Expect this kind of thing to start happening all over the country. Small to medium sized cities, saddled with astronomical public employee pension obligations, forced to declare insolvency because their predecessors refused to deal with the problem.
According to Mark Stowers writing in the Oakland Press: (via The Blog Prof ) *
The Auburn Hills pension plan put in place decades ago for city workers will potentially bankrupt the city if changes are not made, city officials fear.Assistant City Manager Tom Tanghe has worked for the city for most of the current decade and has been negotiating city worker contracts. Tanghe said the problem lies with employees in the Defined Benefit Pension plan, which was closed by the city in the late 1990s.
"The thing that is harming the pension fund is that someone decided and adopted a 5 percent, non-compounding cost-of-living adjustment," Tanghe said. "If you retired at $40,000 you would get a 5 percent adjustment the following January."
The 5 percent amount is added each year to the base pension. Tanghe said that simple 5 percent cost-of-living adjustment will double the pension in 20 years to $80,000. Retirees' pensions are passed on to spouses in the event of death. Of the city's 187 employees, 46 are in the defined benefit plan. The rest are in the city's 401(k) retirement plan.
"So if you retired at the age of 50 with a $4,000 monthly pension, by the time you are 70, your pension would be $8,000 a month," he said. "And if you're lucky enough to live to 90, your pension would be $12,000 a month. And when I looked at those numbers I said, ‘How can any community ever pay that?'"
Indeed - and this is not the most generous of city pensions around. Some allow the employee to be eligible for up to 70% of these benefits after only 5 years of service. Others allow a city employee to retire, receiving 90% of an average of his final 3 years salary - a salary oftentimes deliberately inflated just so that those last three years can garner the employee as much taxpayer loot as possible.
The solution? Many experts believe that these defined benefit plans should be moved to a defined contribution plan, as well as passing stricter rules for eligibility, and dropping the gold plated retirement provisions.
It may well be too late for Auburn Hills.
* Correction: The town of Auburn Hills is located in Oakland County Michigan and not California as is stated in the title.
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