Legacy benefits

When I first got into the financial planning business I took a lot of courses to get a lot of initials behind name. I once joked that I would have to get larger business cards. In any event my interest directed me toward retirement planning and that is where I spent 25 years working. I recall in the early days I would be constantly searching for someone who understood pensions and I couldn’t find anyone. I had to learn on my own and as the years passed I discovered that I had become the expert I was looking for and associates were turning to me for help.
I am telling you this because of the all of the news about pensions and how unions are revolting not only in the US but in Europe. I understand why they are upset and they have legitimate reasons. The problem exist in both public and private pensions but more so in the public area.
Let’s go back in time to the 1950’s and you own a company and you want to set up a pension plan for your employees. You sit down with a pension expert and set out your plan. First he asks for the number of employees and their ages and salaries. Then he asks for turnover because you have to consider how many of your current employees will still be there at retirement age. Then he asks for your opinion on what inflation will be for the next 20 years so he can determine how wages will increase over time. Finally he asks how much you expect to earn on the pension fund over the coming years. It doesn’t take a rocket scientist to quickly understand that all of these estimates are just wild guesses. In order to overcome the problems associated with these guesses he suggests that you review your pension each year and make adjustments accordingly. Plans that were developed like this and adjusted like this remained solvent but often times these procedures were not followed.
In some state plans the need for funds was so great that they diverted pension money to other projects, things like bridges and highways. Now the government requires that pensions always have enough money to meet the needs of retirees so if there was not enough the plans were underfunded and the government demanded that they be brought up to spec. Now any professional pension consultant will tell you that you must be conservative on your projections of future earnings and using the inflation rate would be acceptable. When these plans diverted pension monies they made up the difference by estimating future earnings at a higher rate. Then as the years passed and elected officials found this new source of funds the practice continued until some states were projecting future earnings at 8% even though current inflation has been less than 3% for most of the past two decades. If I save $1,000 per year at 3% for 30 years I have $47,000 but if I use 8% I have $113,000.
Please understand that over the years many of the pensioners were given retirement benefits in lieu of wage increases. This allowed the states to continue on their spending spree by pushing off commitments to the later years. Well the later years are here. It is time to pay the piper. Since states are not allowed to declare bankruptcy they must come up with a way to resolve this problem and most will have to reduce benefits and people are not going to be happy about this. Some have suggested that congress pass the appropriate laws to allow states to declare bankruptcy but many say this could be unconstitutional.
Earlier I mentioned that public pensions are in worse shape than private pensions and the reason for that lies in the negotiating process. If you own a company you are looking at your money or your stockholders money when you renew your pension contracts, If you are in the public sector you are using public money. Which do you think you are more likely to covet?
Let us look at an example. Suppose there is an election for county commissioner. The union people select a candidate who is partial to their view and campaign for this person. The not only go door to door but they contribute funds for his campaign and he is subsequently elected. Now when it comes time to negotiate a new contract the unions leadership sits down across the table from the person they helped to elect and the two sides decided on how they will divvy up the tax payers money.
This process has been going on in cities and counties across the country for 30 plus years and we now see the results with public pensions having better benefits than the private pensions. Once this cozy arrangement was put in place not only were pension benefits increased but salaries and other benefits like health care were also padded.
For you people in my generation, if this is sounding familiar, don’t be surprised for the federal government has done something similar to social security. The money in social security was used to purchase government bonds and this money was then used for things like bridges and highways. This mixing of government money with social money is known by the happy name of unified federal budget.

In the Minneapolis School District there are 3,300 teachers and 6,700 support staff. 1,500 of the support staff are members of the teachers union. If the teachers select a candidate who will negotiate contracts that are favorable to teachers and then work to get them elected, they have a very good chance of winning. If each teacher and spouse vote for a particular candidate that is 9000 votes. Now if they get their parents to vote that is another 18,000. Next if they have coffee parties and invite the neighbors plus make a small campaign contribution they can just about guarantee a win for their candidate. The proof of this is that
No DFL-endorsed candidate for the board has lost in at least 20 years.

Here are the results from the last school board election and it is easy to see why someone with a 27,000 vote head start will be the likely winner and you can be assured that all the teachers do vote.


3 seats 131 of 131 precincts (100%)

Lydia Lee *
61,623

Jill Davis
58,998

Carla Bates
54,691
Sharon Henry-Blythe *
39,476
Kari Reed
33,118
Doug Mann
28,416

This is why it is necessary for there to be a disinterested third party to negotiate contracts. Some thing similar to arbitration