Public Employee Pension Roundup – Illinois, Detroit Update
Here is a summary of key areas in the fight to prevent state and local public employee pensions from bankrupting governments.
Detroit. Judge Stephen Rhodes will rule today at 10:00 a.m. (EST) on whether the city is eligible to enter bankruptcy. From the LATimes. Most legal experts expect Rhodes to declare that Detroit is eligible for bankruptcy protection. A ruling to enter bankruptcy would give emergency city manager Kevyn Orr leverage to bargain with unions over pension reductions or to make unilateral changes. Whether such changes would be constitutional would be decided later.
UPDATE: The NYTimes is reporting that Detroit is insolvent and eligible for bankruptcy:
Judge Steven W. Rhodes of the United States Bankruptcy Court, found that Detroit was insolvent and that the pension checks of retirees could be cut during a bankruptcy proceeding, a crucial part of his decision
I had not expected that a ruling on pensions to be part of the judge’s ruling. USAToday has some amazing facts about Detroit’s situation including the fact that it has three times as many retirees as workers.
Illinois. As I discussed earlier, the state is poised to vote on huge pension reform and the outcome is in doubt. A vote is expected in both the state House and Senate, also today. The outcome is clouded because Republicans who normally would vote for such a measure will be helping the state’s Democratic governor. My answer, be known as the party of principle, it works better for you in the long run. Meanwhile, some Democrats will have to vote against the unions for this to pass. More detail on the plan:
About $90 billion to $100 billion of that savings is expected to come out of the wallets of state workers, teachers outside Chicago and public university employees. The other $60 billion to $70 billion in savings is expected to come from the state owing less as it seeks to pay down the pension debt sooner — a move akin to a homeowner saving money by paying down the principal on a mortgage more quickly.
UPDATE: The WSJ is reporting that pension reform has passed the Illinois state legislature. The Chicago Tribune reported that the House voted 62-53 in favor and the state Senate passed with a 30-24 vote. In reviewing the details in the Tribune article, I am inclined to agree with Brian Brady, frequent SD Rostra commenter and blogger, that the reform doesn’t go far enough.
San Diego. Proposition B remains held up in administrative limbo by the California Public Employment Relations Board (PERB), no relation to Bob Filner. Craig Gustafson reports in the U-T that the key cost saving measure of Proposition B has been implemented.
. . . the city and its unions reached a deal earlier this year on a five-year freeze on the pensionable pay of current city workers, a provision in the ballot measure that is projected to save the city nearly $1 billion over the next three decades. By agreeing to terms, the city has locked in those savings even if Proposition B is later found to be illegal.
Unfortunately, the city may have to wait until April 2015 to get a ruling. Implementing remaining pieces of the proposition may become an issue in the mayoral campaign. Meanwhile, the city of San Diego chose to settle a lawsuit where the city tried to get the city employees to be responsible for half of any shortfall in the pension funds investment rate. I am concerned, as is the U-T editorial board, that this signals a lack of willingness on the city council to tackle tough pension issue.
California. The mayor of San Jose, Chuck Reed, is attempting to put pension reform on the state ballot in 2014. Reed is a Democrat, like Governor Pat Quinn of Illinois. The Pension Reform Act of 2014 would give cities more flexibility in changing pension retiree health care rules for future retirees. The public employee unions are actively opposing the plan of course.
“What they’re trying to do is overturn decades of case law, Supreme Court decisions and change the California constitution to allow public employers to either change, cut or eliminate public employees’ pensions in the middle of their career,” said Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees.
Exactly. Of course we need to change decades of case law because these retirement benefits are unsustainable if we are to have government perform any function at all.
Rhode Island. In the mostly Democratic state of Rhode Island, the legislature passed pension reform in 2011 that included a temporary halt in cost of living increases and moving part of the retirement to a 401(k) style plan. From the state’s web site:
The Rhode Island Retirement Security Act of 2011 as Amended includes language that:
- Suspends new cost‐of‐living adjustments (COLAs) to retirees’ benefits until the system is better funded but provides for an intermittent COLA every five years until 80% funded.
- Moves all but public safety employees to hybrid pension plans.
- Increases minimum retirement age for most employees not already eligible to retire.
- Preserves accrued benefits earned through June 30, 2012.
- Begins to address independent local plan solvency issues.
Recent complaints about the investment strategy pursued by the state’s treasurer do nothing to change the basic impetus for pension reform. There are allegations by a long time financial industry critic, “Ted” Siedel on inappropriate investing in hedge funds that result in hefty Wall Street fees. (Hedge funds received over half of the fees paid out by the pension fund last year.) However, 401(k) style pensions could reduce the opportunity for abuse, if employees are given the opportunity to choose their own fund in which to invest. More important to note for supporters of pension reform, the legal struggle over pension reform in Rhode Island continue two years later, with no end in sight.
Lesson learned: You have to be in this fight for the long haul.
What You Should Be Reading
- San Diego blogger W.C. Varones asks if media bias has any impact on economic performance? Fascinating answer. Maybe it can benefit your market timing.
- The VOSD takes a look at a San Diego couple’s questions about the ACA. It quickly gets complicated. Note how the question of subsidy isn’t fully resolved.