A Thoughtful Reminder of Another Pension Landmine

A recurring theme of Bacon’s Rebellion is that billions of dollars of liabilities lurk in the balance sheets of Virginia’s state/local government and quasi-governmental organizations — from the $20 billion unfunded pension liability of the Virginia Retirement System to the $3.5 billion unfunded pension liability of the Washington Metro system. Some don’t get the attention they deserve. As I come across new examples, I’ll bring them to your attention…

Like Fairfax County’s $5.6 billion pension liability. According to the Fairfax County Taxpayers Association (FCTA) Watchdog Report:

The Fairfax County pension liability is now $5.6 billion. … There are 400,000 homes in Fairfax County, so the liability amounts to $14,000 per household. To pay the liability will require an increase in the real estate tax of $1,000 for 14 years. The liability and the real estate tax will increase unless the retirement age is increased to 65 or 70 years of age — as compared to the current 55 to 60. Without such a change, the liability per household will get worse in the future because the number of county and school employees has been increasing 1.6% per year while the population has been increasing only 0.9% per year.

The debt bomb is worse than you think. Much worse.

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13 responses to “A Thoughtful Reminder of Another Pension Landmine

  1. Well that is chump change compared to this:

    ” Taxpayers are on the hook for one of the biggest government failures they’ve probably never heard of — $1 trillion in unfunded pension liabilities for federal retirees.

    Massive unfunded pension liabilities at the local and state levels have made headlines in recent years, but rarely mentioned is the estimated $1 trillion funding gap in the world’s fourth-largest retirement system.

    Promised benefits from the Civil Service Retirement and Disability Fund, which has 2.6 million retirees and 2.7 million current federal employees, are only 48 percent funded. If it was a private sector system, retirement leaders would be legally required to have a rehabilitation strategy when it dropped below “critical” funding levels of 65 percent, McKinney said. But in an illustration of bureaucratic “hypocrisy,” no such requirement is applied to the federal government, he said.”

    This is Federal Civilian employees. It’s no better on the Armed Forces side.

    ” benefit changes for its new entrants

    Federal budget woes are forcing once-untouchable military pensions onto the cutting board as the Pentagon faces $450 billion in budget cuts over the next decade and an unfunded pension liability expected to hit $2.7 trillion by 2034.”

  2. All of this goes back to a question I have asked and that is what is the real effect of unfunded pension liabilities? Serious question. We DO KNOW that there have been “failures” both private and public.

    We have a govt agency called the PGGC which has taken over hundreds of private pensions which “failed” but the question I have is that it seems that quite a few public pensions are said to be – not fully funded and to thus said to have unfunded liabilities. The question I have is that obviously many pensions that are said to be “unfunded” – continue to pay full benefits – like VRS in Virginia. So the question is – how does that unfunded liability actually translate into actual unpaid pensions? When would that happen in Virginia with VRS? in 2020? or 2050? or 2100?

    we’ve got the gloom and doom “we’re all gonna die” narrative… but what is the actual reality? What happens and when if VRS or Fairfax continues to have unfunded liabilities?

  3. For many years – Govt Pension fund liabilities were not even required to be reported on financial reports. Non-govt business was required to report and there was a stream of failed companies that failed to pay promised defined-benefit pensions and they were picked up by the Pension Benefit Guaranty Corporation, a govt charted corporation created in 1974 to essentially take over pension plans that had been abandoned by private-sector companies. More than 22,000 plans and over 30 million people have been affected since then.

    Interestingly enough – the PBGC is not funded from tax dollars but rather:

    Insurance premiums paid by sponsors of defined benefit pension plans;
    Assets held by the pension plans it takes over;
    Recoveries of unfunded pension liabilities from plan sponsors’ bankruptcy estates
    Investment income.

    it does not make whole the pension plans either – depending on the circumstances it can be pennies on the dollar or fully funded.

    So – ironically – depending on one’s viewpoint – it’s the same Federal Govt that routinely runs a deficit and has a 20 trillion debt – that “safeguards” people’s private sector pensions! PBGC does NOT safeguard local and state govt pensions….

    Further – Local and State Governments were not required to even disclose pension liabilities until 2015 when it required not only reporting of unfunded pension liabilities but also other post-retirement benefit plans (OPEB – health and life insurance ).

    That is why the issue is now in the news so often. It’s not because VRS or Fairfax or METRO pensions were suddenly unfunded. They have been under-funded all along – for decades! The difference is that now they must report that fact.

    However – the original question remains.

    We KNOW how a private-sector pension fails to get paid. The company declares bankruptcy and depending on the law – the money they had in a pension fund gets absorbed by creditors – which now days may well include the PBCG which has the legal right to take certain assets in order to try to make the pension holder whole or more whole.

    Municipal entities like Detroit do not get rescued by the PBGC but the pension fund is not liquidated either – and “bankrupt” in a govt context does not mean the fund disappears – it means it still exists but does not pay full benefits…

    And this is what happens to most govt sponsored pensions if the govt fails to adequately fund the pension. It’s either that or the govt entity has to increase it’s revenues from taxes to fully fund the pensions and OPEB.

    So, how does a govt-sponsored, unfunded pension liability play out?

    In a worst case scenario – it would mean that the govt would have to take enough revenues/taxes in – each year to fully pay for the pensions and OPEB but the bigger question in my mind is… how far in advance do they have to pre-fund the pensions and what is the rationale behind that number?

