

TGT

February 22nd, 2010
1:21 pm

Kyle: Of course, the federal govt. is in pretty much the same position. The U.S. govt. is staring at an economic reckoning unlike anything the world has ever known. Before its bankruptcy, GM lost money on every car it made. Currently, the U.S. spends about $2 for every $1 it takes in. GM’s losses weren’t nearly this drastic.

Also, according to the 2009 Social Security and Medicare Trustees Report, the combined unfunded liability of these two programs has reached nearly $107 trillion in today’s dollars. Medicare and Social Security trust funds will be exhausted in 2017 and 2037, respectively.

The difference, of course, is that the federal govt. can print its own money, which it has been doing at an alarming rate.

Kyle Wingfield

February 22nd, 2010
1:23 pm

As far as I’m aware, scrappy, that has never happened. I’m fairly certain that taking money out of the city’s pension funds would be illegal.

The problem has been mostly twofold: a steep rise in retroactive benefits in the last decade, and the under-performance of the markets in the last 10 years relative to historical trends. Of course, each factor has exacerbated the other.

Williebkind

February 22nd, 2010
1:24 pm

neo-Carlinist: You may be right about the malfeasance but the (401K, Rot IRA, etc.) pensions are better aftwards than most state retirements but less than the federal retirements.

LA

February 22nd, 2010
1:25 pm

@@

Paul Ryan and Ron Paul should be the only Republicans to go debate Obama on health care. They are both doctors and have more experience in the field of medicine.

Williebkind

February 22nd, 2010
1:33 pm

LA:
It does not matter any more if you have performed well or presented the abilities to do the job well. It matters only if you have the degree. So anyone with a degree would qualify to debate the already shown displeasure of healthcare.

Jess

February 22nd, 2010
1:37 pm

Kyle,

The city cannot take money out of the pension fund, however they can essentially do the same thing by chronically funding the program at the minimum allowed in order to spend funds for other reasons.

LA

February 22nd, 2010
1:37 pm

Obama is sealing the democrat’s doom. Oh well….Obama has now surpassed Jimmy Carter as worst president ever.

White House: If GOP Filibusters, We’ll Pass Health Reform Via Reconciliation

http://theplumline.whorunsgov.com/health-care/white-house-if-gop-filibusters-well-pass-health-reform-via-reconciliation/

LA

February 22nd, 2010
1:38 pm

“It matters only if you have the degree.”

D’s get degrees. John Kerry, George Bush and Al Gore were all D students.

Hillbilly Deluxe

February 22nd, 2010
1:42 pm

TGT

February 22nd, 2010
1:43 pm

Here we go again. From Drudge today: Doomsday Predictions Tax Illinois.

From the article: “In order to implement those increases, the Civic Federation says unions should pay more toward their pensions and health care — but the unions aren’t interested.

‘Illinois’ fiscal crisis has been many years in the making. It was caused by more than 30 years of pension underfunding and many years of spending unfettered by the state’s shrinking revenue resources,’ said Msall.”

Skeptic

February 22nd, 2010
1:44 pm

Of course, the federal govt. is in pretty much the same position. The U.S. govt. is staring at an economic reckoning unlike anything the world has ever known.

That’s not quite true, especially with regard to pensions for Civil Service employees. The Federal Employee Retirement Plan (FERS) that went into effect in the 1980s is less than generous–it pays 1% of the average of the top three years’ salary for each year of creditible service–work 30 years and your annual pension is 30% of your average “high-three” salary. In fact, it’s a three-legged stool, consisting of the FERS pension, Social Security (to which federal employees under FERS contribute)and a 401k-like plan, called the Thrift Savings Plan.

I don’t know where the federal government stands with regard to the old pension plan, the Civil Service Retirement Plan, which is much more generous and does not require that an employee contribute to Social Security. But if Atlanta’s pension system was modeled on the current federal pension plan, Kasim Reed would not be having the funding problem he’s dealing with now.

scrappy

February 22nd, 2010
1:49 pm

Seems like the pension fund for the government employees is failing because of mismanagement by the government leaders. Failure to fully fund the pension program over the years, in order to spend money elsewhere, when they could have just not spent the money on waste programs. Add in the bad economy and this is the result.
Also seems similar to how the Enron employees lost their retirements due to leadership mismanagement.
I still feel like I am on the side of the employees who were promised this as part of the compensation package, and now through no fault of their own, are going to lose this because of mismanagement by “leaders”.

