You may have read in the paper, or saw the story on the news, about the financial problems plaguing Detroit. The financial crisis had a tremendous impact on the city which had been on the ropes for the last two decades. A crumbling infrastructure, and significantly eroded economic base, forced the city into bankruptcy in August. Detroit has $18 billion in liabilities and underfunded pensions are a big part of the liabilities.
Detroit is the largest in a string of municipal bankruptcies that have surfaced across the country (others include Stockton, Cal. and Scranton, Pa. to name a couple). Workers in these cities are now dealing with the fact that the cities can no longer fulfill their promise to provide pension benefits to the retired workforce or current employees. Formulas used to calculate pension benefits assumed unachievable rates of return. As a result, cities did not provide an adequate level of funding for many years to keep the pensions solvent.
An op-ed that appeared in the Aug. 4, 2013 New York Times, titled “A Plan to Avert the Pension Crisis” by Richard J. Riordan and Tim Rutten, described that that the total value of underfunded municipal pensions is approximately $1 trillion. Some cities have addressed these pension problems by issuing long-term bonds. Some would argue that this is a “kick the can down the road” approach. Others have also made changes which have resulted in reduced benefits for retirees and future retirees. In some areas consideration is being made to switch to 401k style retirement plans which are significantly less expensive for the municipalities to fund.
The article also discussed a plan put forth by a Stanford economist to provide a federally backed program to allow municipalities to issue to long-term bonds to help close the funding gaps. Involvement in the program would require the municipalities to abide by a number of fiscal requirements intended to help the municipalities and ensure that federal funding would not be needed to back the pensions.
Undoubtedly there will be a lot of debate before a program like this is implemented.What does this mean for us as residents of Northeast Philadelphia? Two things come to mind immediately.
If you work for the city, do not be overly confident about receiving your full pension in retirement. Mitigate this risk by putting as much as you can into your deferred comp program. If you are a citizen, you have to be mindful of the chances that the city may raise our taxes to cover some of these unfunded liabilities. Also, the issuance of bonds to fund future liabilities is nothing more than kicking the can down the road, which will leave a major financial burden for our children and grandchildren. This is what is happening at the federal level now.
The point of all this is that we as individuals have to take on more responsibility to ensure we have a secure financial future. If you have not done a plan yet (regardless of your age) now is the time.
Good luck with your planning.
The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security.
Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC 8725 Frankford Avenue Philadelphia, PA 19136 firstname.lastname@example.org 215-332-4968