    So if a pension fund is unfunded by 98% – then we know that they’re basically having to collect enough revenues every year to pay out their pensions but what if that number is 50% or 25% – what does that mean?

    If VRS is not 100% funded but instead.. 50% – what exactly is the threat that affects workers and retirees?

  4. In all fairness, the strong stock market has reduced some of the underfunding deficiencies. But the burden on both taxpayers and other government functions caused by the failure of government officials to follow the private sector, VRS and the federal government into pension reforms remains unsustainable. And then when you consider that the bulk of taxpayers are not covered by defined benefit plans, a massive taxpayer bailout seems very unfair.

    • @TMT – re: defined benefit.

      we know that in 1984 the Feds converted their pension system to be primarily based on defined contribution for FERS and the TSP fund.

      We know that in Virginia – more and more school and county pensions are based on defined contribution…

      so where is the problem? Are Fairfax pensions still defined benefit?

      yes.. we still have a good number of retirees with defined benefit pensions but there are less and less as the years go by so that liability is going down, no?

      • Larry, Fairfax County has a number of pension plans. Teachers are under VRS, with newer hires under the hybrid plan. There are special defined benefit plans one for police officers and another for other uniformed employees.

        The rest of the county employees are under a separate defined benefit plan. There are two supplemental pension plans that are defined benefit. One is for county employees who retire early. They get a supplement equal to Social Security until they are eligible for Social Security. I think this goes to age 66-67. The teachers also have a special plan that gives them a supplement equal to Social Security but it never stops when the employee is eligible for Social Security. So they get VRS, Social Security and Social Security equivalent.

        The County also has a 401k-like investment plan with some matching.

        The County’s credit rating has been at risk for years. One of the reasons is the huge pension liability. But unions give money to Democrats and, despite statements from both sides of the aisle about the need for reform, the BoS will not schedule a committee meeting to consider reform. And guess what party Chair Penny Gross belongs to.

        • @TMT – even the Feds provide a small(er) defined benefit pension that is paired with a bigger defined contribution and Social Security.

          Teachers and public safety (and perhaps other county) typically get a stepped-up pension in the years between their retirement and 65 when the pension reduces and social security kicks in.

          The thing about Fairfax is that it is a AAA county – one of only 7 in Virginia. That means that more than 90% of the other jurisdictions in Virginia have a Worse credit rating so Fairfax is clearly one of the better counties in Virginia when it’s comes to Fiscal health.

          no?

          It’s just hard to see your view which is clearly partisan -when we compare Fairfax to RoVa on fiscal responsibility. They clearly are among the better counties in the state.

          • TooManyTaxes

            Larry, Fairfax County officials have told people in McLean that the rating agencies have raised the possibility of downgrading Fairfax County’s credit rating because of its high level of pension liabilities. What does that have to do with partisanship?

            Supervisors from both parties have expressed the need and some willingness to reduce pension plan benefits going forward for new hire. But Penny Gross refuses to schedule a committee meeting to do this. She is a Democrat and has expressed her view that pensions should not be cut for anyone. That’s not partisan. Those are the facts.

  5. I don’t think a taxpayer bailout is necessarily unfair. Where else can the funds come from? Obviously investments aren’t cutting it. Those employees at whatever governmental level were hired by us to perform needed (hopefully) functions.

    Being 50% unfunded is probably exacerbating the situation as payments are made to existing retirees out of principal instead of income. Fund managers are restricted in the types and percentages of investments in their portfolios. They likely are required to be heavy in fixed (read low yield) vs. equities for safety.

    When the workers were hired they were assured they’d be covered by a defined benefit plan as I was when I was employed by Big Blue. My Social Security “benefit” is another horror story, however.

  6. I’m still looking for what “unfunded” means in real terms.

    The base case, which is considered unacceptable, is pay-as-you-go where the company or govt entity budgets each year how much they owe in pension benefits.

    But how many years do you have to have in a fund in order for it to be said to be 100% funded?

    How many years have to be in a fund in order for it to be said to be 50% funded?

    I for one don’t know but I strongly suspect that most others do not also and so I am basically asking… if someone is going to hold an opinion about the harm of unfunded pensions – is it an informed opinion?

  7. And I’m still waiting for someone to explain what the basics are with respect to a pension being said to be 100% funded. What does that mean? Is there some set number of years of advanced funding that is the benchmark for fully funded pensions?

    How can any of us hold any informed opinion about this if we do not actually know what the facts are?

    I’m on a quest to get this issue better explained… in part..because we round-robin the unfunded pension issue on a regular basis – and to this point, I’ve never seen any explanation as to exactly what “unfunded” means.

    • Larry – I have a friend who ran the pension programs for Mobil Oil and Amtrak. He’s told me that actuaries determine the funding needs based on life expectancies, terms of the plan and an expect rate-of-return, etc. That determines the needed funding. Of course the amount changes annually when one reviews deaths, persons entering the program, contributions, changes in the plan, earnings, etc.

      If under these conditions, the plan contains an amount that is sufficient to pay expected liabilities under the present assumptions, I believe the plan is considered fully funded.

      Back in the 1980s, the company I worked for had pension plans that were more than fully funded. As such, management did not have to make any contributions for several years.

      Based on what I’ve been told, if the above analysis of present conditions and projections show the plan does not have sufficient funds to pay its liabilities, it’s considered underfunded.

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