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The move by New Jersey to strip workers of their previous benefits will save the state approximately $132 billion over the next 30 years.  But many argue that the state is fixing the problem by hurting those who have worked hard their entire lives for their state.  What do you think?  Have union’s become out of control and it’s time to reign them back in to help fix budget problems?  Or is this a case of the working class having to bear the brunt of a broken system?

Read more here in the article, “New Jersey Legislature Moves to Cut Benefits for Public Workers.”

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Pension Envy!  The Next Big Fight/Debate!?

You have probably read about the brouhaha in Wisconsin over
pensions.  More and more state and local governments find that they are not able
to pay for benefits that public employees have been promised.

A recent article from the Associated Press, “Anger brews over
government workers’ benefits,” summarizes the debate.  “At its heart, the issue
is this:  Some public workers get a sweet deal compared to other workers.  And
it’s taxpayers who pay for it.”

And there is mounting evidence that citizens are taking sides
in this debate.  A USA Today/Gallup poll last month found show that Americans
largely side with the employees, though about two in five that want government
pay and benefits reined in.

Read this article

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Policy makers are working behind the scenes to come up with a way to let
states declare bankruptcy and get out from under crushing debts,
including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal
bankruptcy court. Any effort to change that status would have to clear
high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible
way out may be bankruptcy, giving Illinois, for example, the opportunity
to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural
problems, like insolvent pension funds, that are diverting money from
essential public services like education and health care. Some members
of Congress fear that it is just a matter of time before a state seeks a
bailout, say bankruptcy lawyers who have been consulted by
Congressional aides.

Bankruptcy could permit a state to alter its contractual promises to
retirees, which are often protected by state constitutions, and it could
provide an alternative to a no-strings bailout. Along with retirees,
however, investors in a state’s bonds could suffer, possibly ending up
at the back of the line as unsecured creditors.

“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a
partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.

For now, the fear of destabilizing the municipal bond
market with the words “state bankruptcy” has proponents in Congress
going about their work on tiptoe. No draft bill is in circulation yet,
and no member of Congress has come forward as a sponsor, although
Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

House Republicans, and Senators from both parties, have taken an
interest in the issue, with nudging from bankruptcy lawyers and a former
House speaker, Newt Gingrich,
who could be a Republican presidential candidate. It would be difficult
to get a bill through Congress, not only because of the constitutional
questions and the complexities of bankruptcy law, but also because of
fears that even talk of such a law could make the states’ problems
worse.

Read more of this article.

Ever since Marie Corfield’s confrontation with Gov. Chris Christie this fall over the state’s education cuts became a YouTube classic, she has received a stream of vituperative e-mails and Facebook postings.
“People I don’t even know are calling me horrible names,” said Ms.
Corfield, an art teacher who had pleaded the case of struggling
teachers. “The mantra is that the problem is the unions, the unions, the
unions.”

Across the nation, a rising irritation with public employee unions is
palpable, as a wounded economy has blown gaping holes in state, city and
town budgets, and revealed that some public pension funds dangle
perilously close to bankruptcy. In California, New York, Michigan and
New Jersey, states where public unions wield much power and the culture
historically tends to be pro-labor, even longtime liberal political
leaders have demanded concessions — wage freezes, benefit cuts and
tougher work rules.

¶
It is an angry conversation. Union chiefs, who sometimes persuaded
members to take pension sweeteners in lieu of raises, are loath to
surrender ground. Taxpayers are split between those who want cuts and
those who hope that rising tax receipts might bring easier choices.

And a growing cadre of political leaders and municipal finance experts
argue that much of the edifice of municipal and state finance is
jury-rigged and, without new revenue, perhaps unsustainable. Too many
political leaders, they argue, acted too irresponsibly, failing to
either raise taxes or cut spending.

A brutal reckoning awaits, they say.

These battles play out in many corners, but few are more passionate than
in New Jersey, where politics tend toward the moderately liberal and
nearly 20 percent of the work force is unionized (compared with less
than 14 percent nationally). From tony horse-country towns to
middle-class suburbs to hard-edged cities, property tax and unemployment
rates are high, and budgets are pools of red ink.

A new regime in state politics is venting frustration less at Goldman Sachs
executives (Governor Christie vetoed a proposed “millionaire’s tax”
this year) than at unions. Newark recently laid off police officers
after they refused to accept cuts, and Camden has threatened to lay off
half of its officers in January.

Fred Siegel, a historian at the conservative-leaning Manhattan
Institute, has written of the “New Tammany Hall,” which he describes as
the incestuous alliance between public officials and labor.

“Public unions have had no natural adversary; they give politicians
political support and get good contracts back,” Mr. Siegel said. “It’s
uniquely dysfunctional.”

Read more of this article.

This struggling small city on the outskirts of Mobile was warned for
years that if it did nothing, its pension fund would run out of money by
2009. Right on schedule, its fund ran dry.

Then Prichard did something that pension experts say they have never
seen before: it stopped sending monthly pension checks to its 150
retired workers, breaking a state law requiring it to pay its promised
retirement benefits in full.

Since then, Nettie Banks, 68, a retired Prichard police and fire
dispatcher, has filed for bankruptcy. Alfred Arnold, a 66-year-old
retired fire captain, has gone back to work as a shopping mall security
guard to try to keep his house. Eddie Ragland, 59, a retired police
captain, accepted help from colleagues, bake sales and collection jars
after he was shot by a robber, leaving him badly wounded and unable to
get to his new job as a police officer at the regional airport.

Far worse was the retired fire marshal who died in June. Like many of the others, he was too young to collect Social Security.
“When they found him, he had no electricity and no running water in his
house,” said David Anders, 58, a retired district fire chief. “He was a
proud enough man that he wouldn’t accept help.”

The situation in Prichard is extremely unusual — the city has sought
bankruptcy protection twice — but it proves that the unthinkable can, in
fact, sometimes happen. And it stands as a warning to cities like
Philadelphia and states like Illinois, whose pension funds are under
great strain: if nothing changes, the money eventually does run out, and
when that happens, misery and turmoil follow.

It is not just the pensioners who suffer when a pension fund runs dry.
If a city tried to follow the law and pay its pensioners with money from
its annual operating budget, it would probably have to adopt large tax
increases, or make huge service cuts, to come up with the money.

Current city workers could find themselves paying into a pension plan
that will not be there for their own retirements. In Prichard, some
older workers have delayed retiring, since they cannot afford to give up
their paychecks if no pension checks will follow.

Read more of this article.

The State of Illinois is still paying off billions in bills that it got
from schools and social service providers last year. Arizona recently stopped paying for certain organ transplants for people in its Medicaid
program. States are releasing prisoners early, more to cut expenses
than to reward good behavior. And in Newark, the city laid off 13
percent of its police officers last week.

While next year could be even worse, there are bigger, longer-term
risks, financial analysts say. