Explaining the Public Pension Accrual Freeze Idea


William Baldwin of Forbes wrote of states in a death spiral and, when questioned by Stuart Varney on how states could slow down the spinning, focused on a solution that we at the NJTA had already proposed:

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Mr. Baldwin did a better job in explaining the concept of freezing accruals in public pension plans than I did a few days later:

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26 responses to this post.

  1. Posted by Tough Love on December 11, 2012 at 1:11 am

    While Mr. Baldwin explained his position quite well, he certainly underestimated the legal barriers to freezing DB Plans in many States, especially California.

    Without doubt, there are no effective Pension reform solutions that do not (at a MINIMUM) include reducing the rate of pension accrual for FUTURE service for CURRENT workers (whether via a Plan freeze, or a MATERIAL reduction in the pension accrual rate). Even doing this, only stops digging the hole deeper w/o addressing the huge unfunded liability already accrued for PAST Service.

    Attempts to freeze (or reduce) FUTURE service accruals will undoubtedly be made by States/Cities under financial strain, and will undoubtedly be challenged by the impacted workers. This will clearly take time (perhaps years) to works it’s way through court challenges.

    Dealing with the EXISTING unfunded liability is a MUCH bigger problem with no solutions that do not include significant pain for the stakeholders …..Taxpayers as well as current and retired Public Sector workers. And with the myriad of legal barriers to such changes currently in place, such changes will likely result only as part of a workout from insolvency.

    And all thanks to the grossly excessive pensions and benefit granted by our self-serving, vote-selling, contribution-soliciting elected officials.

    Reply

    • Probably one of the biggest barriers to freezing Public Employee DBs in California is the right Public employees have to receive something of equal or greater value for everything they give up. Giving up future retirement benefits by freezing future accruals doesn’t solve the problem that the Public Employe DBs are unaffordable, that they are unsustaintable. It’s only rearranging deck chairs on the sinking Titanic. The taxpayers will have to pay the same amount or more in another way.

      Reply

      • Posted by Anonymous on December 12, 2012 at 9:24 pm

        I can not see any additional information here. We are looking for a solution given all the facts.

        Reply

        • You’re right. I didn’t offer a solution. I’ve been looking for a solution for the City of Vallejo, CA since 1993. As you probably know, Vallejo went into bankruptcy in 2009.

          I thought that bankruptcy would force Vallejo to find a solution. It didn’t.

          Vallejo exited bankruptcy protection without a solution to its unfunded pension liability that exceeds a quarter of a billion now. Vallejo didn’t try to tackle that because CalPERS, the largest pension plan in the Country, threatened Vallejo. As you can see by the actions that CalPERS has taken with regards to Stockton, San Bernardino and Compton, Ca, those weren’t idle threats.

          The only solution that I can think of is for the Public Employee Unions to tear up their current contracts and to replace them with contracts that are sustainable.

          Reply

          • Posted by Anonymous on December 12, 2012 at 9:46 pm

            Short, but to the point. When I ran for State office several years ago, the teacher committee replied that a promise was better than nothing when I pointed out their retirement was way, way underfunded.
            In short, we are dealing with trusting old fashioned people our Constitution is meant for…………

          • Posted by LowIncome on December 12, 2012 at 10:20 pm

            If your solution is in essence a single party bankruptcy it is time to eliminate all public employees. To be replaced with contractors. This can work for every party involved. No pay- no police, fire, water or teachers.

          • Posted by Tough Love on December 12, 2012 at 11:42 pm

            Quoting …”Vallejo exited bankruptcy protection without a solution to its unfunded pension liability that exceeds a quarter of a billion now.”

            Vallejo CHOSE that path. The Courts made it clear that it could pursue pension reductions. While I understand it was fearful of the litigation costs that CalPERS promised would come from a Pension challenge, my understanding is that the City Council was controlled by Union Democrats and simply didn’t have the stomach nor desire to consider cutting pensions.

            A good reason why Taxpayers should support an end to Public Sector Union “collective bargaining”.

          • Posted by Tough Love on December 12, 2012 at 11:47 pm

            Responding to “Anonymous”, particularly his statement that …”the teacher committee replied that a promise was better than nothing when I pointed out their retirement was way, way underfunded.”.

