Excerpt from David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob
Brinker Host), Financial Education, Helpful Links, Guest Editorials, and
Special Alert E-Mail Service. Copyright David Korn, L.L.C. 2009
If you enjoy listening to Bob Brinker, I write a newsletter that provides commentary on the radio show Moneytalk. Here is an excerpt from my newsletter last weekend in which Bob Brinker had guest, Stephane Fitch, who recently wrote an article entitled “Gilt-Edged Pensions.” Here is a synposis of that interview. To find out how to subscribe to my newsletter,
Fitch’s article discusses the pension obligations of states and municipalities. The article begins by giving the real life example of Glenn Goss who retired from the Delray Beach, Florida police department at age 42 after working there for 20 years. He immediately began drawing a $65,000 annual pension that is guaranteed for life, is indexed to keep up with inflation and comes with full health benefits! That is the equivalent of a $2 million package based on the present value of his vested retirement.
After retiring at age 42, Goss did what most of us would do. He went out and got another job, this time as police chief in Highland Beach making $90,000 a year and building another pension. This idea of retiring a multi-millionaire in your early 40s is usually reserved for corporate executives. The surprising thing is a large number of public employees are able to retire with very significant benefits.
Fitch said Goss is a good guy and simply following the rules of the system. Fitch said cops put themselves on the line and so he has no problem with compensating them at a high level. The problem is that huge retirement pensions for public employees have put many states on the hook for billions upon billions. Fitch noted that Illinois is $60 billion behind; New Jersey $50 billion behind; Florida is behind $25 billion. The only way to close the gap is tax hikes and the reduction of services. They will get paid for because they are guaranteed by State constitutions. Nobody is bailing out private citizen’s 401(k) plans, but as taxpayers we will be required to fund those pension plans.
Fitch said you can try and blame the union bosses, but they are simply doing their job to get the best deal for their members. The real blame is the politicians who make the deals. The politicians who are coming into office now have to deal with the issues. Fitch noted that state and local government workers are getting paid an average of $25.30 an hour which is 33% higher than the private sector’s $19 according to our government’s own labor statistics data. When you add in pension and other benefits, the gap grows to 42%.
Fitch said that if you have a private sector company, and the company can’t afford its obligations, bankruptcy is often a solution. Fitch noted that the reality is that States aren’t going to declare bankruptcy, and even if they did, chances are a bankruptcy judge would still make the State pay these pension obligations since they are constitutionally backed.
Four in five public-sector workers have lifetime pensions, versus only one in five in the private sector. When small municipalities get behind, there is really not much they can do about it. With the market declining so much, it has become an enormous problems, even for bigger government entities. Fitch used Chicago as an example. They have a Fireman’s pension fund that is 19% funded, or 81% under-funded. It shows the irresponsibility of a generation of politicians. At best, they felt that the market would bail them out and continue to generate extraordinary returns.
Caller: A union negotiator called up and said that Fitch didn’t point out that many of these public employees who receive pensions don’t get social security. He thought it was unfair that public servants are unfairly targeted. Fitch asked how many States will come up with the money to pay for the pension benefit shortfall. Fitch said the unions aren’t to blame, the politicians and lawmakers are in bad faith as they gave out something they couldn’t afford.
Caller: A caller pointed out that his city once published the salaries of all city workers and people were astonished to see how many six-figured incomes there were, and that much of it came from overtime wages. Fitch noted that the average New York City employee makes $107,000 a year. That is breaking the City’s budget. In California, prison guards can earn $300,000 year with overtime pay.
Fitch said that in Las Vegas, Nevada, fireman can collect an inflation-protected $40,000 a year for life on top of their pension for disability and they can collect that even if they are healthy enough to work in another occupation. If you get heart disease, you would qualify even if you could work another job.
EC: The article Fitch wrote is an eye opener and worth a read. Check it out at this url: