Government Pension Plans at Risk!

[moonlightandmargaritas]

You are missing something because my name is not Jason...

My bad, I was picturing my niece's boyfriend who is similar in appearance...my apologies.

JUSTIN JUSTIN JUSTIN.

I'll write it on the board 500 times.

 

[somarco]

Paul, why are you thinking about your nieces BF? Isn't that a bit odd?

Back on topic, govt pensions are exempt from PBGC. They are not prohibited from participating, but they are not required to contribute to PBGC like corporate pensions.

When they go belly up the covered participants get a pro-rata share of their vested benefits.

And 401(k) plans or any other money purchase plan cannot participate in PBGC.

 

[scagnt83]

And you wouldn't get the buildings, unless they are surplus which means they are worthless. There really is nothing you can take from a city government if you wish to leave it as a going concern. The only things are sports arenas and museums. That is if they are profitable and in the case of the museum you promise to keep it going. Of course, they may also be financed by their own bonds which would make it difficult to take them.

A museum wouldnt be bad! I would take the head off of the T-Rex skeleton and put it in my living room!!


Seriously though, there is no good solution for the Creditors. The only hope is that the Judge grants more than the 10%. Which might happen for a few but definitely not for all.


The arenas and museums were certainly built with the bonds. And considering the state of Detroit I wouldnt be surprised if they took out more to finance the operations.
But I dont know how that would make it difficult to take them. It would just make it difficult to recoup your investment. You might trade the 10% of your bond for a -50% money pit. Because if things in Detroit where profitable then this wouldnt be happening!

(and if I was a bond holder I would demand a cop car too!)

 

[bluemarlin08]

Underfunded pension plans are problem in the private and public arena. Many folks will feel this pain.

 

[scagnt83]

And 401(k) plans or any other money purchase plan cannot participate in PBGC.

Thats because they are DC not DB. The risk of prudent investing is transferred to the participant. So if your 401k is underfunded it is your own fault.

But at least they are held in a trust, so there is no way a dying company can raid a 401k like they can a Pension. Your 401k is YOUR 401k. Your Pension is YOUR EMPLOYERS Pension.

(of course uncle sam can tax the living hell out of your 401k....)

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Back on topic, govt pensions are exempt from PBGC. They are not prohibited from participating, but they are not required to contribute to PBGC like corporate pensions.

When they go belly up the covered participants get a pro-rata share of their vested benefits.
.

The problem with the Pension Plan Bond holders I mentioned is not necessarily a belly up Pension. Pension Plans from all over the US have invested in Detroit Munis. The problem is that they are now taking huge losses. So if they were struggling before this just exacerbates the problem.

Govt Pensions are not required to contribute to PBGC because the goverment never mismanages money!
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I just heard on cnbc that 40%-50% of Detroits debt is due to underwater retirement plans.

 

[somarco]

Pension Plans from all over the US have invested in Detroit Munis.

Tax free muni's? If so, makes no sense.

With all the investment options, I would be surprised if many (outside of MI) have a significant portion of their assets in D bonds.

Regarding unfunded liability . . .

We analyzed 153 state and local pension plans, representing more than 85 percent of liabilities for state and local pensions and other benefits, and recalculated their liabilities using a lower discount rate. Our calculations show:

Unfunded pension liabilities are approximately $2.5 trillion, compared to the reported amount of $493 billion.
Unfunded liabilities for health and other benefits are $558 billion, compared to the reported $537 billion.
Thus, total unfunded liabilities for all benefit plans are an estimated $3.1 trillion — nearly three times higher than the plans report.
To put these liabilities in context, state and local governments’ reported unfunded obligations under pension and other benefit plans amounting to 7.1 percent of U.S. gross domestic product (GDP) in 2008.

$2.5 trillion seems low. I would have thought it was much higher.

Pension funding, current obligations + unfunded liability, is a major drag on almost every local municipal budget. Several places have tried to renegotiate retirement plan formula's, making them less rich.

I recall seeing somewhere that garbage collectors in Chicago are retiring on $100k+ pensions. Seems their formula was based on your highest earnings including overtime and accrued vacation time.

That's just nuts.

 

[Justin Bilyj]

Which is why I cringe when I see FA's push muni bonds for its tax-free interest, not a good retirement vehicle the way the bond markets look!

 

[VolAgent]

The arenas and museums were certainly built with the bonds. And considering the state of Detroit I wouldnt be surprised if they took out more to finance the operations.
But I dont know how that would make it difficult to take them. It would just make it difficult to recoup your investment. You might trade the 10% of your bond for a -50% money pit. Because if things in Detroit where profitable then this wouldnt be happening!

I suspect the bonds on the arenas would hold a senior position as they are tied to the arena. So even if you took it over, you'd have to pay those bonds off before you could start to recoup your own bonds.

 

[somarco]

push muni bonds for its tax-free interest

Tax free anything inside a qualified plan makes no sense.

 

[scagnt83]

Tax free muni's? If so, makes no sense.

With all the investment options, I would be surprised if many (outside of MI) have a significant portion of their assets in D bonds.

Not all munis are tax free. Not only does it depend on the buyers location. But any muni that is not for the overall publics benefit is not tax free (at least on a fed level).

Yes, the majority of munis are tax free, especially if you buy within your state. But the higher yield munis are usually taxable.


But I do agree that most pensions do not have money invested in Detroit munis. But for the few that might it really sucks for them.

Detroit Retirement System Taxable Series A have a coupon rate of 4.9%.
These were the holders that were offered less than 10 cents on the dollar. What a nice thank you to the people who helped to secure those workers financial future!!

If you look at Refunding Bonds in the state of MI, you will see that Detroit is all over the first page of results. Paying off debt with more debt, its the american way these days!

Not a pretty picture up there.

Some people might disagree with my position. But this could actually be a saving grace for Detroit. Let the capitalist vultures swoop in and buy up Detroit on the cheap. Then restructure it on a true free-market basis. Kick out the unions, let free markets reign. But I doubt that they have the balls to negotiate with the unions like they need to. Look at GM. Unions might as well have run the whole restructuring show.
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I suspect the bonds on the arenas would hold a senior position as they are tied to the arena. So even if you took it over, you'd have to pay those bonds off before you could start to recoup your own bonds.

Would it not be the senior position holders that would have first shot at the underlying assets?

Either way its a cluster #### for all involved.
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Tax free anything inside a qualified plan makes no sense.

I dont think he meant inside of a QP. I think he just meant in general to supplement retirement.

I have heard FAs and especially financial journalists push tax-free munis to help supplement QPs.


To get my rant of the day out of the way:
America needs to get out of the mindset that a QP is the only way to save for retirement. Why does a persons "Retirement Plan" or "Retirement Vehicle" have to be a QP??? A QP is the most restrictive way to save for retirement. Even the IRS does this. They automatically equate "Retirement Plan" with "Qualified Plan" (I recently had to change the wording of an article on my website because of this).
I do realize that the majority of americans have their retirement savings in a QP. But the 401k/IRA/SEP/SIMPLE etc. were not originally meant to satisfy 100% of a persons retirement needs. They were originated to supplement a persons retirement needs.
Dont get me wrong. A QP can be great. Especially a 401k with a match. But it is by no means the only way to save for retirement.
Ok, Im stepping down from my soapbox now.