With the nation’s capital knee deep in fiscal policy wonkery, it seems a good time to remind lawmakers about their fiduciary duties to taxpayers. Asking that our money be allocated wisely and efficiently is simple enough, especially at a time when the U.S. Debt Clock just whisked by $20 trillion. (If you have a strong stomach, click here to see how quickly the IOU levels are growing at a federal, state and international level, respectively.)

In my little household, like so many others, we balance our checkbooks to the penny. We don’t overspend and we borrow what we can reasonably repay on time. I don’t accept that a bigger purse leads to better outcomes. What about doing more with less and improving efficiencies? How is leaving a legacy of crushing debt the right thing for our younger generations? These questions are just two of dozens that demand good answers, regardless of your political affiliation.

It’s hard to joke about excessive debt and a runaway spending machine. On the other hand, if humor adds impact, then my recent efforts writing quirky prose are worthwhile. Click to download a pdf version of “A Taxpayer’s Scream” by Dr. Susan Mangiero.

Over dinner last night with friends, my husband told a joke about Kim Kardashian and Paris Hilton (or whomever you want to designate as fact-challenged individuals). The hotel heiress asks "Which is closer to us – Florida or the moon?" The reality star replies – "Hello, can you see Florida from here?" Unfortunately, this type of silliness has reared its head often over the years with regard to the topic of promising too much and funding too little. The math just does not work. To the logical observer, this flight of fantasy was always destined to self-destruct. It was more a question as to how long the downward spiral would take for impacted U.S. and non-U.S. government plans.

On July 27, 2006, I wrote "Tea Party Redux: State Pensions in Turmoil." It was blatantly clear that trouble was heading our way. Since then, headlines about retirement plan gaps continue to dominate the news.

In what could be a bellwether situation, the State of Illinois wants to address a shortfall that is referred to as "the biggest in the U.S" and is fighting the court system to be empowered to do so. See "Illinois Fights Court Block of $111 Billion Deficit Fix" by Andrew Harris (Bloomberg, November 27, 2014). In "Why Illinois pension reform may be constitutional" (Crain’s Chicago Business, December 6, 2014), Joe Cahill explains that "important state interests" may justify the limiting of pension contracts that are deemed constitutional and therefore inviolable. He references Felt v. Board of Trustees. Those who disagree that reform is legally possible suggest that taxpayer hikes and/or reduced overall municipal spending are inevitable.

Now it appears that U.S. lawmakers may have their sights set on private pension plans too. In "Congress could soon allow pension plans to cut benefits for current retirees" (December 4, 2014), Washington Post journalist Michael A. Fletcher describes a move that, if enacted, would see lower payouts for plan participants of multi-employer plans in distress. The alternative is to have the Pension Benefit Guaranty Corporation ("PBGC") take over any failed plans. As stated in "Solutions not Bailouts" (February 2013), Randy G. Defrehn and Joshua Shapiro write that benefits would be lowered anyhow in the event of a PBGC assumption of plans deemed as insolvent. In "The lame-duck Congress plots to undermine retiree pensions," Los Angeles Times reporter Michael Hiltzik urges readers to stay tuned as the December 11, 2014 vote on an omnibus spending bill may contain language that, if passed into law, would snip dollars from union retirement arrangements. He quotes advocates of defined benefit plans as pushing for careful deliberation instead of rushing ahead.

Expect lots of changes in 2015 and thereafter. The pension crisis (at least for some sponsors and their employees) is not going away anytime soon. In the meantime, smart cookies are invited to the negotiations table. The worst thing that could happen is to ignore reality. Leave that to Kim and Paris. 

Not surprisingly, the conversations about pension reform are getting louder and taking place more often. Calls for further transparency, political posturing and headlines regarding the link between municipal debt service and questions about the contractual nature of pension IOUs are three of the many factors that are being hotly debated, with no end in sight. Interested parties are invited to read "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz, CPA. Published by the American Bankruptcy Institute, the authors bring attention to the fact that courts are making decisions about critical issues such as whether creditors, in distress, can move ahead of public pension plan participants. Click here to read more about the article and the connection between retirement plan promises and municipal bond credit risk.

Others are approaching the topic of public and corporate pension plan obligations from the perspective of younger workers being asked to subsidize seniors. In "Why We Need to Change the Conversation about Pension Reform" (Financial Analysts Journal, 2014), Keith Ambachtsheer writes that "Pension plan sustainability requires intergenerational fairness." He adds that suggestions such as lengthening the time over which an unfunded liability can be amortized or assuming more investment risk "effectively pass the problem on to the next generation once again."

