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City's pension liability zooms up by $937 million
"They have...basically put the city in bankruptcy."
The City of San Diego's pension liability as of June 30 has soared to $2.65 billion, up by $937 million since June of 2015, according to a report by Cheiron, the actuarial firm used by the San Diego City Employees' Retirement System (SDCERS).
Former city attorney Mike Aguirre said today (December 21) at a press conference that the city is essentially bankrupt. I sought a response from SDCERS, but none had come prior to publication.
Major reasons for the increase are changes in economic and demographic assumptions, which raised the net pension liability by $620 million in the year. These include interest rates, salary increases of 3.05 percent, and cost of living adjustments of 1.9 percent.
Interest rates are critical. During the 2015-2016 period (mid-year to mid-year) the Federal Reserve kept short-term interest rates far under 1 percent, often close to zero. Lower interest rates produce a higher pension liability. A one percent decrease in the discount rate increases the net pension liability by 12 percent, according to the report.
Conversely, an increase in rates lowers the liability. The Federal Reserve has raised short-term rates over the recent period and says it intends to raise rates even more in 2017. This should lower the liability, other things being equal.
Net investment income plunged from $935 million in 2014, to $208 million in 2015, to merely $64 million in 2016, according to the Cheiron report. Investment gains or losses are measured over a five-year period. Assumption changes knocked $620 million off investment returns during the year. SDCERS will recognize $207 million in the current year, and the same amount in each of the next two years, according to the report.
"Pension-fund managers are once again hiding the size of the pension debt," says Aguirre. "They have managed the pension for their own selfish purposes and basically put the city in bankruptcy."
The report came out November 30 but didn't cause a ripple. Aguirre came across it when working on a case. Mayor Faulconer has mentioned that pensions will take up more of the city's money but hasn't been specific. The increased liability should come into the deliberations of whether the Chargers will move to Los Angeles or be able to wangle a subsidized stadium from San Diego.
Here's something you might be interested in.
City's pension liability zooms up by $937 million
"They have...basically put the city in bankruptcy."
City's pension liability zooms up by $937 million
"They have...basically put the city in bankruptcy."
The City of San Diego's pension liability as of June 30 has soared to $2.65 billion, up by $937 million since June of 2015, according to a report by Cheiron, the actuarial firm used by the San Diego City Employees' Retirement System (SDCERS).
Former city attorney Mike Aguirre said today (December 21) at a press conference that the city is essentially bankrupt. I sought a response from SDCERS, but none had come prior to publication.
Major reasons for the increase are changes in economic and demographic assumptions, which raised the net pension liability by $620 million in the year. These include interest rates, salary increases of 3.05 percent, and cost of living adjustments of 1.9 percent.
Interest rates are critical. During the 2015-2016 period (mid-year to mid-year) the Federal Reserve kept short-term interest rates far under 1 percent, often close to zero. Lower interest rates produce a higher pension liability. A one percent decrease in the discount rate increases the net pension liability by 12 percent, according to the report.
Conversely, an increase in rates lowers the liability. The Federal Reserve has raised short-term rates over the recent period and says it intends to raise rates even more in 2017. This should lower the liability, other things being equal.
Net investment income plunged from $935 million in 2014, to $208 million in 2015, to merely $64 million in 2016, according to the Cheiron report. Investment gains or losses are measured over a five-year period. Assumption changes knocked $620 million off investment returns during the year. SDCERS will recognize $207 million in the current year, and the same amount in each of the next two years, according to the report.
"Pension-fund managers are once again hiding the size of the pension debt," says Aguirre. "They have managed the pension for their own selfish purposes and basically put the city in bankruptcy."
The report came out November 30 but didn't cause a ripple. Aguirre came across it when working on a case. Mayor Faulconer has mentioned that pensions will take up more of the city's money but hasn't been specific. The increased liability should come into the deliberations of whether the Chargers will move to Los Angeles or be able to wangle a subsidized stadium from San Diego.
Comments
But, but, but, Jerry Sanders told us that the pension problem was solved (by him presumably.) Does this mean he didn't tell the truth? Oh, say it isn't so, Jerry.
