Why Stockton should worry American pensioners

With the bankrupt city of 300,000 allowed to restructure its finances, its once-untouchable pension fund may see cuts.

By Aimee Picchi Apr 2, 2013 1:17PM

A senior woman getting the mail (© Jonathan Gelber/Getty Images)While working as a city bureaucrat might not have many perks, it's always had one guarantee: a nice pension. 


But a federal judge's ruling Monday that allowed bankrupt Stockton, Calif., to restructure its finances may weaken that once-untouchable pension check. 


That's because the ruling signals the city might have to cut payments, The Wall Street Journal reports. The decision also sets precedent for other cities, raising concerns that the country's once-inviolable pension funds could find their protections weakened. 


Stockton, a city of 300,000, is deep in the hole because of its pension obligations. It owes $900 million to the California Public Employees' Retirement System, or CalPERS, to cover pension guarantees, according to The Associated Press. That makes CalPERS the city's biggest financial obligation.


"It's really unfortunate that it's come to bankruptcy proceedings as a way to negotiate pension promises and contracts," Jean-Pierre Aubry, the assistant director of state and local research at Boston College Center for Retirement Research told NPR.


The ruling comes after the city has struggled for years with rising foreclosures and cuts to its services. At the same time, Stockton made an effort to protect the pension fund, angering bondholders, who felt they were forced to take cuts while CalPERS was unscathed, The New York Times notes. The city's creditors include Franklin Resources (BEN) and Assured Guarantee (AGO).


But Stockton also raises questions about whether pension guarantees, often made when the stock market was booming, are excessive, given today's economic environment. 


Take the case of former Stockton Police Chief Tom Morris, who got the job in 2008. After leaving the post only eight months later -- at age 52 -- he took a pension of more than $204,000 a year, according to Bloomberg


Not only is that a startling amount of money for most Americans, whose median household income is just above $50,000, but it also represents a cushy retirement at a time when most workers aren't saving enough for their golden years. 


"We didn’t have very many people looking out for the taxpayers when these deals were negotiated," San Jose Mayor Chuck Reed told Bloomberg last year.


More on moneyNOW

50Comments
Apr 2, 2013 1:59PM
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Yes, Americans should be aware of Stockton as an example of government gone wild in their spending habits. Public employees giving themselves twice the salary of comparable jobs in the private sector is always a disaster in the making, and that is just the beginning of the political corruption.
Apr 2, 2013 2:01PM
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Unfunded pension plans are a bomb waiting to explode.  So many gov entities made so many unrealistic and impossible promises to so many people, and left it to future generations to make good on those promises, without also passing along the funding.   Those future generations are the ones in charge now, and it's not looking good. 

Many of these pensions were extremely underfunded from the start.  Many were set up based on assumptions of 10-15% annual ROI - good luck with that project.  Many were based on assumptions of future increases in tax revenue that haven't materialized.  And many were based on complete fantasy - somehow a union city bus driver will be able to contribute $75k over his working life into a gov pension plan and then he'll be able to retire after 25 years of service and get paid $50k per year for the rest of his life, and all this will somehow magically happen, according to the union contracts, even though the city will only match his contributions and leave the unfunded portion of the pension (about 90% of it) to future generations to deal with.

At the same time, some of these tax free munis aren't looking so great, either.  Like everything else, do your research.
Apr 2, 2013 2:51PM
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States aren't allowed to file bankruptcy, so only cities and counties can use bankruptcy laws to get out from under onerous pension obligations. In California the state pension plans are underfunded in excess of $150 billion. Bankruptcy is not an option, so the state will either need to raise taxes even higher than they already are - total tax burden in CA is the highest in the nation, cut services to the bone, or cut pensions and face lawsuits from powerful public employee unions. It's too bad we can't arrest the politicians who signed off on these pension deals. 
Apr 2, 2013 2:36PM
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For the municipal bondholders of Stockton, this is government stealing their money.  I was a bondholder of GM, the Government stole my money and gave it to the unions for concessions, I lost everything.  The same thing is happening in Stockton.  This is the new socialist age in America.  Sad.
Apr 2, 2013 2:59PM
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"It's really unfortunate that it's come to bankruptcy proceedings as a way to negotiate pension promises and contracts,"  ....  what a short sighted statement.  I'm betting that if the city decided before bankruptcy to cut pension payments, they would have been brought to court, pay a huge amount of legal fees, in the end lose and not be able to make any cuts. So the only thing accomplished is they would have gone bankrupt sooner.  What's really unfortunate is how the taxpayer is constantly being taken advantage of, this is nothing short of corruption.

