Employees of Maryland May Need a Bail Out in the Future

danb · May 2, 2019

If you are already drawing a pension they cant cut it short of declaring bankruptcy.

The disagreement among state law is really whether future benefits can be cut. Benefits that have been accrued due to past service may or may not be able to be cut, that's tricky. If you accept cuts as a condition of employment, maybe. If you've left the job but have accrued benefits, maybe not. But its complicated.

Any cuts or restructuring will mainly affect people in the job now who have not retired or looking to enter the profession.

Inigoes · May 2, 2019

A state can't declare bankruptcy.

danb · May 2, 2019

Inigoes said:
A state can't declare bankruptcy.

Bingo.

So let me tell you about that time Maryland essentially offloaded pensions to counties....

Inigoes · May 3, 2019

People forget there is a difference between something promised in a contract versus fulfilment of the promise.

The future is never garraunteed!

Inigoes · May 3, 2019

People forget there is a difference between something promised in a contract versus fulfilment of the promise.

The future is never garraunteed!

My father learned that with Bethlehem Steel, and he was one of the lucky ones that got a livable retirement income.

danb · May 3, 2019

Right, but when a business or person can no longer fulfill a contractual promise they go bankrupt, which lets you cancel or restructure contracts (its not clear pensions are contracts in the first place tho). Cities and municipalities can go bankrupt. Typically sovereign governments like the US or Argentina dont go bankrupt, they resort to printing money. Pre-US constitution a lot of states had their own "currency" had very high inflation. New England colonies for example struggled with inflation through the 1700s. Partly because of wars, partly because of bad fiscal and monetary policy (https://www.clevelandfed.org/newsro...-money-and-inflation-in-colonial-america.aspx)

Speaking of Argentina, inflation is over 50% right now. The previous administration added about 3 million people to the state rolls who had not paid in. Unfunded pension, welfare, and entitlement benefits a re huge driver of inflation in Latin America.

The need to fully fund government spending (on wars, pensions, etc) backed by taxes to prevent inflation has been understood for literally centuries.

British authorities initially viewed colonial paper currency favorably because it supported trade with England, but following New England’s “great inflation” in the 1740s, this view changed. Parliament passed the Currency Act of 1751 to strictly limit the quantity of paper currency that could be issued in New England and to strengthen its fiscal backing. The Act required the colonies to retire all existing bills of credit on schedule. In the future, the colonies could, at most, issue fiat currencies equal to one year’s worth of government expenditures provided that they retired the bills within two years. During wars, colonies could issue larger amounts, provided that they backed all such issuances with taxes and compensated note holders for any losses in the real value of the notes, presumably by paying interest on them. As a further important constraint on the colonies’ monetary policies, Parliament prohibited New England from making any fiat currency legal tender for private transactions. In 1764, Parliament extended the Currency Act to all of the American colonies.

Despite this, governments seem to want to deny reality. Individual states are in an awkward position - they cannot print money, and if they raise taxes too much, people flee. Of course, even if they could print money, inflation is a tax of a different sort and people can still flee in this day and age. So here we are. Reality being denied and no political will to move forward until there is a crisis, which there will be. The next recession, the "bubble" that will pop is not the housing or stock market... it will be the municipal pension bubble.

And of course, some states are smartly offloading pensions to individual municipalities in preparation, because they know what is coming.

Blacksmith101 · May 3, 2019

So if the State which can't declare bankruptcy offloads the pension to a municipality who can then the pension, if it is a contract, could be canceled or restructured. Interesting.

TheBert · May 3, 2019

Norton said:
That will be one way to completely finish off the school systems, start telling teachers that their pensions that they largely fund out of their own pockets as a condition of employment aren't going to be there.

Watch a few thousand teachers decide all at once that they simply are done.

Don't let other people hold your money!