Visduh: Yes, Jerry Sanders boasted that he solved the pension problem. He was not telling the truth. Surprised? Best, Don Bauder
Surprised? Not in the least.
Visduh: It would be interesting to know whether Dean Spanos and his clique will take the huge pension deficit into account when making his decision on whether he can seduce San Diego into financing a stadium for him. The pension deficit, plus the billions of dollars of infrastructure deficit, plus potential future problems like drought and global warming add up to one thing: it would be insane to give a nickel of public money to a pro football team. Best, Don Bauder
Don: It would be more interesting if the CITY takes the huge pension deficit into account. Somehow--I doubt it.
aardvark: I agree. The City should take this pension deficit into account and let Spanos know the problem SD has. Will that happen? We can always hope. Best, Don Bauder
San Diego Mayor Faulconer is stuck with four full years of office-holfding ahead of him, a situation he probably would probably like to turn into a run for cover -- even a run for Governor of California -- to avoid the fallout from a Chargers' exit and another public employee pension crisis. Happy talk from Mayor Sunny will not suffice: maybe he will actually have to do something about the city's problems.
And he will start with photo ops at pot holes.
And then will he move on to doing ops at water main leaks, sewer system stoppages, leaking library roofs, and tacky neighborhood parks?
Visduh: For at least six months prior to the 1998 vote on Petco, the U-T didn't report on infrastructure woes. That media scam can be run again. Best, Don Bauder
AlexClarke: When he ran for mayor, he pointed to photos of rundown infrastructure. Once elected, he hasn't done much. Best, Don Bauder
monaghan: Faulconer shows few signs of wanting to do anything about the massive pension and infrastructure deficits. He likes to talk and make sweet promises. Typical pol. Best, Don Bauder
Are you guys kidding? He's going to get right out there in Balboa Park with shovel and pale and start digging a new hole for the city taxpayers to deal with after he's termed out.
None of these politicians act responsibly with our 💰. Then after the new debt is due it's c-ya later.
Sadly it's our fault, we keep electing these people, believing their bull💩.
JustWondering: The voters, swayed by the mainstream media, should get much of the blame for the massive corporate welfare. Best, Don Bauder
The only way the "pension crisis" can be solved is to end defined-benefit pensions, or at least the taxpayer backstop for them. They're mathematically unsustainable. All the emotional, hand-wringing arguments about "Retirees aren't the problem, they paid in, they did their jobs, their pensions aren't excessive, they were promised, they are owed!" doesn't change the basic fact that the whole idea is, essentially, a Ponzi scheme. Politicians today will always promise more to be paid out tomorrow and then pay in less today. They get votes and salaries and their own pensions and benefits, then stroll away whistling and leave the problem for someone else.
The ONLY possible answer is a defined-contribution system, where what's there is what's there. No magic, no hocus-pocus, no promises... only dollars and cents. And if what's there isn't "enough", that's reality, the same reality we all have to live in.
The city ended the DB plan for all new hires some time ago with the exception of 👮. Every new employee is enrolled in a DC plan as you suggested.
jnojr: Yes, people will claim that current retirees "paid their money" and the outsize benefits can't be denied them. But many did NOT pay in. Many bought future benefits at discount prices…"X years of retirement pay for $x dollars.". Best, Don Bauder
That may have happen originally, but Aguirre, as City Attorney, manipulated the SDCERS Board, which restated the clock on the statute of limitations. That led to litigation and the plaintiffs lost and were required to pay tens of thousands more for the purchase of credits.
JustWondering: Yes, Aguirre got some of the worst offenses eliminated or tamed. But he was thwarted by higher courts in effectuating real reform. That's one reason the deficit has ballooned again. Best, Don Bauder
The biggest Ponzi scheme of all is Social Security. If we had a high rate of population growth, and an economy where all young people worked from age 18 onward, it might be able to cover the outgo. In general SS has been on a pay-as-you-go system for most of its existence. The funds paid in by workers were not retained and invested, but were paid out in benefits to those drawing checks. If you call putting some temporary surpluses in the Treasury and holding its IOU's "investing", that is ludicrous. The Treasury has run huge deficits, and any SS surplus just went to covering the larger shortfall. When SS is asking for those excess funds back from the Treasury, it has only two ways to do that, from taxes or from borrowing.