Hillbilly Deluxe

February 22nd, 2010
1:52 pm

Failure to fully fund the pension program over the years, in order to spend money elsewhere

That’s the problem with most pension plans that are in trouble, both public and private.

neo-Carlinist

February 22nd, 2010
1:54 pm

Willie, if a private retirement account such as a 401K or Roth IRA is worth less than the actual investment, how could this be so? the problem is the belief that there is a different “currency” in a public employee pension fund, or that $100 in a municipal workers pension is worth more than $100 in a privately funded retirement plan. you know, my broker told me my $1,000.00 Enron, MCI, Bear Sterns investment would be worth $100,000.00 when I retired. how is this different than Andrew Young, Bill Campbell, Shirley Franklin or Sam Massell assuring a firefighter, police officer or sanitation worker his/her pension will be there when he/she retires. anybody see the movie Animal House? remember what Otter told Flunder after the Deltas wrecked his brother’s car? “you f**ked up, you trusted us”.

Skeptic

February 22nd, 2010
1:57 pm

Failure to fully fund the pension program over the years, in order to spend money elsewhere, when they could have just not spent the money on waste programs.

Right on! It’s like the so-called Social Security Trust Fund. It’s a fund in name only; no money is in it, because Congress has “borrowed” the money to fund current operations in every spending category. Every penny that’s paid in goes out the minute it’s received, and it doesn’t go out merely to pay Social Security recipients.

TGT

February 22nd, 2010
1:58 pm

Skeptic: I consider Social Security and Medicare to be part of the federal govt.’s involvement in “pensions” and “health care.”

LA

February 22nd, 2010
1:59 pm

TGT

Illinois, like Michigan and California, all democrat states by the way, is going to go bankrupt.

@@

February 22nd, 2010
2:09 pm

LA:

Are we talking about the same Paul Ryan…Congressman Paul Ryan from Wisconsin? His degree is in econ and poli-sci, but having a doctor AND economist confront Obama on healthcare would be a double-whammy.

Jess

February 22nd, 2010
2:11 pm

TGT,

Last week Harry Reid suddenly dropped the Jobs programs bill even though he had two republicans on board. Although it wasn’t singled out, many speculate it was because Fox broke the news that buried in the program was a provision to bail out the New York teachers union pension fund which was insolvent due to bad investments.

LA

February 22nd, 2010
2:13 pm

@@

Sorry, I must have been thinking of another Ryan. Anyhoo there is someone in the GOP who is/was a doctor.

TGT

February 22nd, 2010
2:14 pm

LA: Not that current financial woes are limited only to “blue” states, but, interestingly, but not surprisingly, the top ten for state-local tax burdens in 2008: 10.) Rhode Island 9.) Wisconsin 8.) Vermont 7.) Ohio 6.) California 5.) Hawaii 4.) Maryland 3.) Connecticut 2.) New York 1.) New Jersey.

Notice how “blue” these states are. (All went for Obama last election.)

The ten lowest in 2008 for state-local tax burdens: 41.) Arizona 42.) Louisiana 43.) Texas 44.) Tennessee 45.) South Dakota 46.) New Hampshire 47.) Florida 48.) Wyoming 49.) Nevada 50.) Alaska. Notice the “redness” of these states. Seven out of ten of these went for McCain in the last election.

Skeptic

February 22nd, 2010
2:15 pm

Skeptic: I consider Social Security and Medicare to be part of the federal govt.’s involvement in “pensions” and “health care.”

Well, I do too, but let’s remember that Congress’s failure to act to provide an adequate funding stream for both is a major part of the problem with those two. Congress has known for years that both programs need action, but instead of taking action to increase the taxable base, increase the tax rate, or reduce the benefits, that body has sat on its collective hands. That negligence can hardly be blamed on the beneficiaries and the other participants. Instead, this esteemed body has allowed the cry of “Tax increase!” or “Social Security and Medicare cuts!” to intimidate it. As an example, just look at what happened when the recently deceased healthcare bill included a $400 billion Medicare cut in the form of an elimination of Medicare Advantage for the privileged few who wanted Medicare to pay for their own HMO, prescription drugs, etc., benefits that the average Medicare recipient doesn’t receive. The cry became “Medicare cut!” and everybody backed off.

JDC

February 22nd, 2010
2:18 pm

Ok, so if the military pensions are sustainable, why? What are they doing differently? Is that part of the defense budget? If they need more money, do they just either raise the taxes or shift if from somewhere else?

I confess my ignorance on the subject, thus the questions. If their system works, and it’s a government controlled system, why not model other government controlled systems after that one?