FGT1958 · May 3, 2019

danb said:
Right, but when a business or person can no longer fulfill a contractual promise they go bankrupt, which lets you cancel or restructure contracts (its not clear pensions are contracts in the first place tho). Cities and municipalities can go bankrupt. Typically sovereign governments like the US or Argentina dont go bankrupt, they resort to printing money. Pre-US constitution a lot of states had their own "currency" had very high inflation. New England colonies for example struggled with inflation through the 1700s. Partly because of wars, partly because of bad fiscal and monetary policy (https://www.clevelandfed.org/newsro...-money-and-inflation-in-colonial-america.aspx)

Speaking of Argentina, inflation is over 50% right now. The previous administration added about 3 million people to the state rolls who had not paid in. Unfunded pension, welfare, and entitlement benefits a re huge driver of inflation in Latin America.

The need to fully fund government spending (on wars, pensions, etc) backed by taxes to prevent inflation has been understood for literally centuries.

Despite this, governments seem to want to deny reality. Individual states are in an awkward position - they cannot print money, and if they raise taxes too much, people flee. Of course, even if they could print money, inflation is a tax of a different sort and people can still flee in this day and age. So here we are. Reality being denied and no political will to move forward until there is a crisis, which there will be. The next recession, the "bubble" that will pop is not the housing or stock market... it will be the municipal pension bubble.

And of course, some states are smartly offloading pensions to individual municipalities in preparation, because they know what is coming.

I used to work for the PBGC and previous posters are correct that they only cover private industries defined benefit pension plans...not State or municipalities. I am not sure what, if any, entity oversees State and Local pensions, but in private industry I guaranty you that the pension are considered a contract and the PBGC does its best to keep the promises of the former company to its employees. I believe the current cap for a PBGC pension is $67K per year.

The main reasons the DB plans fail are 1. lack of funding and 2. employer misuse of pension funding. The lack of funding could be due to overly optimistic assumptions or a number of other factors. The employer misuse of the pension funds usually was a result of the employer not recognizing that those funds did not belong to the company anymore. They see a big pot of money and see that they are contributing to it and some think of it as another account they can tap. I don't think the legislature is all that much different from private industry in this regard.

I think the most successful method of investment funding is the combination of duration matching on your fixed income side with a combination of active and passive equity management. It worked for the PBGC, as I believe they are now 90 some percent funded on the single employer side.

teratos · May 3, 2019

So they’ll probably tax me more....essentially allowing me to put less into the retirement I am responsible for. Politicians need to stop with unsustainable promises.

Norton · May 3, 2019

TheBert said:
Don't let other people hold your money!

We have no choice. We must contribute.

FrankOceanXray · May 3, 2019

FGT1958 said:
I used to work for the PBGC and previous posters are correct that they only cover private industries defined benefit pension plans...not State or municipalities. I am not sure what, if any, entity oversees State and Local pensions, but in private industry I guaranty you that the pension are considered a contract and the PBGC does its best to keep the promises of the former company to its employees. I believe the current cap for a PBGC pension is $67K per year.

The main reasons the DB plans fail are 1. lack of funding and 2. employer misuse of pension funding. The lack of funding could be due to overly optimistic assumptions or a number of other factors. The employer misuse of the pension funds usually was a result of the employer not recognizing that those funds did not belong to the company anymore. They see a big pot of money and see that they are contributing to it and some think of it as another account they can tap. I don't think the legislature is all that much different from private industry in this regard.

I think the most successful method of investment funding is the combination of duration matching on your fixed income side with a combination of active and passive equity management. It worked for the PBGC, as I believe they are now 90 some percent funded on the single employer side.

I always appreciate the depth and breadth if subject expertise here.

j_h_smith · May 3, 2019

Norton said:
We have no choice. We must contribute.

That's the way I feel about union dues. I worked 34 years in a closed shop and never had to count on the union for representation.