            I believe that most of CA’s public sector workers understand that CA has a BIG financial problem and the their very generous pensions and benefits are contributory to that problem. I also believe that most feel that pension accruals for PAST service are completely untouchable with potentially less protection for FUTURE service accruals.

            This mindset contributes to their rock-hard do-nothing stance as long as there is money in the pot to pay current retirees, ignoring the trajectory of that pot of money. Their rationale is that every day they delay material reform increases those untouchable PAST service accruals.

            While I understand this mindset, I believe that they are (in the words of some investment advisers) “juggling with knives”, as there is a “tipping point” beyond which their city (and perhaps the State of CA) will become insolvent. At that point all bets are off, as the Federal Courts will likely play a big roll in divvying up that pot … with a high degree of certainty that benefits associated with PAST service accruals of actives and retirees will well be included in the hair-cutting.

      • Posted by Tough Love on December 12, 2012 at 11:33 pm

        I doubt that. It will simply keep moving in the direction of, and until it reaches insolvency. At that point the Federal Bankruptcy Counts will be holding the hair-cutting machine.

        Clarity will come from the current San Bernadino case. But even if CalPERS wins, many cities will w/o doubt have zero ability to pay for anything but “essential services” (pension payments to CalPERS certainly NOT being one of them) and the Courts can’t create the massive funds needed to fully fund these absurd promises.

        In the end-game, the employees will lose. It’s called “reality” and math”. As a CPA, you should see that coming …. unless you’re a Public Sector CPA (participating in these Plans) and still on the wishful-thinking bandwagon.

        Reply

        • Your last paragraph is right on. I saw it coming years ago, once I discovered that the City had retroactively increased the retirement benefits for all City employees without funding the increase. City Council members relied on the CalPERS assurances that the increases wouldn’t cost the City any more money.

          Again, I thought bankruptcy would bring employee unions, City management and the City Council to reality. It didn’t. And City employee unions still refuse to recognize reality.

          Reply

          • Responding to “Tough Love”, you’re right, Vallejo chose that path. But it wasn’t because of “Union controlled Democrats”. I say that as a Republican.
            It was, as you point out, because they didn’t have the stomach for it. Their bankruptcy advised them against going against CalPERS because of the risks of loss and the enormous costs of litigation. The City had already spent more than $5 million in legal costs because the IAFF and IBEW spent millions fighting the City in Court. Then there is the issue of “Binding Arbitration”. You can’t imagine how much that cost the City over the nearly 40 years it was in the City Charter. It took Vallejo Police and Firefighters from being some of the least paid public safety employees in California to, at one time, among the highest paid public safety employees in the Country …all because they could take the increased salaries and benefits, setting an standard that other Cities in California followed. Doing away with collective bargaining for public employees could be a tool to fix the problem. Elected officials still must have the stomach to act …

          • Posted by Tough Love on December 13, 2012 at 1:11 pm

            Read my comment responding to Anonymous above. That’s my take on the mindset of the workers and why they won’t compromise. I call it shooting yourself in the foot.

          • Your other post about how the pension money will deteriorate over a period of time is also right on. However, that doesn’t change the mindset of the Public Employee Unions in the City of Vallejo, and perhaps elsewhere. They don’t want to accept it, and they certainly don’t want to start paying for it now. They’ll wait until there isn’t any money left, and then fight over the scraps. Unfortunately, the public employees who will probably be hurt the most will be the non public safety employees. The Public Safety employees have too much power. Public Safety is a far more emotional issue than potholes in your street and even educating your children.

          • Posted by Tough Love on December 13, 2012 at 1:46 pm

            JD Miller, Re your point about fighting over the scraps …. As Plan asset dwindle, the younger, shorter service “actives” will realize how hey are being scammed by those already retired (and the soon to be retired), with all of THEIR contributions going out the door to pay for the excessive pensions of those that came before them … leaving little to nothing for THEM.

            At some point they will see that they are being throw under the bus by their “brothers”. I envision a significant struggle brewing between these groups, perhaps with the younger actives joining with Taxpayers to demand REAL pension reform.

          • I agree with your logic, but I’ll believe it when I see it.
            I’ve spent the last 4 years trying to convince City of Vallejo employees that the money won’t be there for their retirement without any success. I think it’s too horrific for them to accept, so they prefer to live in Fantasyland.

