For the past century, a public pension was an ironclad promise. Whatever else happened, retired policemen and firefighters and teachers would be paid.
That is no longer the case.
Many cities and states can no longer afford the unsustainable retirement promises made to millions of public workers over many years. By one estimate they are short $5 trillion, an amount that is roughly equal to the output of the world’s third-largest economy.
Certain pension funds face the prospect of insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed. It is increasingly likely that retirees, as well as new workers, will be forced to take deeper benefit cuts.
In Kentucky, a major pension plan covering state employees had about 16% of what it needs to fulfill earlier promises, according to the Public Plans Database, which tracks state and local pension funds, based on 2017 fiscal year figures. A fund covering Chicago municipal employees had less than 30% of what it needed in that fiscal year, according to the same database. New Jersey’s pension system for state workers is so underfunded it could run out of money in 12 years, according to a Pew Charitable Trusts study.
When the math no longer works the result is Central Falls, R.I., a city of 19,359. Today, retired police and firefighters are wrestling with the consequences of agreeing to cut their monthly pension checks by as much as 55% when the town was working to escape insolvency. The fiscal situation of the city, which filed for bankruptcy in 2011, has improved, but the retirees aren’t getting their full pensions back.
“It’s not only a financial thing,” said 73-year-old former Central Falls firefighter Paul Grenon, who retired from the department after a falling wall punctured his lung, broke his back and five ribs, and left him unable to climb ladders. “It really gets you sick mentally and physically to go through something like this. It’s a betrayal, as far as I’m concerned.”
Uncertainty over public pensions is one reason some Americans are reaching retirement age on shaky financial ground. For this group, median incomes, including Social Security and retirement fund receipts, haven’t risen in years. They have high average debt, and are often using savings for their children’s educations and to care for their elderly parents.
The public pension arose from the aftermath of the U.S. Civil War. New York was the first city in the U.S. with a pension fund for injured police officers in 1857 and then for firefighters in 1866. The concept of a public pension plan for government workers became widespread in the early decades of the 20th century. The understanding was employees would accept relatively lower pay in exchange for richer, guaranteed benefits once they retired.
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When times were flush, politicians made overly generous promises. Public-employee unions made unrealistic demands. High-profile municipal employees, such as coaches at public universities, have drawn fire for what some consider too-rich retirement benefits, while some first responders scored rich early retirement and disability arrangements.
Extended lifespans caused costs to soar, as did increasingly expensive medical care, which unions put at the center of contract negotiations, among other benefits.
A technology-led stock market boom in the late 1990s produced a brief period of surpluses in pensions, according to figures from Pew, before deficits began to creep higher in the mid 2000s. Deficits accelerated following the 2008 financial crisis, which caused steep losses for many funds just as large numbers of baby boomers began to retire.
State and local pensions lost roughly $35 billion in assets between 2008 and 2009, according to Pew. Liabilities, meanwhile, ballooned by more than $100 billion a year, widening the difference between the amount owed to retirees and assets on hand. Not even a nine-year bull market in stocks could close that gap.
Officials, taxpayers and public-sector employees are increasingly at odds as they figure out what comes next. The board overseeing Puerto Rico, which filed for the largest-ever U.S. municipal bankruptcy in 2017, this year certified an average 10% cut in certain retiree pensions as part of a plan to restore the island to solvency. The governor has vowed not to implement it, a face-off that will likely end in court.
In the Bluegrass State, a judge in June ruled that a reduction in new worker benefits championed by Kentucky’s governor was unconstitutional because of the way lawmakers passed it. The state’s attorney general opposed the cuts. The case could end up at the state Supreme Court.
Public pensions are becoming a growing burden for many states and cities across the U.S.
Funded ratio† for state and local public pension funds
Employer contribution* as a percentage of payroll for state and local pensions
*Weighted by payroll †Weighted by plan assets
Source: Public Plans Database
In California, several cases before the state’s Supreme Court are testing an influential 1955 rule that stipulates benefits for public employees can’t be cut. Gov. Jerry Brown is predicting pension reductions in the next recession if that rule is loosened. A change in that law might persuade other states to reach for deeper benefit reductions.
State and local pension plans in the U.S. now have less than three- quarters of the money they need to meet their promised payouts, their lowest level since at least 2001, according to Public Plans Database figures weighted by plan size. In dollar terms the hole for state and local pensions is now $5 trillion, according to Moody’s Investors Service. Another estimate of unfunded state pension liabilities, from Pew, is $1.4 trillion.
The prospect of lower benefits is particularly daunting for pensioners in their 60s. Those older are likely to die before a large reckoning, while those younger have years left in their careers to make new plans. But many in their 60s have spent four decades assuming a financial promise that is no longer guaranteed.