LA

February 22nd, 2010
2:20 pm

TGT

Thanks for posting that. Can’t wait until HDB comes over to try to argue about how great democrats are and how spending other people’s money is.

Skeptic

February 22nd, 2010
2:23 pm

LA: Not that current financial woes are limited only to “blue” states, but, interestingly, but not surprisingly, the top ten for state-local tax burdens in 2008: 10.) Rhode Island 9.) Wisconsin 8.) Vermont 7.) Ohio 6.) California 5.) Hawaii 4.) Maryland 3.) Connecticut 2.) New York 1.) New Jersey.

Something else for you to ponder, TGT. Many of those states are “term-limit” states–states in which legislators are limited to a certain number of years in office. In fact, ABCNews.com recently listed the top five “basket-case” states in terms of budget problems. Four of the five, including Republican Florida, were term-limit states.

Maybe all this is something for the throw-the-bums-out advocates to ponder–an example of what happens when representatives who know they have only a limited time in office choose not to construct reasonable budgets or else lack the expertise to do so.

LA

February 22nd, 2010
2:27 pm

“Many of those states are “term-limit” states–states in which legislators are limited to a certain number of years in office.”

That MUST explain the Ted Kennedy’s of America.

LA

February 22nd, 2010
2:29 pm

“Four of the five, including Republican Florida, were term-limit states.”

The problem with that argument is the fact that Florida is a tourist state. It’s not due to insane spending like Illinois and California.

When tourism is down, business is down.

@@

February 22nd, 2010
2:34 pm

LA:

Last I checked there were something like 13 GOP doctors serving in the house and senate. They’re asking for an audience with Obama.

Republican Doctors Offer to Make White House Call for Health Care Summit

They want to discuss their first-hand experience with waste in medicare and medicaid. Obama’s been shutting everyone out, including the American people from day one. I have every reason to believe he’ll shut The Doctor’s Caucus out as well.

Have a good day, LA. I’ve got errands to run.

By the by….I saw where you suspect someone, whose name will go unmentioned, may be Mrs. G. That’s interesting. I also noticed that the aforementioned, unmentioned is referring to you as “she”. I think she thinks you’re me. ‘Ya gotta watch out for those stalkers from the left.
_____________________________________

Kyle, don’t know if ^^^ that violated your rules or not. If so, feel free to ban me for a week.

scrappy

February 22nd, 2010
2:42 pm

JDC – Such a good point, and it makes so much sense. Too much sense – there has got to be a ridiculous reason that only makes sense to Washington to answer that question.

JDC

February 22nd, 2010
2:46 pm

Found the answers to my questions here: http://actuary.defense.gov/cfo2009.pdf

So the military pension fund is funded in large part by The Treasury, which is tax dollars. Again, I ask, why no uproar about this? Why is it only about state or local government? While I certainly mean no disrespect to those that serve in our military, I would not consider them to be above our police force and other first responders in importance.

Defined benefits paid by tax dollars = defined benefits paid by tax dollars. Federal, State or Local. Tax dollars = tax dollars.

LA

February 22nd, 2010
2:55 pm

@@

I think that blogger took a hike after Kyle put his foot down.

The Tar and Feathers Party

February 22nd, 2010
3:15 pm

Just tell the union scum to look up Chapter 9 Bankruptcy rules…They git nuthing if the city files Chapter 9, nuthing

The Tar and Feathers Party

February 22nd, 2010
3:18 pm

Chapter 9 is Federal Law, it supercedes Georgia State law and constitution.

dewstarpath

February 22nd, 2010
3:24 pm

To Kyle, LA and @@:

I am not Mrs. Godzilla, a stalker from the left, or a pundit for
any political viewpoint.

I attack when I get attacked. LA at 2:55 pm today is proof of that,
as well as past posts that can be checked with a search engine.
And I do NOT run scared from anything or anyone when threatened.
Nor do I try to blame someone else for my actions.

I do not wish anyone ill will, and do not discriminate based on race, gender,
or orientation.

If the above gets me banned, so be it.
I always try to remain as objective and fair as possible.

LA

February 22nd, 2010
3:27 pm

“I attack when I get attacked. ”

You know that is a lie, dewstarpath. You threw the first punch and Kyle knows it.

“I do not wish anyone ill will, and do not discriminate based on race, gender,
or orientation. ”

Yet you called me and Horrace, gay.

LA

February 22nd, 2010
3:27 pm

“LA at 2:55 pm today is proof of that”

That comment was not an attack, dewstar.