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Blue Model Blues
The Pension Crisis, Philadelphia Edition

The state of Philadelphia’s pension system is dire and Ron Dubow, the city’s Director of Finance, is sounding the alarm. CNBC reports:

Appearing on CNBC’s “Power Lunch” on Wednesday, Rob Dubow, director of finance of the City of Philadelphia and chairman of the city’s pension fund board, said the situation is “very bad.”

“The health of the municipal pension fund is one of the greatest financial challenges facing our city. One particular challenge is that the number of retirees exceeds the number of current employees paying into the fund, and that is a huge drain on our budget,” said Dubow.

In his interview, Dubow notes that pension payouts have grown from 5 to 16 percent of the city budget, taking away money from providing key services (“it really means less of everything,” he said). This is a crisis hitting cities across the country as bills racked up come due. How American cities dig themselves out of this multi-trillion dollar disaster will be one of the great questions of our time.

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  • Tom

    That part’s easy. Bailouts for everyone. And the people who complained about moral hazard in ’08 will be singing the government’s hosannas.

  • Andrew Allison

    Public employee pensions are Ponzi schemes in which contributions are being used to pay the pensions of existing retirees. I suspect that the only way out of this mess is to make public employee pension plans subject to ERISA. This will be ugly because agencies which are now whining about pension costs will be faced with the real ones. Incidentally, Philadelphia’s pension costs represent HALF the percentage of many other cities.

    • Fat_Man

      ERISA Plans that go bust are liquidated by the Federal Pension Benefit Guaranty Corporation (PBGC). They haircut payments to the retirees, but, their payouts have no effect on Social Security. Wait until you hear the howls of outrage about the haircuts.

      • Andrew Allison

        The haircuts are going to happen anyway, and of course the victims will blame anybody but the unions and elected officials who negotiated ridiculous pensions or the trustees who lied about the financial condition of the plans. But you raise a very good argument against PBGC guarantees; the agency is already running a huge deficit. The logical, i.e., guaranteed not to happen, solution is to sequester the assets of the public pension funds and give the pensioners Social Security benefits based on their lifetime earnings.

        • Fat_Man

          PBGC takes over the assets of any plan that it covers which is insolvent and it is liquidating.

          Plans insured by PBGC have paid premiums for their insurance since the earlier of their organization or PBGC’s in 1974. State and local government plans have not paid premiums, although maybe it is time for them to start.

          • Andrew Allison

            It would be manifestly unjust to provide PBGC benefits to plans which haven’t contributed to it. Could one approach be to offer to guarantee benefits for public pension plans willing to cough up premiums since the earlier of their organization or PBGC’s in 1974? Alternatively, simply pass legislation requiring public pensions to follow the reporting requirements of private plans. The opposition from the pigs feeding at the public pension trough (administrators, local governments, the investment community and retirees) to any reform would be fierce but the alternative is an implosion in pension benefits.

          • Fat_Man

            Actually, the alternative is raising your taxes.

          • Andrew Allison

            Not necessarily mine. This is a state and local government problem and as cities like San Jose (CA) have determined, there’re limits to increasing revenue and deceasing services. Municipalities are going to be forced into bankruptcy (some already have), with devastating effect on both the residents and the retirees. The choice is to watch it happen, or to try and mitigate the fallout. As previously noted, I’m not optimistic about the prospects for reform, but shouldn’t we at least try?

          • Fat_Man

            The Federal government can make it your problem (and mine too). The demands that they bail out the S&L pension plans will be loud and insistent.

          • Andrew Allison

            Agreed, and I’ve stocked up [grin]

  • Beauceron

    There’s nothing to worry about here.
    You know, you just know, that we will all be bailing out the cities and states that have been so irresponsible.

    • CapitalHawk

      Of course. Because Democrats take care of their own and Republicans take care of everyone except their own.

  • White Knight Leo

    Why is it every time I see stuff like this I want to buy more ammunition?

    • Fat_Man

      Ammo won’t help you, you need KY. See below.

  • Daniel Nylen

    If there was some way that the pension guarantees only extended to the money appropriated to the pension funds it would solve a myriad of problems. the unions wouldn’t accept open ended promises due decades later and the pension funds would not be used a piggy-banks by the politicians. A raise in pension today would mean a tax increase to up the amount of funds added now to the fund.

    Unfortunately, there isn’t a path to get from the current system with its imho unconstitutional and immoral future guarantees (one legislature has limits on future legislature’s actions and funding) to something that is even close to stable and reliable. Most companies have moved to a defined contribution plan, even military retirements are changing to something close to it, but not state public pensions.

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