Visduh: Sad to say, but you have richly illustrated the government Ponzi scheme. An individual thinks the government has a pot of money with his or her name on it, filled with his or her contributions over the years. 'Taint so. The money goes in the front door and out the back to current retirees. This is a Ponzi. The government could fix it by requiring higher pay-ins, and smaller pay-outs to the filthy rich crowd. But they have all the influence over government. Best, Don Bauder
I think it is almost impossible to end the taxpayer backstop to pensions. Even bankrupt Stockton and San Bernardino (as far as I know) are still making all their payments to the public employee pension funds.
I definitely agreed that defined-benefit pensions should end. It is too easy for politicians to offer benefits far into the future based on absurd investment assumptions (e.g. 8% guaranteed annual return).
ImJustABill:I haven't looked at this for awhile, but I think bankrupt cities, in the main, still honor their excessive monetary pledges to retirees. Several courts have been involved with this. Best, Don Bauder
jnojr: I believe defined benefit pensions have been eliminated for new hires. Somebody correct me if I am wrong. Best, Don Bauder
In the City of San Diego, all new hires, except police officers, ONLY GET Defined Contribution accounts.
JustWondering: Thanks for the clarification. I think this was greatly what Jerry Sanders relied on when he said the pension situation was solved. Best, Don Bauder
"Investment funds must be sold to pay pensions now, about $5 billion this year to add to $14 billion from employer-employee contributions to pay $19 billion for the pensions of the retirees. Reducing this growing “negative cash flow” is one of the reasons for raising rates."
https://calpensions.com/2016/12/21/calpers-acts-to-cut-earnings-forecast-raise-rates/
More retirees than employees...transitioning to lower return investments...more bankruptcys
sumguy: That's why some call it a Ponzi scheme. Best, Don Bauder
Problems with San Diego City Pensions began with Republican Mayor Pete Wilson who made a deal with City employees and their unions to take public employees off of Social Security and put them in the City Pension system. Did that hundreds of millions of dollars that City employees paid in ever made it to the pension fund?!?! Inquiring minds would like to know!... And, I read that the City stopped making its accurate contributions long ago. When the City did contribute, it was far below the contractual amount the city owed to the plan. City pension funds were diverted for decades by Republican Mayors and Administrations(including Susan Golding) to fund their "pet projects" and never repaid such as the Republican Convention, Jack Murphy Stadium and upgrades, subsidies to the Chargers including remodeling Qualcomm and ticket guarantees. Naming rights to Jack Murphy "given away" to Qualcomm for "peanuts" 18M total when it should have been 18M per year for 20-30 years..the list is very long.....Subsidies to the Padres and the Downtown, East Village Petco Park Development. Bottom line, the City employees became the convenient "political scapegoat" for the City's financial problems. If successive Republican Mayors had paid the contractual pension contribution amount on time every year as required, then the City would never have had a pension deficit. It adds up quickly when Mayors and City Managers short the City pension funds by 10's of millions of dollars every year for decades. Repubs refuse to raise the funds with taxes for city services including roads, police, fire, sewer, infrastructure...because conservatives do not want to be on record as ever raising taxes or revenues...So, they diverted "in house revenues" stipulated for City pensions for their own "pet projects" vastly shorting the City's pension plan. It became a "shell game"....The "Ponzi Scheme" that another poster is referring to was created by City Officials when they allegedly robbed money from the money pot that was supposed to go to City pension contributions and contributed it to their own "pet projects" instead leaving the pension plan with a bigger and bigger deficit each year. Nobody mentions when running that ballot initiative that passed a few years back ending the "defined benefit pension plan" for the City, that it was "highway robbery" by a succession of Republican Mayors, Councils and City Managers that created the pension problems in the first place. And, the passing of that 401K style plan does not clear up the deficits in the City's pension plan, and may have many negative repercussions.
