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Somebody else’s money

May 28, 2008 By Trickle up 7 Comments

Apparently, the convenient fiction that the cities and towns are responsible for their own fiscal plight makes it easy for the Masters of Beacon Hill to play this kind of shell game. But as one mayor points out

“It’s a tremendous gesture, but the money doesn’t exist,” said Mayor Scott W. Lang of New Bedford, who says he would have to lay off six current employees to make it work for the city’s 1,721 retirees. “I have absolutely no qualms whatsoever of bumping that to meet the inflationary needs, but there’s no funding. Without the funding it’s illusory.”

The broad theme that has emerged since the Weld administration (obligingly taken up by the Democratic legislature) is, Enough of this local-aid stuff, you go raise your property taxes. Progressives should think long and hard about the implications of a tax structure where communities end up strictly stratified by wealth.

The next step, apparently, is the legislature funding its noble ideas with renewed pressure on the property tax.

Go ahead, read the story and tell us what you think.

Update: Fixed a bad link.

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Filed Under: User Tagged With: cities, massachusetts, pensions, spending, towns

Comments

  1. gary says

    May 28, 2008 at 1:47 pm

    “It’s $10 a damn month; that’s all it is,” said Ralph White, president of the Retired State, County and Municipal Employees Association of Massachusetts

    <

    p>by the same reasoning, if the same $10 per month is so damn inconsequential, then he can afford to be without it.

    <

    p>How much longer do we have to keep shoveling benefits at our ‘greatest generation’?

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  2. mike-from-norwell says

    May 28, 2008 at 4:08 pm

    Interesting that the national press has recently started focusing on government pensions over the last month (NY Times, WAPO, et al).  As a pension actuary with some exposure to governmental plans, I’d venture that the best funded government plan doesn’t stack up favorably to the worst funded private sector plan.  There basically are no funding regulations for governmental plans (I’ve seen cases in the past where the retirement age was ratcheted down 10 years with benefit improvements at the same time, then they don’t want to up the contribution – anyone paying $10 to ride a bus in the future will understand why).

    <

    p>There has to be some responsible actuarial cost to the benefit improvements; heckuva lot of spread between $1b and $6b (someone using a 20% interest assumption?).  In the end, the real problem is there is no accountability for increased pension costs (and please don’t kid yourself with statements about how the plan will be fully funded in 2023; I remember back in the 80s Dukakis proudly announcing that the plan would be funded since they were going to amortize the unfunded PSL over 40 years – that’s like saying that I’m on track to pay off my credit card by making the minimum payment).  The Pension Protection Act of 2006 is basically requiring private sector plans to eliminate unfunded liabilities over the next 7 years – would be extremely interesting to see a valuation of the MA government plans using IRC 430 funding.  That would surely open the eyes of folks around here.

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    • stomv says

      May 29, 2008 at 12:45 pm

      The trouble that local gov’ts are facing is that they think there may be some kind of state bailout in the future, so they don’t want to pay in extra now only to end up “losing” that extra contribution to a lower piece of state aid later.  So, the towns continue to do the bare minimum.  Personally, I’d like to see the state shave the requirement so that things are caught up a bit sooner.

      <

      p>I suspect the state is in a similar predicament with national pension plans.  Why risk getting less of some sort of federal pension bailout pie?

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  3. mike-from-norwell says

    May 28, 2008 at 4:24 pm

    From the NY Times 5/21/2008:

    <

    p>http://www.nytimes.com/2008/05…

    <

    p>From the Washington Post 5/10/2008:

    <

    p>http://www.washingtonpost.com/…

    <

    p>Particularly love this bit of “reasoning”

    <

    p>

    Many public pension managers say their projections are based on past experience. Moreover, they say they can take more risks than private companies because there’s no chance of going out of business.

    <

    p>Sure, us taxpayers will just bail out the plans…

    <

    p>

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  4. trickle-up says

    May 28, 2008 at 6:27 pm

    I understand that you like the way industry is required to fund its pensions better than the way government funds its. I’m not so clear on what difference is important to you. And I’m especially in the dark about why.