MDFF2008 · May 3, 2019

As a 33 year old, I think that there needs to be a serious discussion about retirement age. Using retirement ages based on 1940s and 1950s life expectancies in 2019 is unrealistic.

rseymorejr · May 3, 2019

gprimr1 said:
As a 33 year old, I think that there needs to be a serious discussion about retirement age. Using retirement ages based on 1940s and 1950s life expectancies in 2019 is unrealistic.

Government jobs really don't take into account age, just years of service. That's why they can retire in their early 50's and draw that check for 30 years. Meanwhile, before too ling, you'll have to be pushing 80 to start to draw Social Security (if anything is left of it)

danb · May 3, 2019

gprimr1 said:
As a 33 year old, I think that there needs to be a serious discussion about retirement age. Using retirement ages based on 1940s and 1950s life expectancies in 2019 is unrealistic.

Also work ethic. Actually expecting to people to work as hard and kill as many bad guys to defend freedom as in the 1940s and 1950s is unrealistic.

j_h_smith · May 3, 2019

gprimr1 said:
As a 33 year old, I think that there needs to be a serious discussion about retirement age. Using retirement ages based on 1940s and 1950s life expectancies in 2019 is unrealistic.

There's talk about the laziness of the American worker, but look at the number of hours other country's workers put in. I was a liaison for my company and a Switzerland company. I found out that they each get a month off plus their vacation time. This was mandated by their government.

They also couldn't believe the US drivers, drive in the left lane. In their country, it is used only for passing a slower car. They said a ticket was in order if you were caught driving in the left lane.

Steve_Zissou · May 3, 2019

erwos said:
The reality is that the courts are going to have to allow haircuts for state pensions, or a bunch of states are going to essentially implode Detroit-style.

I'm betting that the latter happens to at least one state within the next 10-15 years and we end up with a 1970s-tier currency devaluation to keep pensions, state budgets, and our sovereign debt afloat. We've been kicking the can down the road too long for the situation to be resolved any way other than catastrophically.

Steve_Zissou · May 3, 2019

j_h_smith said:
There's talk about the laziness of the American worker, but look at the number of hours other country's workers put in. I was a liaison for my company and a Switzerland company. I found out that they each get a month off plus their vacation time. This was mandated by their government.

They also couldn't believe the US drivers, drive in the left lane. In their country, it is used only for passing a slower car. They said a ticket was in order if you were caught driving in the left lane.

Left lane sitting is a distinctively American/Canadian phenomenon, and one that grinds my gears incessantly.

As for work hours, I'd love to see a breakdown of per-capita GDP vs average work week among 1st world nations. I'd imagine that the per-hour worker productivity of Swizerland, Germany, Austria, and the Scandinavian countries is actually pretty good, because of the cultural fixation with efficiency, whereas the Japanese are legendary for working long hours and getting relatively little done during them because of the cultural obsession with saving face which prioritizes giving the appearance of working hard through spending long hours on the job over getting your work done quickly, because if you leave work early because you finished it faster it looks like you're skipping out on your time obligation to your employer.

MDFF2008 · May 3, 2019

j_h_smith said:
There's talk about the laziness of the American worker, but look at the number of hours other country's workers put in. I was a liaison for my company and a Switzerland company. I found out that they each get a month off plus their vacation time. This was mandated by their government.

They also couldn't believe the US drivers, drive in the left lane. In their country, it is used only for passing a slower car. They said a ticket was in order if you were caught driving in the left lane.

I agree with this. IMO productivity can be measured in different ways. Someone who puts in 100 hours a week might just be showing up. My sister worked in Japan, and she said it was common for employees to do things like retype the same report over and over, because the culture valued being there for 10 hours more than actually being productive in the 8 hours you were supposed to be there.

And we have a firefighter from Denmark, I was training him to drive our utility truck, he was slowing down for green lights, I asked him why, he said that running a yellow light is ticketable sometimes in Denmark.

Employees of Maryland May Need a Bail Out in the Future

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