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How Safe Is Your Pension?

As a public employee, if your pension is underfunded because your employer won't contribute its share, you just might be out of luck.

October 17, 2011  |  by - Also by this author

Recently filing for Chapter 9 themselves, officials in Central Falls, R.I., plan to emerge from bankruptcy within six months and avoid the drawn-out proceedings that have plagued Vallejo. Central Falls has already cut the checks of its retired police officers in half. It's the first city in its state to file for bankruptcy, but it might not be the last.

In the Rhode Island town of Cranston, each of the city's 172 retired police officers on pensions is receiving only $5,000 less per year than its 109 active police officers. That's a big drain on the budget, and the city can't sustain the system as is.

Tier Systems

The way most underfunded pension plans are making changes is through the use of "tiers." Anyone hired after a certain date falls into a different "tier" and gets a modified retirement package that doesn't provide as many benefits as that of other law enforcement officers already in the pension plan.

Currently, the IMRF is fully funded, even though the state of Illinois has major funding concerns. This was possible because the employers, not the state, contribute to the fund. And these employers always make their contributions because they're required to by law, and that mandate is enforced.

"There have been a number of places, including Illinois, where they have devised a second tier. New York City, which has a history of modifying plans for new hires, is on Tier 6," says Smoot. "There's a momentum to do that right now."

Experts say the combination of a fully functioning funding system and a tier system that adjusts benefits for new hires keeps spending at a sustainable level.

"One of the best models of pension funding is the funding model in the Illinois Municipal Retirement Fund (IMRF)," says Smoot. "Under IMRF, employees contribute a set percentage amount of their salary, and IMRF sends the public employer a bill for whatever their contribution share is. And if the city or county doesn't pay their bill, the state comptroller withholds that amount of their share of their tax money and pays the pension fund."

But most other pension funds in Illinois have problems, which affects state troopers and other police officers. The five major state public pension funds are underfunded by around $80 billion total, with the best being only 46 percent funded. And those problems could end up affecting everyone if there isn't enough money available.

Chief Bross of the Atwood (Ill.) PD is thankful that his previous employment with a sheriff's office allowed him to qualify as part of Tier 1 in the IMRF. Otherwise, he would be lumped in with others who were hired on to member agencies after Jan. 1, 2011, and receive lesser benefits as a part of Tier 2.

"With Tier 1, which is much better, you can take early retirement at 55, and as long as you're 20 years in, you're collecting half of the average of your last three or four years' salary," says Bross. "With Tier 2, I believe it's the average of your last five years and early out is 62 [years of age]."

Los Angeles Police Department officers also have a new tier. Instead of paying eight or nine percent of their salary toward their pension, employees in the new tier must pay 11 percent, in addition to paying for retirees' healthcare for the first time, according to Paul M. Weber, the president of the Los Angeles Police Protective League and a sergeant with the LAPD.

These changes for new hires are small adjustments compared to other proposals for solving funding problems. When asked about the prospect of officers having only 401(k)s, or defined contribution plans that depend solely on the market, instead of guaranteed pensions, Bross is skeptical. "I think you're going to find that hard," he says. "You might be able to do it with the non-union officers, but really I don't see the FOP letting that fly."

Comments (3)

Displaying 1 - 3 of 3

joe corey @ 6/8/2012 9:56 PM

I think this story strikes home for an awful lot of police officers,of which I am one. I live in R.I. which is mentioned in this article more than once. In fact the city of Pawtucket is now considering ways in which to cheat us out of our lawful pensionb.This plan was always paid into by the officers,but the city itself missed numerous years and is now trying to cheat us for their unlawful actions. Of course no one in the city goverement is now in office who was responsible for the fact,but is is very clear those in office knew about it.

Yardcop @ 6/10/2012 7:39 PM

I know my department has changed the contribution amounts for new hires from 3% @ 55 to 2.5% @ 55. Though it's not horrible, I have to wonder if the splitting of the union benefits between older and newer officers won't have a side effect in future union endevours to raise standards and unification.

Vincent Gabbeart @ 7/10/2012 8:43 AM

In less than two weeks, your time for assessing your options outlined in the General Motors Pension Buyout Plan will be over. The offer from GM, announced on June 1, presented you with three choices: to take a lump-sum payment, to continue a monthly benefit, or to take on a new sort of monthly benefit. From the start it has been strongly encouraged that you meet with a financial advisor experienced in the areas of retirement and investment planning. Additionally, you can watch this video which may help to shed some light on the three available options: You've had time to think about your pension options, now is the time to act.

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