How Safe Is Your Pension?

As a public employee, if your pension is underfunded because your employer won’t contribute its share, you just might be out of luck.

Note: This article originally ran in Police Magazine and is intended to help campus protection professionals compare their benefits to those of traditional law enforcement.

You can’t turn on the television these days without hearing about the economic crisis that’s affecting not only the United States, but the entire world. So it stands to reason that many retirement funds are suffering as a result. Some public sector pension plans are relatively unaffected, while others were too fragile to weather the financial storm. Whether the safety of your retirement is in danger depends on the terms and stability of your pension fund, the health of your public employer’s overall finances, and how long you have to make up any losses before you retire.

Chief Rob Bross of the Atwood (Ill.) Police Department is a part of a fully funded pension plan in Illinois, the Illinois Municipal Retirement Fund (IMRF). It’s one of the reasons he left his previous job as chief at a much smaller Illinois police department that instead provided only a government-approved 401(k)-type plan for retirement that matched a small amount of contributions.

The man who was chief before Bross at that department lost $80,000 in the plan when the market took a dive during the Great Recession. He worked for a year and a half more than he’d intended to try to make it up, but it wasn’t enough. Bross says the retired chief has now burned through most of his savings just paying his everyday bills. “With a guaranteed retirement such as IMRF, at least you’re guaranteed you’ll have x number of dollars every month,” says Bross.

This is a good example of the two ends of the retirement spectrum right now in law enforcement. If you’re vested in a well-funded defined benefit plan, your retirement is OK. If you don’t have a defined benefit plan, or if yours is underfunded, the fate of your retirement is most likely up in the air right now as politicians, union reps and financial experts develop a redesigned benefits package based on your public employer’s current and projected finances.

Blame Everyone for the Problem

Monies for pension funds come from three sources: employee contributions, employer contributions and return on investments. Employee contributions come out of your paycheck like clockwork. But anyone could tell you return on investments has been down since the Great Recession. And if an employer hasn’t been paying its annual share, investments are no longer able to make up the difference as they had in the past. Therein lies the problem.

How did this happen, and who is being blamed? The list includes banks, small to large governments, unions and police officers themselves.

Banks and other advisors that misled pension fund trustees have been sued by some funds. Wisconsin’s Milwaukee County sued consulting company Mercer Inc. for $100 million in 2009 over what the county claims was bad advice regarding the amount of money lump sum “backdrop payments” to pensioners would cost. Out of a $45 million settlement, $13 million went to pay for attorneys’ fees and $32 million was placed in the pension fund.

Similarly, the Police and Fire Retirement System of the City of Detroit sued Michigan real estate company Paramount Limited, LLC earlier this year over an alleged Ponzi scheme to recover funds owed from a defaulted $9.9 million loan.

Danger of such financial missteps is why James McNamee established the Illinois Public Pension Fund Association in 1983, while he was serving as a police officer with the Barrington (Ill.) Police Department. When he was elected to the Barrington Police Pension Board, he discovered there was no training or education for trustees of the fund like himself.

McNamee currently serves as president of the association he founded to provide training to its members, which has grown from 50 to 400 pension funds. He’s also helped to establish standard pension board policies and procedures, and has helped implement legislative changes as well as help to review the performance of investment managers and consultants.

“The vast majority of public sector pension plans are well funded,” assures Hank Kim, executive director of the National Conference on Public Employee Retirement Systems (NCPERS). “For the few that are the headline-grabbing examples of underfunded pensions, the cause of that underfunding stems from the fact that plan sponsors have not made their contributions to the pension plan.”

Apparently not all pension boards are as well informed as the members of McNamee’s association. Some of the problems of underfunded pensions could be due to poor financial planning and management by trustees and consultants who lacked knowledge. But that’s not true for every case.

When education and experience are factored in, public employees are not overpaid compared to private sector workers, according to "Getting It Right: Empirical Evidence & Police Implications FromResearch on Public-Sector Unionism & Collective Bargaining." Traditionally, relative job security and health and pension benefits help to make up for disparity in pay. This chart shows that  California and New Jersey are the only states whose public employees make more than the private sector. Their hourly total compenstation is about 2% more than private sector employees.

“There is a crisis, but it’s been manufactured in large part to cover up the fiscal mismanagement of elected officials over several generations,” says Jim Pasco, executive director of the National Fraternal Order of Police. “As economic times deteriorated, elected officials suddenly found themselves pinched for cash, and they developed buyer’s remorse over the contracts they and their predecessors over time had entered into. Now all of a sudden it’s seen as the fault of the greedy public servant that there was a fiscal crisis in these communities.”

The real problem for many underfunded pensions is lack of employer contributions over time—a long time—that’s coming to a head now because of the dip in the market. No one knew when this would happen, but the public employers that failed to make their yearly contributions did so intentionally.

“In Illinois, under our former governor Rod Blagojevich, the state made zero contributions to the state’s pension funds, what Blagojevich called a ‘pension holiday,’” says Sean Smoot, director and chief legal counsel for the Police Benevolent and Protective Association of Illinois. “It was a notorious thing that he did.”

Blagojevich’s government wasn’t the only one to take a “pension holiday.” In fact, Milwaukee’s pension fund had been so well funded up until 2009 that the city of Milwaukee hadn’t contributed in two years. The mayor and city council dipped into a reserve fund that had been created to help cover the costs when both the city and county were required to cover the loss of one-third of its pension funding because of the down market.

Now many police officers and other public safety professionals are left wondering why they’re getting punished for someone else’s bad decisions.

Some States Taking Drastic Measures

Rhode Island is one state facing a major problem with underfunded pension funds. And it’s looking to make major changes to come up with some sort of solution. Officials are looking at reducing benefits, lowering retirement payments, replacing part of the pensions with 401(k)-type accounts, and reduci
ng retirees’ cost-of-living increases.

If you’re grandfathered in to a pension system, you might be safe. And if your state has in its constitution that it can’t renege on pension promises, you’re in a better position. But with too little money on hand and few other options, states like Rhode Island that are faced with severely underfunded pensions are less afraid of potential legal recourse from unions and other interested parties.

States are now cutting into current retirees’ pension benefits to stay afloat-something thought unthinkable until recently. South Dakota, Colorado, Minnesota, New Jersey and Maine have all reduced cost-of-living increases for their retirees. But there are other measures that can generally be taken before taking that step.

“If a pension plan has systemic, long-term funding issues, employers could contribute more, employees could contribute more, they could change some of the multipliers, they could change the retirement age,” says NCPERS’ Kim. “If there’s collective bargaining, if there’s constitutional protections for the promises made, those things need to be worked out sitting across the table from each other to negotiate on.”

Having taken a drastic measure to solve its financial woes, the city of Vallejo, Calif., is emerging from bankruptcy protection after three years. It decreased its police department by 47%, but it couldn’t alter the pensions of police officers who were already retired because of a California law. “But we could increase what employees are asked to pay and the cost of their medical,” Vallejo’s city manager Phil Batchelor told local station WPRI. “All of those were made possible because of the bankruptcy proceeding.”

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