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Sunday, December 26, 2010 1:43 AM


Pensions Eat 70% of Decatur, Illinois' Budget; New York City's $76 Billion Shortfall; Houston Mayor Wants Pension Benefit Cuts


Public pension woes continue to escalate. Here are three more stories highlighting problems at various cities in Illinois, New York, and Texas.

Pensions Eat 70% Decatur, Illinois Budget

Please consider Pensions eat up growing portion of city of Decatur's property tax revenue

As the Decatur City Council prepares to convene Monday to discuss setting its portion of the local property tax levy, the largest burden on those revenues - funding the pensions of police, firefighters and city employees - remains a persistent and growing challenge.

City Manager Ryan McCrady and Finance Director Ron Neufeld highlighted some telling statistics in the city's attempts to maintain its pension funds over the last decade.

"We've been putting in what we're required to put in, but the unfunded liability keeps growing," McCrady said.

In 2001, about 30 percent of the city's property tax levy went into paying down the pensions of its retired police and firefighters. In 2011, 70 percent of it will go toward pensions, even as recent years have seen cuts to other services that draw their funds from the same source, including the Decatur Public Library.

The state legislature sets all of the rules for pension contributions, and over the years it has mandated that municipalities make ever increasing payments. The result, McCrady said, has been a higher and higher cost for the city.

Recent pension reforms that passed the General Assembly and await the Gov. Pat Quinn's signature could provide long-term relief, McCrady said, but in the short term, city staff and the council have to figure out how to meet their obligations in a fiscal climate that leaves little breathing room.

"It's to the point now where taxpayers can't sustain a property tax levy to the point where we can fund these out of the property taxes," McCrady said. "We're starting to draw from other operations to pay for these obligations."
Long-term fixes won't do Decatur much good now if it runs out of money a few years from now. Property tax hikes certainly are not the answer either. I suggest bankruptcy, followed by outsourcing the police and fire departments to the lowest qualified bidder.

New York's Exploding Pension Costs

The Empire Center for New York State Policy discusses New York's Exploding Pension Costs
Public pension costs in New York are mushrooming—just when taxpayers can least afford it. Over the next five years, tax-funded annual contributions to the New York State Teachers’ Retirement System (NYSTRS) will more than quadruple, while contributions to the New York State and Local Retirement System (NYSLRS) will more than double, according to estimates presented in this report. New York City’s budgeted pension costs, which already have increased tenfold in the past decade, will rise by at least 20 percent more in the next three years, according to the city’s financial plan projections.

NYSTRS and NYSLRS are “fully funded” by government actuarial standards, but we estimate they have combined funding shortfalls of $120 billion when their liabilities are measured using private-sector accounting rules. Based on a similar alternative standard, New York City’s pension funds had unfunded liabilities of $76 billion as of mid-2008—before their net asset values plunged in the wake of the financial crisis.

In November 2003, the Manhattan Institute for Policy Research issued a report de-scribing New York State’s public pension system as “a ticking fiscal time bomb.”

The bomb is now exploding—and New Yorkers will be coping with the fallout for years to come.

New York’s state and local taxpayers support three public pension funds encom-passing eight different retirement systems—five covering different groups of New York City employees, and three covering employees of the state, local governments, school districts and public authorities outside the city. Between 2007 and 2009, these funds lost a collective total of more than $109 billion, or 29 percent of their combined assets. Two of the three funds ended their 2010 fiscal years with asset values below fiscal 2000 levels; the third has barely grown in the past decade.

Meanwhile, the number of pension fund retirees and other beneficiaries has risen 20 percent and total pension benefit payments have doubled in the past 10 years. Tax-payers will now have to make up for the resulting pension fund shortfalls.

Assuming the pension systems all hit their rate-of-return targets:

  • Taxpayer contributions to NYSTRS could more than quadruple, rising from about $900 million as of 2010-11 to about $4.5 billion by 2015-16. The projected increase is equivalent to 18 percent of current school property tax levies.
  • State and local employer contributions to NYSLRS will more than double over the next five years, adding nearly $4 billion to annual taxpayer costs even if most opt to convert a portion of their higher pension bills into IOUs that won’t be paid off until the 2020s.
  • New York City’s budgeted pension contributions, which already have in-creased by more than 500 percent ($5.8 billion) in the last decade, are projected to increase at least 20 percent more, or $1.4 billion, in the next three years.

Pension costs would be even higher if New York’s state and local retirement funds were not calculating pension contributions based on permissive government ac-counting standards, which allow them to understate their true liabilities.

While New York’s two state pension systems officially are deemed “fully funded,” we estimate that NYSLRS is $71 billion short of what it will need to fund its pension obligations, and that NYSTRS has a funding shortfall of $49 billion, based on valua-tion standards applied to corporate pension funds.

New York City’s pension systems are not as flush as NYSLRS and NYSTRS, which is the main reason why the city spends more for pension contributions than all of the state’s other public employers combined. The official “funded ratios” for the five city retirement systems ranged from 56 percent to 80 percent as of June 30, 2008. This would indicate they were $42 billion below fully funded status before the financial market meltdown wiped out more than 20 percent of their net assets. However, the city actuary also has computed alternative measures of funded status based on the kind of more conservative assumptions used in the private sector. These measures show the city’s pension system was underfunded by $76 billion in 2008.

The shortfalls in the city systems undoubtedly have grown much larger in the last two years, but the full dimensions of the problem won’t be known until the pension plans issue their financial reports for fiscal 2010.
Note that those shortfalls assume New York meets its expected rates of return of 7.5-8.0% based on plan. The odds of that happening are slim. Please see the article for more facts, figures, and charts.

Houston Mayor Wants Pension Benefit Cuts

The Houston Chronicle reports Houston mayor wants benefits cut, takes fight to Legislature
Instability in its three pension systems is the greatest threat to Houston's financial solvency, city officials and financial analysts say.

Within three years, according to an actuarial study commissioned by the city, the pension for firefighters will require the city to contribute 45 percent of its payroll costs for that retirement plan, a burden Mayor Annise Parker says is unsustainable.

The other two plans are in even worse shape. The police and municipal employee pensions are underfunded by $2.1 billion, roughly the equivalent of what the city spends annually for public safety and general operations.

"The bottom line is the whole system is completely unsustainable with current benefit levels and the city's financial position," said John Diamond, a Rice University public finance fellow and governmental tax consultant.

The opening salvo in what may be a long fight over city pensions is expected to take place in the upcoming state legislative session. The city is taking direct aim at the firefighters' pension, seeking help from state lawmakers to force pension officials to negotiate in hopes they can reduce benefits and lower annual contributions.

"Voters elected me to make tough choices, and voters elected me to get the city's budget in order," Parker said. "We are hemorrhaging right now … in some of our pension costs. … There's a difference between a fair pension and a gold-plated pension, and the citizens of Houston have to know that we can find a fair balance in there."

Christopher Gonzales, executive director of the firefighter pension, said the fund does not want to join the city in a "meet and confer" agreement, a sort of watered-down collective bargaining. Those negotiations with the two other employee pensions in recent years have only resulted in reduced benefits for the workers and annual contributions to the system that were not enough to ensure its financial security, he said.
The firefighters don't want "watered-down collective bargaining". Well, I don't want collective bargaining at all. Collective bargaining is one of the problems.

The mayor ought to grant Gonzales his watered-down wish and outsource police and fire to the lowest bidder. Then again, the City of Houston is Bankrupt (So are California, Oregon, and Pension Plans in General) so arguably the best thing for Houston to do is admit it and file for bankruptcy. The police and fire departments can then see what benefits they get in bankruptcy court.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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