Legislators are slowing starting to act, in large part because they cannot afford not to do so. According to Wall Street Journal reporter Josh Dawsey, New Jersey Governor Chris Christie has spent his summer with constituents, holding town hall meetings to explain his decisions about pension plan funding. See "Christie Plays Pension Issue Beyond N.J." (August 9-10, 2014). On August 1, 2014, he signed Executive Order 161 to facilitate the creation of a special group that is tasked with making recommendations to his office about tackling "these ever growing entitlement costs."

New Jersey is not alone. Prairie State politicos are attempting to forge reform. In "4 reasons you should care about pension reform in Illinois" (July 25, 2014, Chicago Sun Times reporter Sydney Lawson explains that the $175.7 billion owed to participants and bond investors will cost every taxpayer about $43,000 if paid today. According to its website, the Better Government Association estimates that replenishing numerous police and fire retirement plans in Cook County will "require tax hikes, service cuts or both."

The Big Apple retirement crisis  is no less massive. New York Times journalists David W. Chen and Mary Williams Walsh write that "the city’s pension hole just keeps getting bigger, forcing progressively more significant cutbacks in municipal programs and services every year." A smaller asset base and decision-making that occurs across five separately managed funds are described as trouble spots for Mayer Bill de Blasio. Noteworthy is the mention of an investigation by Benjamin M. Lawsky, head of the Department of Financial Services, that seeks to understand how service providers were selected to work with New York City pension plans and the level of compensation they receive. See "New York City Pension System Is Strained by Costs and Politics" (August 3, 2014).

Curious about the extent of this New York City and New York State focused investigation, I asked one of my researchers to file a Freedom of Information Act request in order to obtain details. We are awaiting the receipt of meaningful results. So far, we are being told that information is not available to send. What is known so far, based on an October 8, 2013 letter from Superintendent Lawsky to Comptroller of the State of New York, Thomas P. DiNapoli, is that questions will or are being asked about retirement plan enterprise risk management and "[c]ontrols to prevent conflicts of interest, as well as the use of consultants, advisory councils and other similar structures."

Pandering for votes by promising lots of goodies may not be a successful recipe for reforming pensions that need help. Moreover, judges are in the driver’s seat once a dispute about contractual status is litigated. In a recent opinion, a federal court of appeals ruling about lowering cost of living adjustments overturned an earlier decision that such an action was unconstitutional. See "Baltimore wins round in battle over police, firefighters pension reform" (The Daily Record, August 6, 2014). Click to download the August 6, 2014 opinion in Cherry v. Mayor and City Council of Baltimore, No. 13-1007, 4th U.S. Circuit Court of Appeals.

Like Homer’s Odysseus who was caught between Scylla and Charybdis, policy-makers, union leaders and heads of taxpayer groups are navigating some very rough waters indeed. We have not seen the end of these heated debates about what to do with underfunded municipal pension plans. Trying to align interests of seemingly disparate groups is only the beginning.

With one of the largest pension systems in the United States, California reform has been a topic of conversation for awhile. Last week, the state senate voted 36-1 to position massive changes for a final okay from Governor Jerry Brown. A combination of salary caps (used to determine pension benefits), increased retirement age and higher contributions from employees is expected to save taxpayers billions of dollars every year. Some critics say that this is a drop in the bucket and that much more is needed.

According to "Calif. Lawmakers Pass Pension Reform Measures" by Erin Coe (Law360.com, August 31, 2012), Governor Brown had hoped for broader changes to "rein in rising retiree health care costs," create a 401(k) type retirement plan for new employees and allow the state’s pension board more latitude in decision-making. 

Click to download the 60-page document that lays out the details of AB  340, the California Public Employees’ Pension Reform Act of 2013.

Lots of people throughout the United States are watching and hoping that change occurs quickly. Plan participants want assurances about promises made. Taxpayers are groaning about possible hikes to cover what they describe as employee benefit plan largesse. Municipal bond investors are nervous about defaults.

Reason Magazine’s Steven Greenhut writes that Vallejo’s attempts to restructure were followed by "Stockton, then Mammoth Lakes, and now San Bernardino and soon possibly Compton," with pension and health care plan participants often showing up as creditors.According to "Battle over pension debt looms in San Bernardino bankruptcy" by Tim Reid (Reuters, August 30, 2012), the California Public Employees’ Retirement System ("CalPERS") is listed as San Bernardino’s largest creditor. A sign of possible trouble ahead, what is at stake depends on who you ask. CalPERS estimates that is owed $319.5 million in contrast to the city’s number of $143.3 million.

