The bankruptcy filings of large municipalities, like Detroit and Stockton, Calif., highlight a growing problem that needs more than a temporary fix.
Many, if not most, municipal governments are awash in pension debt. Lots of states are in the same boat. Part of the problem is today’s artificially low interest-rate environment, which has played havoc with pension assets and liabilities. Part of the problem also is a long history of governments not making the required contributions to their plans. Now they don’t have the money to do so, and the debt has become debilitating. It’s gotten so bad that many cities have found themselves paying more for retiree benefits than they do for public services such as fire and police.
Terminate the plan
Unlike corporations, municipalities don’t have as much flexibility to change their pension plans. They need the support of their state legislatures to make any substantive changes.
Switch to a DC plan, gradually
Some states including Florida are slowly reforming their pension plans. Rather than abruptly pulling any plugs, they give all of their employees the option to either enroll in the state’s traditional pension plan for government workers or to contribute to a 401(k)-type plan.
Tinker with cost-of-living adjustments
According to the National Association of State Retirement Administrators, most state and local governments provide a cost-of-living-adjustment to reduce or offset the effects of inflation, which erodes the value of a worker’s retirement income. They also provide an inflation adjustment to their retiree pension benefits, which is particularly important for those public employees, like public school teachers and public safety workers, who are not eligible for Social Security. Most state and local retirement systems pre-fund the cost of a COLA over the working life of an employee to be distributed annually over the course of a participant’s retired lifetime.