SportsFan0000: Your analysis is worth a study. How long was this shortchanging going on? We know that Golding reobbed the pension fund to finance the Republican Convention, promising to up the ante in the future. It was increased around the turn of the century…..Plop!!! The funds weren't there as the stock market cratered. The City employees got off the hook in a series of judges' decisions. Golding got out got out of office and is seldom seen around now. Best, Don Bauder
SportsFan0000 left out the "Waterfall" ripoff of the pension system. You may recall City managers would appropriate any earning above the expected return euphemistically calling it the "Waterfall". Then, they would use those earning to pay for OPEB, i.e. Retiree health care also promised by Wilson when he pulled the employees out of Social Security and Medicare. None of those stolen funds were ever repaid even after the IRS ruled the practice illegal.
JustWondering: To the best of my memory, you are correct. There was also the 13th check that was paid retirees with funds that should have been squirreled away for crisis times like the present. Best, Don Bauder
The difference between the two: the Waterfall was done by managerial fiat as a way to cook the books. The 13th check had public hearings as well as being read twice at city council meetings to pass the ordinance. But you're correct both were needed for when the system did not meet the expected investment return.
JustWondering: You say both were needed because the city didn't have enough money to pay retirees. You may be right, but it's worth checking on that. Best, Don Bauder
The other difference I failed to mention is the so called 13th check is NOT paid to retirees in fiscal years when returns do not meet certain thresholds. There also is no carry forward provision. The most recent examples, the 13th check was not paid in FY 2009 or 2012.
JustWondering: Yes, the 13th check is not distributed every year. It goes out when investment returns are strong. Actuaries basically didn't like the 13th check concept. There are good years and bad years. Reserves should be bolstered in good years, rather than the money sent out to retirees. Best, Don Bauder
And, yes there will be "blowback" for eliminating the defined benefit public pension plans. Experienced City employees with "deep institutional knowledge" are fleeing City employment and taking more competitive pay positions with the other cities and counties in the region including Orange, Riverside, San Bernardino, LA and more...Police, Fire, 911 Dispatchers, Planning Department and other key City position pros....Next time you need a 911 operator and have to wait 20 minutes to an hour...then you will know why..If you are still alive when EMS finally gets to you..If you ever wonder why the City makes so many stupid deals with private sector companies, millioaires and billionaires, then here is part of your answer....going cheap on salaries and pension benefits means you get what you pay for....less competent public officials and negotiators also... Disclaimer: I do not have a dog in this hunt. I am not a City employee nor is any member of my family a City employee
SportsFan0000: There is a shortage of police and fire personnel. That's another reason the City should tell Spanos: "No public money!" Best, Don Bauder
Many of the municipalities you mention are in worse shape financially than San Diego.
ImJustABill: San Bernardino went into bankruptcy a few years ago. Riverside is in bad shape. You are right: some of those cities are in worse shape than SD. Best, Don Bauder
This is yet another financial nail in the City of $D coffin! Just imagine if the Charger $tadium passed! Time to call out all our elected Officals (both new & old along with the Independent Budget Office since they all "allowed" this to occur! No wonder the City is looking for help with auditing! Voters should demand that no more New Projects money get spent until we have paid our way out of this huge Fiscal hole.
Founder: Agreed. But what City or state does that? Are Illinois and New Jersey digging themselves out? They are still digging deeper holes. Best,Don Bauder
https://www.sandiego.gov/city-clerk/boards-commission
Did you leave out an "s"?
https://www.sandiego.gov/city-clerk/boards-commissions
ImJustABill: Would Founder's alleged omission be considered an s-hole? Best, Don Bauder
Founder: My computer won't pick up that page. Best, Don Bauder
Don and Don,
See what happens when don't listen to Aguirre.
Diogenes: Should I ask Aguirre to come over and fix my computer? Best, Don Bauder
The main reason for the almost $1 Billion SDCERS Pension increase is due to the continuous Pensionable Pay Raises and Benefit Increases during the supposed 5-year Pensionable Pay Freeze negotiated by former Mayor Filner starting on July 1, 2013 to June 30, 2018.
https://www.sdcers.org/Forms-Publications/Annual-Reports/Current-Year/2016-SDCERS-GASB-67-68-City_20161110vs.aspx
The 5-Year Pensionable Pay Freeze never actually happened.
Although the 5-year Pensionable Pay Increase is in place, Mayor Faulconer has given several large Non-Pensionable Pay and Benefit Increases. Notice on the Closed Session Agendas, that even with signed labor agreements, labor negotiations are constant since September 2013.
http://tinyurl.com/20160314a
Analyze the Actuarial Valuation by Cheiron for SDCERS for 2016 compared to 2013 when the 5-year Pensionable Pay Freeze was signed. Lots of new changes and expenses, all brought forward by Mayor Faulconer and Interim Mayor Todd Gloria mostly always on consent with no discussion.
Proposition B did not create any Pension savings, the 5-year Pensionable Pay freeze came out during Closed Session Negotiations.
“Sanders and Faulconer touted this as such a victory for the taxpayers,” Harris said in an interview, “but the reality is, it will end up costing the taxpayers … the savings were all out of the five-year pay freeze.”
Please analyze the City Attorney’s Closed Session Reports, specifically for Conferences with Labor Negotiators and City Designated Management Team Representatives, which always excluded our Strong Mayor from 2013 to the present.
Unlike previous San Diego Mayors, Mayor Faulconer has abdicated his Elected Strong Mayor authority by not being the Lead Negotiator during Meet and Confers with the Unions for Non-Pensionable Pay and Benefit Increases. The Unions are negotiating with themselves with no oversight by elected officials, until negotiations are over.
https://www.sandiego.gov/city-clerk/councilcomm/closedsess
In 2016, 10 of the 21 Closed Session included ongoing Labor Negotiations, Pay and Benefit Increases, and Pensionable Pay Increases during the supposed 5-year Pensionable Pay Freeze.
1 of 1 Closed Session for January 2016. 2 of 3 Closed Sessions for February 2016. 2 of 2 Closed Sessions For March 2016. 2 of 3 Closed Sessions for April 2016. Zero Closed Sessions for May 2016 1 of 2 Closed Sessions for June 2016 1 of 3 Closed Sessions for July 2016 Zero Closed Sessions for August 2016 1 of 3 Closed Sessions for September 2016 0 of 3 Closed Sessions for October 2016 0 of 1 Closed Sessions for November 2016 0 of 2 Closed Sessions for December 2016
laplayaheritage: Filner tried to put discipline in the system, so the establishment, with help from liberals, forced him out of office with phony charges and threats to break him financially and put him in jail if he didn't surrender. He did.
So a handsome, smiling, weak-spined Republican replaced him, did what the downtown oligarchs demanded, and now hopes to get out of office before the city's woes become an incurable cancer. Best, Don Bauder
Phony charges? I know some ladies who would strongly disagree with that description of Mr. Filner's acts.
JustWondering: Almost all of those women -- their alleged woes publicized daily to maximize press coverage -- were NOT victims of sexual harassment. They were not city employees, with the exception of two whose credibility can be challenged. Maybe these women were, indeed, ruffled psychologically by advances the divorced Filner made, but they weren't representative of sexual harassment. They were part of a fabricated Allred parade which the mainstream media bought into without the slightest bit of skepticism. Best, Don Bauder
You may label them as liars, dismiss their complaints on technicalities or even blame the main stream media for its level of coverage, but the facts are Filner, by his own omission in open court, did the acts. Thus it was his own doings which destroyed his term as Mayor. This will be his everlasting legacy, not any acts of good during his career.
Just as Hillary was her own worst enemy. Her desire for power, greed and secrecy, and Filner's lust for power and control over women led each to their own special place of eternal torment.
JustWondering: Filner did some stupid things. He admitted that. He apparently did not catch on to the new sexual harassment rules, and he continued to act like it was the 1950s. He confessed to having a monster inside of him. But those who forced him to confess that, still went public with their charges,, double-crossing him.