Earlier this year, Senator Orrin Hatch’s office published a report that showed that state and local pension plans with funding ratios below eighty percent had risen from about five percent in 2000 to forty percent in 2006. The study adds that eleven states will likely exhaust their defined benefit plan assets by 2020. The report suggests that heightened disclosures on the part of state and local plan sponsors and a change from a defined benefit plan arrangement to something else merit emphasis before taxpayers are asked to pay more. Click to read "State and Local Government Defined Benefit Pension Plans: The Pension Debt Crisis that Threatens America," United States Senate Committee on Finance, January 2012.

Notably, this blogger addressed the issue of public pension plan funding on July 27, 2006 in "Tea Party Redux: State Pensions in Turmoil." The reference to "tea party" was to a historical event and not the political party.

According to "State Pension Reform, 2009-2011" by Ron Snell (National Conference of State Legislatures, March 2012), all but seven states have made "major changes" in order to lower pension fund obligations. Increasing employee contributions, reducing employer contributions and/or tightening up age and service requirements that dictate when someone can retire are a few of the reforms underway. Modifying how benefits are calculated, offering limited benefits to new employees and replacing defined benefit plans with defined contribution plans are a few of the action steps taken by legislators who worry that there is not enough money to maintain the status quo.

For a state by state listing of the types of retirement plans in place, check out the "Checklist of State DB, DC, and Other Retirement Plans" by Ronald K. Snell (National Conference of State Legislatures, January 2012).

While the pace of change has been noticeably faster in the last few years than ever before, budget reformers still angst about whether various courts will prevent reform by insisting that benefits are guaranteed pursuant to the terms of a given state’s constitution and therefore cannot be altered.

Palm Beach Post reporter John Kennedy reports that workers in the Florida Retirement System may not have to add 3 percent to their pensions if the highest court in the state rules that doing so would violate its governing dictates. See "Challenge of Florida’s forced pension contribution goes to Supreme Court" (March 16, 2012). In "Pension-deal danger: Vote twist leaves door open to lawsuit," New York Post reporters Fredric U. Dicker and Erik Kriss explain that a new pension tier system, signed into law by Governor Andrew Cuomo on March 16, 2012 may face a legal block by "Senate Democrats or one of the public-employee unions that are trying to fight this." As described in "Untouchable Pensions May Be Tested in California" by Mary Williams Walsh (New York Times, March 16, 2012), cities in the Golden State may be barred from enacting reform because of binding provisions in the state constitution. Whether a financially troubled municipality that files for bankruptcy protection will be subject to federal laws – with state mandates taking a legal back seat – is another "hold your breath" issue.

In "Tea Party Redux: State Pensions in Turmoil" by Susan Mangiero (www.pensionriskmatters.com, July 27, 2006), the question was asked whether taxpayers will "enough." With numerous headlines squarely focused on budget crises related to benefit plan funding, "enough" may not come soon enough for some.

Let me start out by saying that the persons at my local post office are courteous, helpful and generally terrific people. That said, like most, I was surprised at the news about a suspension of nearly a billion dollars owed to this federal pension plan.

I guest blogged about this issue for CNBC on June 23, 2011. My commentary is reproduced below.

No Pension Checks for the Postman to Deliver?

The mail gets delivered in rain or snow but it might not include pension checks for postal workers. According to a June 22, 2011 press release from the United States Postal Service, it intends to suspend what it owes to its pension plan as a way to “conserve cash and preserve liquidity.” By doing so, it frees up $800 million in cash for the current fiscal year.

This federal plan sponsor is not alone.

In what seems like an unending stream of bad news on the government pension front, countless cities and states are making adjustments to their existing pension and health care plans for retirees.

Two legislative bills in Minnesota would freeze public pensions as of July 1. Following an arbitration, City of Detroit policemen will see smaller payouts. Florida teachers are suing over a new retirement income tax. Congress is seeking more transparency about public pension plan IOUs and has talked about how large scale municipal bankruptcies related to retirement plan liabilities could adversely impact the financial landscape.

While some sources say that the underfunding crisis is improving for states and cities, others angst that the problem is getting worse and that major reforms are needed now. As we head into an election year, politicos are atwitter about the funding gaps associated with entitlements like Social Security and Medicare. Add underfunded public and corporate plans to the mix and things get scary fast.

Some retirement plans are trying to make up for losses by investing in riskier assets. Absent a robust risk management infrastructure, taking on more risk could worsen funding problems later on.

