Detroit’s Pension Bust: Could It Happen Here?

state pensions

As a native Michigander, it’s very sad (although not surprising) to see what is happening in Detroit.

Detroit has $19 billion (yes, that is a “B” as in billion) dollars of debt. Reportedly $14 billion of that is due to retiree pensions and health benefits.

The current financial crisis has been brewing for several decades. The city has lost more than half its population over the last fifty years, and much of its tax base.

According to news reports, Detroit emergency manager Kevyn D. Orr has promised that retired city workers, police officers and firefighters will not see pensions or health benefits reduced for at least six months, but acknowledges that those retirement benefits will have to be cut “down the road.”

Says Orr, “We don’t have a choice.”

Could it happen here?

Many of our retired clients, including teachers and other public servants, receive monthly pensions from the Florida Retirement System, as well as other city and municipal entities.  They are undoubtedly looking at the developments in Detroit and asking themselves “Could this happen here?”  Do they risk losing the benefits they’ve been promised and depend on?

Florida state pension top ranked

They’ll be relieved to hear that the Florida state pension system ranked among the top 10 financially strongest state plans by researchers at Morningstar, which recently analyzed current data for pension plans administered by all 50 states. Morningstar ranked the plans on several criteria, including their funded ratio, measuring the ability of a pension plan to meet its obligations (calculated by dividing the pension plan’s assets by its liabilities). A funding level of more than 80% is considered good.

The weakest plan in the survey?  Illinois. The state has funded only 43.4% of its future liabilities, leaving each citizen in the state with an unfunded liability of $6,505 per resident.

But other Florida municipalities a mixed bag

While the state’s pension plan seems rock solid, it’s a different story in other Florida cities and municipalities.

“A number of Florida cities are faced with significant, almost crippling liabilities in their municipal pensions that bring into question the long-term sustainability of these pension systems,” said Dominic M. Calabro, President & CEO of Florida TaxWatch, in February 2013 as his organization and Florida State University’s LeRoy Collins Institute released a new study of the challenges facing Florida’s municipalities.

A 2011 report by the non-partisan LeRoy Collins Institute graded more than 100 city pensions, with about 15% of all plans receiving an “A” and one-third earning a “D” or “F” for being underfunded. In South Florida, selected pension plans in Boca Raton, Deerfield Beach, Delray Beach and Plantation scored “A’s.” However, plans in Boynton Beach, Hollywood, Cooper City and Palm Beach Gardens bombed with”F” grades.

Do your homework

If you are covered by a state, municipal or even a corporate pension plan, and have doubts about the plan’s soundness, do your homework. You can probably find information about the plan’s funding ratio online. If the plan looks shaky, try to take your retirement benefits in a “lump sum” payment rather than opting for monthly benefits (e.g. the proverbial bird-in-the-hand approach). Try to compensate for a possible reduction in benefits (such as a scale-back in retiree medical benefits) by saving more on your own, or worst case scenario, switching employers to gain more security.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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