    <

    p>Industry, after all, has been known to do an Enron and disappear, something that usually does not happen with government. Seems to me that stricter requirements really are in order for the former versus the latter. The bond-rating firms seem to agree–if they required a more-aggressive funding plan for government pension liability they’d get it.

    <

    p>There would be both costs and benefits to taxpayers to funding pension obligations  more agressively, but it’s not clear to me that the benefits exceed the costs.

    <

    p>I’m not disagreeing with you about that, necessarily, but I don’t follow your argument.

    <

    p>On the other hand, I take issue with your use of the word “bailout.” This is a 100% government obligation whether taxpayers pay now or over time. No private entities are being rescued by taxpayers.

    <

    p>In any case, however hard it is for cities and towns to meet their unfunded pension obligations, it’s next to impossible if the legislature keeps moving the goal post by adding new benefits that need to be funded.

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    • mike-from-norwell says

      May 28, 2008 at 8:44 pm

      You have two different levels that you fund for under a pension plan. One, you have the projected benefits that you ultimately expect to be paid out in your plan population.  These benefits assume future service will continue, and you’re also making assumptions as to future salary increases in determining what you expect to ultimately pay when a given participant reaches the normal retirement age under the Plan.

      <

      p>You also have the participant’s accrued benefit.  The accrued benefit represents the portion of the benefit that the participant has earned to date, based upon their service and salary history to the date of valuation.  So if a plan was to cease future accruals, this represents the benefit that the participants in the plan have been promised, and you are on the hook for these amounts as they can’t be taken away or modified generally.

      <

      p>An underfunded plan in essence means that you don’t have sufficient assets on hand to cover your current liabilities through that date.  Note we’re not talking about having the future benefits paid for; we’re just talking about having sufficient funds on hand to cover what people have already earned.  If you notice on the WAPO chart, we’re talking about 41% of government plans being less than 80% funded.  That is not a good situation, and it actually understates the problem with salary based plans.  Further, the situation is worsened in that there are widely varying actuarial assumptions used in governmental plans; if you decide to use a higher interest rate or an old mortality table, you can “gimmick” the cost of the liabilities to appear lower.

      <

      p>So yes, I do have significant concerns (as we all should) about the “promises” made through these governmental plans.  The funds aren’t currently there to provide the promised benefits, and there are too many ways to delay the funding costs.  And keep this in mind:  when you deposit funds earlier, you are counting on future earnings to help out along with the dollars contributed to meet your liabilities.  Deferring the funding until later drastically worsens the situation.

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    • mike-from-norwell says

      May 28, 2008 at 9:58 pm

      On the other hand, I take issue with your use of the word “bailout.” This is a 100% government obligation whether taxpayers pay now or over time. No private entities are being rescued by taxpayers.

      <

      p>Ever heard of the Pension Benefit Guaranty Corporation?  Private entities (namely the auto, steel, and airline industry) are “rescued” by the taxpayers.

      <

      p>And I stand by the term “bailout”.  You have government plans raising benefits willy nilly all of the time, with no plan to actually fund these promises.  My eyes were opened with the stuff going on in the MBTA pension fund.  You have benefits being paid that grossly exceed the maximum benefit limitations under IRC 415 to say the least.  When the IRS gets around to looking at this stuff, it won’t be pretty (look at the Milwaukee County escapade from a few years ago).

      <

      p>The real problem, since you bring up Enron et al, is that government is actually even more irresponsible than your worst corporate raider, as there isn’t anyone who actually is going to have to be personally accountable for pension promises (no owners).  Why not gimmick things with buybacks et al?  Sure, I’d cough up an extra 30k if it meant I was going to see a stream of payments ten times as much as my outlay.  When your town, county, or state is choking on the reality of what they’ve promised, then you might see the problem a few years down the road.

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