Doomsday: Public Sector Pensions

Updates

December 1, 2016: Dallas, TX, on the brink of bankruptcy due to generous public servant pensions approved years ago. 

October 1, 2014: a federal judge rules that public sector pensions are not protected when a city declares bankruptcy; Stockton, CA, bankruptcy proceedings.

March 9, 2014: I've been posting this issue for some time now. It's nice to see my thoughts being validated by none other than Warren Buffett. Business Insider is reporting, from page 21 of his annual newsletter:

Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans.

Investment policies, as well, play an important role in these problems. In 1975, I wrote a memo to Katharine Graham, then chairman of The Washington Post Company, about the pitfalls of pension promises and the importance of investment policy. That memo is reproduced on pages 118 - 136.

During the next decade, you will read a lot of news – bad news – about public pension plans. I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist.

Pensions are formally referred to as defined-benefit plans. They differ from defined-contribution plans like 401ks in that the employer guarantees a certain retirement benefit. 401k plans, on the other hand, include no such promise; if the employees' 401k plan investment go sour, they're in trouble.

Original Post

The Los Angeles Times is reporting:

It's not just Detroit retirees who are worried about their pensions. Financially troubled cities in California, Illinois and Pennsylvania will soon face decisions on what to do with chronically underfunded pension funds, and experts say the Detroit ruling has made it easier for cities to argue that pensions must be cut.

"If I were a retired public-sector pensioner, I'd be worried today," said Olivia Mitchell, a professor at the Wharton School of Business and the director of the Pension Research Council.

For decades, representatives of public-sector pensions have depended on constitutional provisions in various states, including Michigan and Illinois, that protected pensions.

Now, U.S. Bankruptcy Judge Steven Rhodes' ruling has shown that federal bankruptcy laws preempt those state provisions. Any city that has underfunded pensions and troubled finances could soon look to bankruptcy as a way out of paying pensions, experts say, as long as their state allows them to file for Chapter 9 protection.

"This is really the first time that there's been a clear decision by a judge that, yes, pension promises are on the cutting board too," Mitchell said.