Leaders nationwide are trying to figure out ways to fix their public pension plan deficits.
Recent pension problem research examines how 100 cities in Michigan structured their pension plans and why they are underfunded. Meanwhile, the latest pension problem headlines offer insights into how some government leaders around the country are proposing pension problem solutions, and how those plans are being received.
From landmark court decisions and investment strategy changes to unwelcome tax hikes, cities and states are trying to climb their way forward to pension plan solvency. Cranston, R.I., plans to be funded in 30 years. Chicago Mayor Rahm Emanuel also unveiled a controversial new plan that will get the Windy City’s pension problem solved in 10 years, after the Illinois Supreme Court struck down his previous plan in March. And New Jersey is now the third state to cut hedge fund investments way back as a way to solve the pension problem.
Detroit was Just the Beginning: The Crisis of City Pension Systems in Michigan
Local government pensions are less than 65 percent funded.
MICHIGAN CAPITAL CONFIDENTIAL
By Josh Paladino
In 2014, Detroit retirees learned the consequences of waiting too long to reform pensions. Retirees took a $1.3 billion hit to their pensions because of a mismanaged and underfunded system. Michigan taxpayers had to pay $200 million to clean up the problem.
But other municipalities around Michigan have underfunded systems, too, and only some are taking concrete steps to solve the problem.
Michigan Capitol Confidential looked at Michigan’s 100 largest cities and found that 80 of the systems were underfunded. Combined, these 80 cities and townships have only saved 62 percent of what they will need to pay the pensions of future retirees. Even after Detroit’s recent bankruptcy settlement, their total unfunded liability equaled $4.6 billion.
Five cities contributed the most to this liability, responsible for over half the total. Detroit comes in at the top of the list with a $1.6 billion liability. Flint’s unfunded liability is $285 million, Lansing’s is $246 million, Warren’s is $207 million and Sterling Heights’ is $166 million. The total unfunded liability of these four cities is $2.5 billion.
Of the 20 cities that are not considered underfunded, most (14) offer a defined contribution retirement plan instead of a defined benefit pension plan.
Continue reading the story to learn about pension funding in Michigan cities on CAPCON’s website.
Judge Rules in Favor of City in Landmark Cranston Pension Reform Lawsuit
Retirees who opted-out of a massive pension overhaul in 2013 failed to prove they had legal standing, ruled Judge Sarah Taft-Carter.
CRANSTON PATCH
By Mark Schieldrop
A Superior Court judge has ruled in favor of the city in a landmark pension reform case that Cranston Mayor Allan W. Fung said Friday was a decision of historic proportions.
Superior Court Judge Sarah Taft-Carter has ruled that the historic locally-administered pension reform deal negotiated between the city and a majority of retired police officers and firefighters in 2013 as lawful, reasonble and necessary.
A number of retirees challenged the plan, choosing to op-out and file suit after forming in 2012. The plan deployed a combination of caps on cost of living increases (COLAs), COLA freezes and reduced COLAs over the next 30 years along with a reamortization of a $300-million unfunded liability to save the plan from collapse. City officials said the plan would save tens of millions.
In a more-than 50-page decision released Friday, Taft-Carter said the injunction sought by the Cranston Police Retirees Action Committee on a contract cause claim “fails as a matter of law” and the group lacked standing to bring a breach of contract claim.
Read the original and related stories on the Cranston Patch website.
Mayor Proposes More Tax Hikes to Fix City Pensions
CHICAGO TONIGHT
By Paris Schutz
Chicago taxpayers already feeling the pinch of considerably higher property taxes, take note: the pain may only be beginning. Water and sewer rates could skyrocket over the next five years under a plan proposed by Mayor Rahm Emanuel to stabilize one of the city’s beleaguered pension funds.
Will aldermen go for it, and will it finally put the city back on sound financial footing?
The target is to get $239 million of new revenue every year, phased in over the next five years, to stabilize the city’s largest pension fund, the municipal employees’ fund. It’s the last of the four pension funds that needs stabilization. The city has already gone to the well with the $550 million property tax hike, the new garbage collection fee and the phone tax. This tax will be tacked on to water and sewer fees.
Right now, the combined water and sewer cost per 1,000 gallons is $7.62 per month. Under the proposal, that would go up 59 cents next year. By 2020, it would be an additional $2.51 every year, bringing the total water/sewer bill to $10.13 per 1,000 gallons. For the average family that uses 7,500 gallons per month, that’s an additional $19 per month.
The mayor says he has gotten almost all unions that represent these workers to agree to pony up on their end as well. New hires will increase their contribution from 8.5 percent to 11.5 percent. Employees hired after 2011 will have the choice of paying a little more and retiring at age 65, or paying the 8.5 percent and retiring at age 67. Benefits for current retirees would be untouched.
The mayor on Wednesday announced the plan before a group of investors who buy city debt. He hopes this plan assuages their concerns about the city’s junk bond rating.
Continue reading the story on WTTW.com.
New Jersey Pensions Backing Away from Hedge Funds
NEW YORK POST
By Carleton English
Another pension fund has backed away from hedge funds.
New Jersey, stung by high fees and weak performance, on Wednesday joined New York City and California as the latest government sponsored-pension fund to cut back on how much money it places with the hedge funds.
The New Jersey Investment Council unanimously voted to cut its allocation to hedge funds to just 6 percent — down from 11.7 percent.
The $71.9 billion fund will move the cash from hedge funds to a mix of stocks — both domestic and international — as well as potentially investing in other, less costly, alternative asset
classes.
The decision to scale back hedge fund investments was not without controversy.
Negotiations among NJIC members — split between labor union members and gubernatorial appointees — were often bitter. The NJIC failed to come to a conclusion at times and was granted extensions until Wednesday’s vote to pull back.
Continue reading the story on the New York Post website.
For more on why investment changes for public pension plans are being considered, Governing magazine this week reported on Public Pensions Facing Worst Returns Since Recession.
For actionable pension problem strategies, our columnist Wayne Winegarden from the Pacific Research Institute walks through the argument for reform.
For good pension news, the city of Fresno, Calif., managed more than solvency via modest benefit payouts.
