Posted on 03/25/2014 11:29:38 AM PDT by MichCapCon
Detroit's pension woes are in the news, but municipal employees around Michigan should not presume that their pension systems are secure.
Indeed, in most Michigan cities the underfunding problems are worse than those in Detroit.
On paper, the unfunded liabilities for Detroit's police and fire system are $147 million, and its general employee pension system underfunding comes to $838 million. That translates into 96 percent and 77 percent funded, respectively. That is, for every dollar in pension benefits earned by an employee, the city has an average of 87 cents saved.
That's not good, but the 2012 financial statements of Michigan's 35 largest cities found that 90 percent of municipal pension plans were underfunded, with total underfunding stated at $2.1 billion.
It may be even worse. Pension funding policies can mask the magnitude of underfunding.
For example, to prevent a single very good or very bad year in the stock market from skewing the value of their investments, pension systems typically use a "smoothing" method to average the values over a period of several years.
Detroit uses an eight year smoothing window. This lengthy period means that its pension fund valuations do not yet fully incorporate the effects of the great recession. At current market prices, the system's assets are $1.35 billion below their "smoothed" values.
Moreover, Michigan's cities also tend to offer retiree health care benefits to employees, even though few private sector employers provide such coverage. Unlike pensions, these benefits are not protected by the state constitution. They amount to gratuities that can be revoked at any time. Importantly, these "other post-employment benefits" are rarely prefunded.
With prefunding, employees know there's some money set aside to pay for what they were promised. Just as important, the cost of each year's service is largely paid for during the same year. When benefits go without prefunding, the certainty that benefits will be provided as advertised is diminished. This is especially the case in the Michigan cities that have lost residents and jobs. Without prefunding, the costs of long-gone government employees' service must be paid by a shrinking tax base.
Underfunding is not the only reason Detroit is seeking to trim the pensions of retirees. The city also is insolvent. That is, it lacks the cash to pay its bills when they come due — including constitutionally mandated pension prefunding contributions. Insolvency coupled with underfunding risks pensions, and the increasing costs of catching up on unfunded liabilities can drive some governments to insolvency.
It wasn't supposed to be like this.
Delegates to Michigan's 1962 constitutional convention wanted cities to pay for pensions as they are earned, and not defer the costs of current employees to future taxpayers. The provision they wrote into our current state constitution amounts to an instruction to city managers to make good, reasonable assumptions about the future value of investments made today, and deposit enough each year to cover the future costs of another year's worth of benefits earned.
The reality of underfunding shows that they have not made good assumptions, and are still assuming excessively rosy scenarios. As a first step, this should change.
Beyond that, the only sure way to avoid digging even deeper holes in the future is to follow the lead of a handful of municipalities that have closed their conventional defined benefit pension systems to new members and offer defined contribution retirement plans instead.
The same is true nationwide.
Yup. Fort Worth is badly upside down. Actually it is third in the nation, and may be the only Texas municipality on the top twenty unsecured pension debt list.
My brother in law works for the Ft. Worth PD. I have pointed out that he will never get a retirement unless he can cash out early.
He is stuck in his own little fantasy world in which he believes that in spite of a growing citizen outcry about excessive force on the part of his department...the state of Texas will bail the pensions out when they run dry.
Not happening.
> Delegates to Michigan’s 1962 constitutional convention wanted cities to pay for pensions as they are earned, and not defer the costs of current employees to future taxpayers. The provision they wrote into our current state constitution amounts to an instruction to city managers to make good, reasonable assumptions about the future value of investments made today, and deposit enough each year to cover the future costs of another year’s worth of benefits earned.
IOW, time to amend the Michigan Constitution to remove this. Muni employees should be moved from defined benefit programs into defined contribution programs; the current pile of cash would be distributed as matching contributions until it’s exhausted. STate employees were moved out of DB to DC over 15 years ago, with the provision that those who preferred to remain in the DB could, or could choose to move into DC (there were already 457K and 401K plans available regardless), and all new hires would be DC with no other option. Thanks MichCapCon.
The only reason Michigan even makes news like this is the fact that Rick Snyder laid the books out on the table and forced everybody to take a look.
I’d like to kick him in the ass about half the time but forcing this out into the open is a good thing.
Cities need to privatize the services wherever they can.
Saginaw ditched some 500 city employees who are still there but working for private contractors. The debt isn’t gone but its not growing and the city isn’t responsible for pensions going forward.
Grand Rapids schools privatized the bus drivers (I suspect they are the bottom of board of ed pay scales, but anyway) some years back, and the local lefty whiners pissed and moaned about it; what happened was, the board bid it out, went with the low bid, and the winner hired a bunch of the drivers and took over the buses themselves. The city needs to do the same thing with snow removal — for years they’ve had a backup list that private plowers (who are typically bivocational anyway) can get on, and when there’s a blizzard and the city plows can’t keep up, the private plows pitch in. With GPS and the like, doing it entirely with private plows (and paying them by the mile, monitored electronically) would make much more sense.
The privately owned Detroit Bus company is still growing in Detroit after more than 3 years. They provide as needed services that people want. They have no standard routes but can be called like a taxi to pick you up using a phone app that shows where the buses are at any given moment. They drop little old ladies with groceries off at their front door and provide free rides to kids in after school programs.
The Go Bus in Grand Rapids does door-to-door service (for those who can’t get around or have a disabled tag) for I think a flat $7 a ride, but the ride has to be scheduled the previous day, and they won’t make change.
Cool story about the Detroit Bus company helping one business out while making some money for themselves.
http://www.mlive.com/news/detroit/index.ssf/2014/02/detroit_bus_company_crashes_to.html
The retired employees of Detroit should sue the Democrat party.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.