There are two basic kinds of employer-provided retirement plans: 1. Defined contribution (where the employer – sometimes with the employee – contributes a fixed amount to the plan, and the money available to be distributed upon retirement is a function of how much is in that retirement account). 2. Defined benefit (where there is a fixed monthly payment on retirement – which may be adjusted by the cost of living – based on seniority, number of years in service, age at retirement, etc.). In the early days of pension plans, virtually all of the union-based and governmental employers (federal, state and local) provided defined benefit plans, which, over the years, required an increasing contribution from the employer every year (or left the employer with a growing unfunded retirement obligation).
IRA and individual 401(k) retirement plans started out the same way, but folks quickly realized that the rising percentage of current income required to sustain the future fixed benefits was, for all but the richest of us, unsustainable. So these individual plans are, for the most part now “you can retire on what you saved, but there are no guarantees what you’ll get each month” – defined contribution. Government was the place where you went for mediocre pay but also for job security and spectacular medical, disability and retirement benefits. As this economy collapsed, those government jobs are now looking pretty lucrative these days, and those fringe benefits are like driving a brand new Rolls Royce in a sea of subcompacts. Military, police and fire retirements, some enabling a retirement in 20 or thirty years regardless of age, are among the most generous defined benefit plans on earth.
As these pension funds have been slammed by the economic collapse – hammered by investments in subprime mortgages and in plummeting stocks – it’s pretty clear that many are edging towards bankruptcy, particularly those with defined benefits. Private plans get some coverage under ERISA (federal pension insurance), but as the bankruptcies of General Motors and Chrysler have shown, they hardly provide the retirees with anything near what they were expecting.
Two of the largest governmental pensions funds are, fairly obviously, in California – the California Public Employees’ Retirement System (CalPERS – the largest pension fund in the U.S and the fourth largest on earth) and the California State Teachers’ Retirement System (CalSTRS), but the decline in their asset base has required that they seeking additional contributions from state agencies to meet their obligations. And of course, California is hemorrhaging red ink, hardly the place to go for more money. The feds can increase the M1 money supply (the modern equivalent of “printing money”) – not particularly good to support the value of the dollar or stem inflation – but states, well, they just get deeper into trouble and debt.
So Chapter 9 of the Bankruptcy Code provides a not-too-graceful debt relief for “municipalities” (which are basically governmental units that are less than a “state”… forcing a state to go bankrupt in pieces) if they file for bankruptcy – while they are relieved of their debt and contractual obligations and do not lose their governmental assets, they do lose operating control of their “municipality” to a federal government trustee in bankruptcy. The strange question to ask is whether a bankruptcy might not be necessary to bring at least the state governments back to the pension reality that so many of us peons discovered a long time ago: neither the states nor the taxpayers can afford early retirements or defined benefit plans anymore, and if it take a bankruptcy to right this ship, that might be the cure. Tough cure. But state governments seem to be headed in that direction by reason of such generate fringe benefits and a litany of other problems, many stemming from the horrible economy.
According the Pew Center on the States, all but two states faced budgetary shortfalls this year (North Dakota and Montana), but ten states are leaning towards financial collapse. Here are the ten worst in the Pew study (“Beyond California: States in Fiscal Peril”) as reported on DailyFinance.com (Nov. 11):
“California topped all states for the magnitude of its budget shortfall in fiscal year 2010, both in dollars and in share -- in this case, nearly half -- of its general funds, which pay for most state operations.”
Like many states, “Arizona's lawmakers relied on one-time fixes to balance its budgets instead of making long-term changes,” the report said. Lawmakers were still wrestling with a $1 billion gap in this year's budget in October.
On top of its poor record of fiscal management, “Rhode Island constantly ranks near the top of states with the highest unemployment rates, and last year it had the highest home foreclosure rate in all of New England.”
“Two of the Big Three Detroit-based automakers went bankrupt in 2009, sending shockwaves through a state that is on track to lose a quarter of it jobs this decade.”
“Nevada's unique gaming-based economy is in jeopardy, as is its state budget that relies on gambling sales to provide 60% of its revenues.”
“State revenues plummeted 19% between the first quarter of 2008 and the first quarter of 2009, a reflection of Oregon's heavy reliance on income taxes,” the report said. Voters have rejected adding a sales tax nine times, thwarting attempts at creating a new source of state revenue.
“For the first time since World War II, Florida's population is shrinking. This is a disturbing revelation for a state that has built its economy -- and structured its budget -- on the assumption that throngs of new residents will move to its sunny shores each year.”
“New Jersey is playing catch-up after years of fiscal mismanagement and a daunting structural imbalance between what it collects and what it spends.”
“Since the last recession earlier this decade, the state piled up huge backlogs of Medicaid bills and borrowed money to pay its pension obligations,” the report said. The 2010 budget shortfall topped $13.2 billion, among the worst in the nation.
“Wisconsin's history of budget shortfalls and pattern of borrowing frequently to cover operating expenses, among other measures, made it poorly positioned to weather the most recent severe economic downturn.”
There’s a lot of pain in our future, but there is also the opportunity to learn from our past mistakes and create a new world going forward that we might actually be able to afford. It’s just hard for me to believe that we are in “recovery mode” with rising unemployment (which is unlikely to abate any time soon), frozen consumer spending, a tanked real estate market and states facing genuine insolvency. The stock market rise is hardly convincing.
I’m Peter Dekom, and I approve this message.
Posts
No comments:
Post a Comment