Pension Funds: Waiting For The Other Shoe To Drop


by Dianne Hermann (Copyright 2013)


In my last article “Bankrupt Cities” I mapped out the cities and counties that filed for bankruptcy and discussed the corruption and incompetence that brought them to financial ruin. Other locales are on the verge of plummeting into the same ravine, like lemmings off a financial cliff. The other shoe is about to drop.

There is a common thread that connects Detroit’s debt of $18 billion with the debt of Stockton, Mammoth Lake, and San Bernardino County, California, which also runs through Jefferson County, Alabama, with its debt load exceeding $4 billion. That common thread is underfunded pensions.

A 2010 Pew Foundation estimate revealed that in 2008 the total unfunded liabilities of the 50 states’ pension funds amounted to about $1 trillion. Pensions funds took a direct hit when the stock market tanked in 2008 and they have not fully recovered.

According to The 2012 Milliman Public Pension Funding Study, which independently measures the status of the 100 largest U.S. public pension plans, there is an aggregate underfunding of $0.895 trillion and an aggregate funded ratio of 75.1 percent. Translation: public pensions are underfunded by about one quarter of what is needed to keep them solvent.

More ominous is Stanford Professor of Finance’s Josh Rauh’s dire predictions. He writes, “The day of reckoning is in fact not as far away as some might imagine. Under my projections, seven states run out of (pension) money before 2020, including Louisiana (2017), Illinois (2018), New Jersey (2018), and Connecticut (2018). Thirty more states are expected to run out of money during the 2020s.”

Based on U.S Department of Labor’s own website, a staggering 72 union pension plans have already met the criteria of “Critical Status” so far in 2013. Another 43 pension plans made the “Endangered Status” list. The Service Employees International Union (SEIU) 1199 Greater New York Pension Fund topped that Critical list in 2012.

Those pension funds are all barely clinging to solvency while the U.S. Department of Labor monitors closely. The DOL directs that, under Federal pension law, if a multi-employer pension plan is determined to be in critical or endangered status, the plan must provide notice of this status to the participants, beneficiaries, bargaining parties, the Pension Benefit Guaranty Corporation, and the Department of Labor.

If a pension plan is in critical status, the Department of Labor mandates “adjustable benefits may be reduced and no lump sum distributions can be made. Pension plans in critical and endangered status are required to adopt a plan aimed at restoring the financial health of the pension plan.”

So, how did all this happen?

SEIU is probably the best example of how unions protect themselves at the expense of everyone else. A 2009 Wall Street Journal report stated that the 145,000 member SEIU 1199 United Healthcare Workers East, the nation’s largest union, re-opened contract negotiations two years early and gave up raises and accepted reduced retirement benefits for future hires so current employees could preserve their existing pensions.

But not all union employees are created equal. SEIU officers and employees get a yearly 3% cost of living increase while SEIU rank-and-file members get none. Are the union leaders lining their pockets at the expense of blue-collar laborers and putting worker pension plans, and city’s finances, at risk

It’s not just public pensions that are in trouble. Corporate union pensions are following close behind after falling victim to union negotiating pitfalls. In the case of General Motors, the United Auto Workers (UAW) negotiated sweet deals like the “job bank” when surplus workers, rather than getting laid off, receive 95% of their full salaries plus benefits for sitting around in the break room while the company waits to reassign them, which can take years.

In addition, the UAW negotiated a “thirty and out” rule during the 1970 strike allowing workers of any age to retire with a cushy pension after thirty years. For example, a 51-year-old worker can retire and start drawing a pension.

With longevity being what it is today, that retired worker can realistically expect to draw a pension for 30 or 40 years! Pension Dynamics Corporation reports the average GM pension is $5,000 a month.

According to Forbes, for every active GM worker there are 4.6 retirees drawing pensions. That is unsustainable by any standard.

Detroit was in the process of negotiating with unions when it filed for bankruptcy. The unions filed an injunction to stop the bankruptcy, arguing they had been bargaining in good faith. Circuit judge Rosemarie Aquilina issued the injunction stating the bankruptcy filing violated the state constitution by threatening the pension benefits for the city’s retirees and upheld the injunction. The city will appeal.

Now consider the Bureau of Labor Statistics report that only 11 percent of U.S. workers belonged to unions in 2012, or roughly 14 ½ million workers. Compare that with the first year of reporting 30 years ago. In 1983 union membership was over 20 percent.

So if union membership is declining, how can cities and counties be suffering from underfunded pensions?

Let’s do the math. Well, actually the Department of Labor’s Bureau of Labor Statistics did it for us. Public-sector workers have a union membership rate (35.9 percent) more than five times higher than that of private-sector workers (6.6 percent). These public-sector unions are strangling U.S. cities and counties. They negotiate through collective bargaining, understandably, for the greatest benefit of their members but to the detriment of the general public.

When investment funds dwindle, tax revenues decrease, government regulations entangle, legal judgments choke, and pension obligations increase then locales are left holding the empty economic bag, waiting for the other shoe to drop.

Time is running out. The other shoe looms over our heads as I write this article.