There are solutions but someone has to lead the way. Raising taxes and/or rescinding benefits is unhappy news to voters. More likely to occur is a legislative mandate to pass the retirement plan hot potato onto Corporate America.

Unfortunately, individuals are unlikely to escape unscathed. The tax man cometh almost surely. Joe Q Citizen may end up footing the bill for someone else’s pension plan even if his doesn’t offer one. The gap in funding for entitlements, public plans and personal savings makes for a trifecta with few winners unless material changes are made soon.

Note to Readers:

According to "Florida governor wants cheaper state pensions" by Michael Connor (Reuters, February 1, 2011), Governor Rick Scott wants to put public employees into 401(k) plans and migrate away from traditional defined benefit plans. Though the state’s system is "relatively strong financially," the article goes on to say that local town halls "pay between 9 and 20 percent of each worker’s salary for pensions" and that "Florida’s 572,000 state and local-government workers now see no paycheck deductions for a fixed-benefit pension program, which supports 319,000 retirees."

Expect more to come after Governor Scott puts his budget to the Florida taxpayers on Monday, February 7, 2011.

Notably, risk management is not any less important for defined contribution plans. To the contrary, a quick survey of some of the litigation underway is focused on 401(k) issues relating to fees, portfolio selection choices, investor education and much more. Moreover, greater pressures for reform are going to force enhanced transparency and allow little time and latitude for decision-makers to focus on prudently realizing risk-adjusted returns. The last thing a board member, lawmaker, regulator or politician wants to address is a worsening retirement IOU situation when taxpayers, shareholders, employees and other stakeholders are grumpy and impatient.

If you did not get to read it when originally published, click to download "Pension Risk Management: Necessary and Desirable" by Susan Mangiero, PhD, CFA, FRM, Journal of Compensation and Benefits, March/April 2006.

Editor’s Note: Fiduciary Leadership, LLC is the new name for BVA, LLC.

Regarding today’s post entitled "Taxpayers and Public Pensions," several people asked for air time. I’ve included their comments below. If you are interested in rebutting or adding a similar opinion, email contact@fiduciaryleadership.com.

"All public sector retirement plans should be the same. We need to cure the actuarial issues caused by retirees thinking they can contribute relatively minuscule amounts for 20 or 25 or 30 years and retire for 30 or 40 or even 50 years thereafter. It can’t be done and we are seeing that now. Retirement before age 65 years should be discouraged. It is important to increase the number of years of participants’ contributions and reduce the number of years associated with paying out benefits. I further recommend a maximum payout of $5,000 per month, regardless of sick days, overtime, unused vacation or any other nonsense included in the benefit calculation. Remember that the maximum payout for Social Security recipients  is about $3,000 per month."

"Civil Servant pensions are extraordinarily generous (with rich formulas, early retirement ages, and post-retirement COLA increases) and therefor extraordinarily EXPENSIVE. The total cost (as a level annual percentage of cash pay) of civil servant pensions is typically 25+% for non-safety workers and 35+% for Safety workers (due to an even richer benefits). This compares to a private sector pension that generally costs the employer about 7.5% of an employee’s pay. With cash pay in the public sector now equal to or greater than cash pay in comparable Private Sector jobs, there is ZERO justification for ANY (yes, ANY) larger public sector pension benefits. Therefore, the cost of public sector pension in excess of the 7.5% offered in the private sector should be paid-for by the EMPLOYEES …. NOT the taxpayers. Hence, non-safety workers should contribute 25% less 7.5% or 17.5% of each person’s pay. Safety workers should contribute 35% less 7.5% or 27.5% of each person’s pay. Now, do I really believe this will even happen? No, of course not. My point is to demonstrate how ridiculously EXCESSIVE the pensions are for public workers and to state that the best (and very NECESSARY) solution is an immediate reduction in the BENEFIT LEVEL of at least 50+% for FUTURE years of service for CURRENT (yes CURRENT) workers. The taxpayers have been hoodwinked long enough."

As I’ve long maintained, THE pension dilemma of an aging population, low savings and greater liabilities is not simply a matter of economics. No politician wants to rescind benefits and/or raise taxes yet the reality in the United States and around the world is obvious. Taxpayers will increasingly force change by voting for candidates who promise reform.

A few days ago, I was sent a press release by the California Foundation For Fiscal Responsibility and was given permission to reprint it here. If you want to provide a countervailing opinion, send an email to contact@fiduciaryleadership.com with a few paragraphs stating your position. Let this important debate continue!