There are few easy solutions. Cities and states can either raise taxes, cut services or become more aggressive about reducing benefits to retirees. For many years governments were unwilling to take these steps because they weren’t politically palatable, although public appetite to cut public-employee benefits is emerging, in states including Wisconsin. Many governments opted to change benefits for new employees, which in some cases didn’t fully alleviate funding woes.
Include 401(k), 403(b) and 457 accounts; IRAs; brokerage and bank accounts
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In San Jose, Calif., voters approved cuts to police pensions in 2012 only to roll back those changes after hundreds of officers quit and the crime rate increased. The measures were revised, with savings coming in part through changes to retiree health care.
San Jose Mayor Sam Liccardo said the bulk of the police departures took place before the pension revamp as a result of earlier hiring freezes, layoffs and pay cuts. He doesn’t see the pension changes as a factor in the crime rate.
San Jose has taken “our medicine perhaps earlier than others have,” said Mr. Liccardo. “This is medicine that hundreds of cities and many states are going to have to take,” he added.
Retirees in other cash-strapped states said they expect to lose some of what they have been promised. “It may sustain itself before I die,” Len Shepard, 68, a retired teacher in Pennsylvania said of the pension system in his state. “But I don’t see how it can continue to do so.”
Central Falls, which sits 7 miles north of Rhode Island’s capital, is one of several former industrial towns that speckle the Blackstone River Valley.
It provided for public workers under a number of pension plans. Under one, firefighters hired after July 1972 could retire after 20 years of service, essentially in early middle age, receiving half of their final base salary. They could earn another 2% a year for up to five additional years of work and 1% a year after that, up to 65% of their end salary if they retired after 30 years.
The city’s required contribution to its police and fire pensions was about $4 million in fiscal year 2011, the last fiscal year before its bankruptcy, or 20% of the total, said Finance Director Leonard Morganis.
Central Falls didn’t pay that year, or in either of the previous two, given the severity of the city’s economic woes. Rhode Island officials then took the rare step of passing legislation that put bondholders ahead of other creditors and pensioners in the event of a municipal bankruptcy.
After the 2011 bankruptcy, an event that received national attention amid predictions of widespread municipal failures, retirees agreed to 55% cuts because they feared facing even deeper cuts later.
The concessions helped Central Falls emerge from bankruptcy in 2012 and create a “rainy day fund” that now holds $2 million. The town hired a grant writer to help secure money for a new firetruck with smaller wheels custom-made for the town’s narrow streets. The truck is emblazoned with an image of Yosemite Sam dressed as a firefighter that reads “The Wild Mile,” the city’s nickname.
Even though the town is on a better fiscal footing, and state contributions blunted the full impact of the cuts, retired workers are still grappling with how their lives were altered in matters big and small. Two men lost their homes to foreclosure after falling behind on their mortgages. Others had problems paying medical bills as they fought terminal illnesses.
Mr. Grenon, the firefighter who retired after he was injured, says the pension reduction left him without enough money each month to cover a $300 prescription lung medication. He has medical coverage but said the medication is beyond what is covered.
George Aissis, a retired Central Falls firefighter, says he has so little left in his checking account he has to buy groceries when they are on sale and use as little power or gas as possible.
The pension settlement cut his income by $1,200 a month to about $2,600, including an additional state contribution. On one recent Wednesday, he said there was $6.01 in his checking account.
“I never used coupons before, but I know about coupons now,” Mr. Aissis said. “You gotta cut back on things when the money is not there.”
Central Falls Mayor James Diossa, in an interview, called the 2011 pension cuts “unfortunate” but said they did alleviate long-term budget pressures for the city. “These aren’t big pensions, but a lot of these folks built their lives around it,” he said. “To see them get cut was devastating.”
Under the changes, many current workers have to work longer than they thought when they signed up and some will get a lower percentage of their final salary than they would have under the old plan.
Some retirees whose income was cut are now arguing their benefits should be restored to prebankruptcy levels.
The person in charge of that effort, 52-year-old former firefighter Don Cardin, acknowledged he and his colleagues have no legal recourse to restore lost benefits since they signed them away in the settlement.
One of his bleaker arguments contends that firefighters tend to have shorter lifespans because of smoke inhalation and other workplace hazards. That means the town, which also covers some health benefits, is unlikely to have to pay the added benefits for more than a decade.
Despite the city’s surplus, the mayor said Central Falls is unlikely to restore the pensions.
What happened in Central Falls is “certainly not going to be a one-off,” said Robert Flanders, who acted as the city’s state-appointed receiver. “Because other cities and towns, not just in Rhode Island but across the country, are still in bad shape.”
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