Apr 2, 2013 1:28PM
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So what happened to the story about the problems with European Health Care? It was taken down within minutes of being put up? Someone not like the truth?
Apr 2, 2013 2:14PM
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Of course they should fear....  All these Pensions, like Social Security and other Ponzi schemes are based on taking other people's money and giving it to the person collecting.  If you stop the money flow, the system will crash and burn, like all Ponzi schemes do.

I say let them collapse, and let the people defrauded understand who defrauded them...  Let the democrats try to lie their way out of their own mess...

Apr 2, 2013 3:37PM
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" The State is the great fiction by which everyone seeks to live at the expense of everyone else" -Frederic Bastiat

 

"Any man who thinks he can be happy and prosperous by letting the government take care of him--- better take a closer look at the American Indian."- Henry Ford



Apr 2, 2013 2:47PM
Apr 2, 2013 2:51PM
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Please sign and pass this link on to anyone who wants to help sign a petition to end welfare and EBT fraud. Thank you!
Apr 2, 2013 4:08PM
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Pensions-- how many of you worked just one job for wages over multiple decades? Why?--- Maybe a better question is why do we have all of this overhead, healthcare expense and legacy costs on our gov. and companies? Maybe we need to get paid a good wage and take care of the above on our own and buy on the supposedly open market we have.  Plan for your own retirement instead of using a pension plan, gov. retirement plan, etc.


Apr 2, 2013 4:33PM
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Let me guess, it was a politician who figured out that you could hire a government employee for $75,000/year, let them retire at age 59-60, pay them $67,500/year, until they die, and replace them with, maybe, a cheaper person.  So, a position that once cost the state or city or school district, $75,000/year is now costing them, in effect, $117,500, if you figure in a replacement person costing $50,000/year.  Let's say person #2 retires after 20 years, they are making that same $75,000. Throw in person #3, and the cost is now $167,500/year. for a job that once cost $75,000/year.  Multiply this over and over, it gets very pricey, very fast.  Then you throw in cost of healthcare.  It adds up and with Obamacare, this is going to get very expensive, very quickly.

 

The best thing would be to stop the pension plan and move it to a 401K that corporate america has to do.

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WOW $204,000 is a crap load of money. US need to put these thieves in jail. These are the people who steal our money to give themselves a golden egg for retirement.

Apr 2, 2013 3:48PM
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I'm sure the bondholders are going to be shafted again as was the case with GM. We can only hope the public opens their eyes long enough to know not to buy any bonds from the entities that shaft them in the future.
Apr 2, 2013 4:11PM
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When people leave gov. jobs or retire we the tax payer should be done with footing the bill for them.
Military perks should also be over, unless you were hurt in war. That way we could take care of the  troops we really owe help, medical care, families help, and living expenses to.
Apr 2, 2013 6:10PM
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I think the pension situation in the city of San Diego is on thin ice also.  What does Bloomberg say about that?  Much larger than Stockton in pop. and far richer per capita. 
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The reality is that retirement use to be for the very wealthy and the disabled----then the money makers sold "retirement" to the general public----you all invest your money in our companies and you will be able to retire with sixty to ninety percent of your income to enjoy the remaining years of your life.  No one stopped to think that it is economically impossible for this to be.  There are no companies in existence today that can produce the growth and income to make the "retirement dream" come true.
Apr 2, 2013 4:07PM
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Stealing from working taxpayers to give to bloated city pensioners. They should be thankful that they are paying their fair share. Hey its not the taxpayers money anyway, it all belongs to t he government who is just keeping your interests in mind.

Apr 3, 2013 5:48PM
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People that work for the non public sector have in most cases always been at risk

of losing their pensions or having them reduced if the company went under.  Kaiser

Steel in Fontana CA was a prime example of "guaranteed" union pensions.

 

Why are public employees protected more than private sector employees.  I see people

I went to school with retiring at age 55 with 90% of the their wages.  This whole scenario

has been played out in warnings over the years.  No one listened and when you have cities

paying 80% of their operating budget to public employees pensions, there is no way they

are going to be able to do so. 

Apr 2, 2013 6:54PM
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Liberal California reaping what it sowed...

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