Release: January 28, 2011

Contact: Marcia Fritz

Should Public Employees Pay Half

the Cost of their Retirement Benefits?


SACRAMENTO – Continuing its online conversation about pension reform, CaliforniaPensionReform.com today asked the public to share their views on a second issue central to the debate over public pension reform:

Should public employees pay half the cost of their retirement benefits?

“Earlier this month, we announced that CaliforniaPensionReform.com will host an online conversation about pension reform,” said Marcia Fritz, president of California Foundation for Fiscal Responsibility (CFFR). “Our first Question of the Week asked if public and private employees should have similar retirement plans. A related question is whether government employees should contribute half the cost of their retirement plans. I’ll be thrilled if the responses are as thoughtful and instructive.”


CaliforniaPensionReform.com will circulate the Question of the Week and periodic updates to those who sign up on its Web site. Future questions include:

  • Should public safety employees have different retirement plans than other government employees?
  • Should taxpayers pay healthcare costs for the lifetime of an employee who retires from government service?
  • Should an employee’s unused vacation and sick pay be considered when his/her annual pension is calculated?  

On January 6, CFFR posted two alternative pension reform approaches on its Web site and invited the public to comment. Proposals from others will be posted for public comment as they become available. CFFR is reaching out to economists, legal scholars, financial analysts and pension managers to analyze pension reform proposals and contribute to the CaliforniaPensionReform.com online library. “California can’t solve its fiscal problems until it solves its public pension crisis. Whether lawmakers or voters do the job, we need a plan that has been thoroughly analyzed and debated by voters, stakeholders and experts,” Fritz said.


A man is not old until his regrets take the place of dreams.
– – – – John Barrymore, "Good Night, Sweet Prince" 1943

If Betty White can rock Saturday Night Live to its highest ratings at the age of 88 and Sunset Daze is media gold for the senior reality television set, there is hope for anyone who wants to stay in the game rather than "retire" from the mainstream. In "Famous folks launched careers after 50" by CNN’s Ethan Trex (May 16, 2010), more than a few individuals have realized great commercial success as seniors, including Colonel Sanders (of Kentucky Chicken fame), President Ronald Reagan and Takichiro Mori (twice reported by Forbe’s as the world’s richest man "with a net worth of $13 billion").

Good news is everywhere for the gray haired set if you accept current research about preservation and growth. In "Creativity and successful brain aging: Going with the flow" by Susan Krauss Whitbourne, PhD (March 23, 2010), having friends, enjoying leisure activities such as bridge or dancing and developing a "flexible mental attitude" are three hallmarks of a productive and enjoyable "later life."

At a time when the world is getting older, employers are challenged with managing the costs of providing post-employment retirement benefits as well as having skilled and experienced workers in place.

In a summary slide show, Business Insider excerpts from the 2009 EU Ageing Report to paint a sober picture of how age impacts gross domestic product ("GDP"), assuming that retired persons truly exit the economy and are given no opportunity to continue working in some fashion. (Keep in mind that official statistics do not fully capture actual employment.)

Country Pension Cost compared to GPD in 2007 Estimated Pension Cost compared to GPD in 2035 Estimated Change in Working Age Population by 2020
Netherlands 6.6% 10% -4.3%
Luxembourg 8.7% 17% -1.1%
Denmark 9.1% 11% -4.3%
Bulgaria 8.3% 9% -5.6%
Czech Republic 7.8% 7.6% -8.3%
Belgium 10% 14% -3.5%
Poland 12% 9.3% -5.7%
Hungary 11% 12% -5.0%
Italy 14% 15% -3.0%
Sweden 9.5% 9.4% -6.0%
Malta 7.2% 9.7% -7.1%
Greece 12% 19% -3.9%
France 13% 14% -5.5%
Finland 10% 14% -8.5%
Slovenia 9.9% 15% -6.6%


Things are not too much better in the United States with respect to financial solvency and unfunded retirement benefits. According to "The Market Value of Public-Sector Pension Deficits" by Andrew G. Biggs (Retirement Policy Outlook, American Enterprise Institute for Public Policy Research, April 2010), "public-sector pension plans have only a 16 percent probability of being able to cover accrued benefit liabilities with current assets."

The ramifications are huge in so many ways. Increased taxes, rescinded benefits or both are vote killers so you have to know that THE demographic time bomb is going to become political radiation in short order.

Until then, if you are healthy and able to continue working or are otherwise financially independent, enjoy the good life. Way to go!