This chart shows public employees' wages and compensation as compared to that of their private sector counterparts. Source: Employment Policy Research Network.
"The vast majority of public sector pension plans are well funded," assures Hank Kim, executive director of the National Conference on Public Employee Retirement Systems (NCPERS). "For the few that are the headline-grabbing examples of underfunded pensions, the cause of that underfunding stems from the fact that plan sponsors have not made their contributions to the pension plan."
Apparently not all pension boards are as well informed as the members of McNamee's association. Some of the problems of underfunded pensions could be due to poor financial planning and management by trustees and consultants who lacked knowledge. But that's not true for every case.
"There is a crisis, but it's been manufactured in large part to cover up the fiscal mismanagement of elected officials over several generations," says Jim Pasco, executive director of the National Fraternal Order of Police. "As economic times deteriorated, elected officials suddenly found themselves pinched for cash, and they developed buyer's remorse over the contracts they and their predecessors over time had entered into. Now all of a sudden it's seen as the fault of the greedy public servant that there was a fiscal crisis in these communities."
The real problem for many underfunded pensions is lack of employer contributions over time—a long time—that's coming to a head now because of the dip in the market. No one knew when this would happen, but the public employers that failed to make their yearly contributions did so intentionally.
"In Illinois, under our former governor Rod Blagojevich, the state made zero contributions to the state's pension funds, what Blagojevich called a 'pension holiday,'" says Sean Smoot, director and chief legal counsel for the Police Benevolent and Protective Association of Illinois. "It was a notorious thing that he did."
Blagojevich's government wasn't the only one to take a "pension holiday." In fact, Milwaukee's pension fund had been so well funded up until 2009 that the city of Milwaukee hadn't contributed in two years. The mayor and city council dipped into a reserve fund that had been created to help cover the costs when both the city and county were required to cover the loss of one-third of its pension funding because of the down market.
Now many police officers and other public safety professionals are left wondering why they're getting punished for someone else's bad decisions.
Rhode Island is one state facing a major problem with underfunded pension funds. And it's looking to make major changes to come up with some sort of solution. Officials are looking at reducing benefits, lowering retirement payments, replacing part of the pensions with 401(k)-type accounts, and reducing retirees' cost-of-living increases.
If you're grandfathered in to a pension system, you might be safe. And if your state has in its constitution that it can't renege on pension promises, you're in a better position. But with too little money on hand and few other options, states like Rhode Island that are faced with severely underfunded pensions are less afraid of potential legal recourse from unions and other interested parties.
States are now cutting into current retirees' pension benefits to stay afloat-something thought unthinkable until recently. South Dakota, Colorado, Minnesota, New Jersey, and Maine have all reduced cost-of-living increases for their retirees. But there are other measures that can generally be taken before taking that step.
"If a pension plan has systemic, long-term funding issues, employers could contribute more, employees could contribute more, they could change some of the multipliers, they could change the retirement age," says NCPERS' Kim. "If there's collective bargaining, if there's constitutional protections for the promises made, those things need to be worked out sitting across the table from each other to negotiate on."
Having taken a drastic measure to solve its financial woes, the city of Vallejo, Calif., is emerging from bankruptcy protection after three years. It decreased its police department by 47 percent, but it couldn't alter the pensions of police officers who were already retired because of a California law. "But we could increase what employees are asked to pay and the cost of their medical," Vallejo's city manager Phil Batchelor told local station WPRI. "All of those were made possible because of the bankruptcy proceeding."
The Vallejo Police Officer Association and other city unions fought the changes, but are now making concessions, especially after the city is out the money spent on legal fees, further draining the public coffers.