Now to OPEN COURT. Yes, after Allred staged her parade (charade), the legal negotiations began. The fact is that the city attorney and others threatened him with bankruptcy unless he confessed. Then they charged him with criminally trying to choke someone. He had hugged a lady in front of hundreds of people in a park. Do you really think a man with intent to choke someone to death would do it in front of all those people? Of course not. This was a case of prosecutorial crime. Not prosecutorial zeal, not prosecutorial overkill. Prosecutorial crime.
The officials who pulled these crimes -- threatening Filner with bankruptcy and jailing -- are the ones who belong behind bars. Best, Don Bauder
Pensions have been under attack since the 70's. Social Security is under attack now. Most employees can never save enough to retire. What we are doing is investing in future poverty. Low wages, low/no benefits, and so called retirements products that will not allow most to retire.
Don just wrote an article about trees but I don't recall anything in that article about money growing on them.
The current financial system is unsustainable. Promises have been made which will only be possible to fulfil in the event of explosive financial returns. It's not possible to provide for early retirements with large guaranteed pensions and still have reasonable taxes.
We either need to start raising the retirement age - A LOT, lowering the defined pension benefits A LOT, or raising taxes A LOT. Probably some combination of the 3.
ImJustABill: I agree: from the beginning, the retirement system was not sustainable financially.
They call it "actuarial science." But it isn't a science. Nor is economics a science. In this instance, actuaries and the city's financial planners both failed, as did elected officials. Best, Don Bauder
AlexClarke: One of the reasons is one seldom discussed. Economists and politicians encourage citizens to SPEND. They do, providing the economy with some growth. (Consumption is more than 70 percent of GDP.)
Why can't they encourage citizens to SAVE? Growth might suffer, but current and future problems would at least partly abate. Best, Don Bauder
AlexClarke: Pensions have been under attack since the 1970s, for a very good reason: companies and governments used flawed actuarial assumptions when promising fat retirements to employees after World War II. Best, Don Bauder
There is nothing inherently wrong with defined benefit plans. But when they are established, they have to be on sound actuarial footing, and then they cannot be "messed with." Unfortunately, when making growth estimates, the managers err on the high side especially when returns have an abnormal spike, which happens from time to time in a bull market. In the public sector, keeping the plans fully financed requires discipline, putting large sums of money into the trusts when it seems it isn't needed. It is needed; just wait until the next downturn.
Across the state and nation we have all levels of government making promises of lovely retirement incomes that cannot be paid for at the current levels of funding and current levels of contribution. If the real cost of the plans were honestly faced and paid in each year, there would be little to pay for current operations. The streets would be worse than they already are, cops would be stretched thin as would fire and emergency medical care personnel. The list of shortfalls goes on.
With the public DB plans always subject to weak-willed political consensus they will never be properly funded. So, the only real answer is to go to a defined contribution plan.
As to the sort of things that will have to occur, they are already happening. The State Teachers Retirement System is now collecting more from both the teachers and from the school districts, for newer hires, than previously. The formula was 8% from the teacher and 8% from the district, supplemented by some state funds every year. For that, a teacher could look forward to a comfortable retirement after thirty years of service. Now the teacher contributes 10%, and the district even more, just to provide the same schedule of benefits as before. And even that formula is criticized as inadequate. School districts are screaming bloody murder because they have to find more money each year to pay the share of STRS for each teacher. The bottom line will be fewer teachers. It's happening already, here and there, in public employment.
Visduh: Absolutely. Defined benefit plans are based on growth that won't occur, and actuarial assumptions that are too rosy. Best, Don Bauder
Visduh II: Don't just blame the public sector. Companies did the same thing. Faced with a strike, management granted defined benefit pensions to buy off workers. The managers knew they would be retired when the flawed retirement plans collapsed. Best, Don Bauder
I was a partner in a pension plan administration firm. The only way defined benefit plans made sense were when they were established by professional groups such as doctors, dentists, lawyers and architects... and so forth. Many were "catch up plans" where the participants (top hat plans) could contribute tax-free as much as 100% of their compensation to the plan. (That is how the 1% get rich, with the massive tax deductions from defined benefit plans or even better, accumulating the "highest paid and most loyal" employee participant benefits divided as employees leave before they vest).