          • Posted by Tough Love on December 13, 2012 at 3:33 pm

            JD Miller, At this point, I agree with you (re the workers being in Fantasyland. Hopefully they will wise up before the Courts are called upon to make the decisions and their window of opportunity to help shape those changes will have closed.

          • Thanks for your conversation. Neither of us knows how this will work out, but it will work out. And it won’t be pretty.

          • Posted by Tough Love on December 13, 2012 at 5:19 pm

            Yes, something WILL happens, just what that will be is not yet clear.

            Paraphrasing Margaret Thatcher …”The trouble with socialism is that eventually you run out of other people’s money.”

            The Taxpayers are those “other people”.

          • Posted by Tough Love on December 13, 2012 at 6:27 pm

            JD Miller, By the way, although this (John Bury’s) blog focuses on NJ financial woes, you might find quite a few of the (almost daily) discussions very interesting.

            You will find that I take a rather aggressive position seek material reform … to the dismay of the Public Sector worker-commentators who (with equal forcefulness) seek to stop and/or delay any and all reforms .

            I’m sure at least a few would like to wring my neck.

          • I’m in good company, then, because more than one City employee would like to do the same to me for similar reasons. Thanks again.

  2. Going back a few years in the Star Ledger, both you and our late Dunsan McNichol put this all together. Should hae been appointed NJ Treasurer then.

    Reply

  3. Posted by Javagold on December 11, 2012 at 1:31 pm

  4. Posted by Tough Love on December 11, 2012 at 5:11 pm

    John,

    This is off topic, but I believe you (as an actuary) will find it quite interesting. The proposal is from a group of University of Illinois professors

    The link is: http://www.wandtv.com/story/20309174/experts-propose-plan-to-reform-university-pensions

    Quoting ….. “In a proposal issued Monday by the Institute of Government and Public Affairs, the professors recommend letting workers trade a portion of their guaranteed benefits for a lump-sum payment. That payment would go into a self-managed retirement account.”

    This is an perfect example why the Public Sector participants will never be part of the “solution”. Essentially, with their pension plan 45% funded (on an “official” basis), they realize their pensions are in jeopardy, so … their “solution” is to strip the fund of more assets, and I’m quite certain that they would argue for those lump sums being calculated using an interest rate considerably lower than the 7.5% (or so) Plan earnings rate assumption. And even IF they such Lump Sums WERE calculated using the 7.5% rate, allowing such payouts would result in a significant drop in the funding ratio for remaining participants. Unadulterated self-interest (harming the remainder), and nothing but.

    What I’m getting at … and why I take a very aggressive posture in many of my comments is that the workers will NEVER offer any material solutions (this one being an extreme example of their mindset). They will NEVER be part of the solution and trying to “work with them” or “negotiate” is a waste of time. In short, Taxpayers must ram MATERIAL changes down their throats by whatever measure necessary, with an aggressiveness no less than the decades-long financial ripoff of Taxpayers that such Unions have successfully perpetrated upon us …. of course via the favorable votes of their bought-and-paid-for politicians.

    Reply

    • Posted by muni-man on December 11, 2012 at 7:52 pm

      Looks like this might be the opening salvo in what’s sure to become the inevitable battle between active vs. retired publics over shrinking pension $’s. No doubt the scholars pushing this novel idea have advanced degrees in the hard sciences like sociology, psychology and art history, so their analysis should be thoroughly rigorous.

      Reply

  5. Posted by LowIncome on December 11, 2012 at 7:45 pm

    The participants are looking for a divorce. It is a good strategy to cash out of most public pensions. There is no interest in funding them in any responsible manner. Only a few systems have been game for pension obligation bonds. The only real strategy is to run a single party bankruptcy with public employees making all the sacrifice to balance the pension systems on a temporary basis.

    Reply

  6. Posted by eatingdogfood on December 11, 2012 at 9:26 pm

    OMG; Michigan, the Birth Place of the UAW; A Right To Work State !!! Say It Ain’t So; AFL- CIO Fat Union Criminal Boss, Trumka !!! Say It Ain’t So; His Highness, Nobama !!! No More Automatic Union Dues Checkoff !!! The Criminal Union Bosses Are NOT Going To Be Sending The Union Dues Directly To The Democratic Party Or To Their Personal Florida Ocean Front Condos !!! HAPPY DAYS ARE HERE AGAIN !!! Yeah; Case Closed, Jeffery !!!

    Reply

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