Then on the contrary, defined benefit plans administered in publicly traded or large private companies get raided by private equity teams that gut the pension fund and throw the carcass at the PBGC to rescue.
When I was in the business, custom designed pension plans were the vanguard of the industry. We spoke "tax code" and "loopholes" and made our money on amending and restating every plan we could to save a few bucks, much like re-financing in the housing market today.
I witnessed the future of the middle-class retirement get gutted in the 80's after TRA '86 and ERISA. All the changes and amendments since then have always granted major tax relief to the high earners and cut-back (using the IRA and 401K) deductions allowed for the middle class. A DB professional can deduct 100% of their income to fund their retirement, but the middle class can't get to sock away more than 15%.
When it come to municipal pensions, I just wonder how long the taxpayers can put up with the insanity. It's is not that compensation for some individuals is out of control, but it is certainly the bloated, unresponsive, lazy, public servant union dolts with laissez-faire attitudes devoid of commitment to service, excellence or transparency that are in numbers that should be sliced by 70% that are going to bankrupt this city.
Ponzi, I recall a short-lived DB plan in one company which was of that "catch-up" kind. It was a great way to stash away large sums of money during fat times, but when things got tight it ended up being jettisoned and replaced--if you can call it that--with a 401(k).
Isn't it ironic that the Employee Retirement Income Security Act (ERISA) has had just the opposite effect from that claimed by its proponents? It was intended, we were told, to reform abuses in existing plans and insure proper funding, hence secure the income stream for retirees. But all it seems to have accomplished is to get employers to abandon the DB approach all together. And there are still scads of plans hanging around out there that are woefully underfunded. The best examples of those are many of the legacy air lines' plans.
Visduh: Your indictment is a trenchant one. It is hard to argue with what you say. Best, Don Bauder
Ponzi: That is a lot of sound information from someone who actually worked in the business. Best, Don Bauder
This was in the late 80's, when employers wanted to switch from a defined benefit plan to a profit sharing or 401K type plan, they usually painted a rosy picture. They would commit to profit sharing contributions which looked more attractive than the defined benefit result. One of the key points was the change in vesting from many years (10 or more), such as eliminating cliff vesting for step vesting. Instead of having to stay with a firm for five years or more to vest (the cliff), now an employee could get vesting in steps... 0 the first year, then 20, 40, 60, 80 and 100% after five years. (Our company was Pacific Pension Designs, Inc. and my partner passed away 10 years ago.)
In a society that didn't stay put, or stay put in jobs, step vesting was attractive and the 401K was sold. However, after a few years, company executives would get greedy and reduce the contribution match, then they would stop contributing the the profit-sharing aspect of the plan. Now that rosy picture looked like a bait-and-switch. It was. We sent our sales people out to "sell" the new plans. "It's not that people plan to fail, they fail to plan!" Was the motto that made employees "decide" to take "their financial future into their own hands."
Where there is a high turnover of employees, when an employee quits (or is pushed out) the non-vested portion of their pension is reallocated to the "remaining participants" based on a percentage of their "time of service and income." Guess who collects (makes all the money) from private pension plans, the "longest and loyal employees with the highest incomes... the owners. The owners get to deduct the expense of employee pensions, but turn around later and get to collect almost all of the pension fund because most people quit before they vest. The wealthiest clients I had were in construction, restaurants and other concerns where they used a pension play to attract employees. But most of those employees quit before they vested. So the owners got the lions share of the pension fund money.
That is great for the private sector, but the public sector does not make fail-safe contributions or tests like the "one point-0 test" that makes sure the plans are within the threshold of funding and solvency required by the IRS. I don't know much about the rules with public pension plans, but I assume government plans are not as regulated as private plans. How else can public pensions be managed with so little over-sight and so much incompetence? They permit politicians to kick the can down the road while actuaries (the Gods of pension plans) are bribed to give overly positive reports on a public pensions health.
Ponzi: Excellent points. In part, you are describing how top managers get into the top 1 percent of wealth in the nation: use bait and switch on benefits, and hog the money while the little folks see their incomes decline over a 20-year period. Best, Don Bauder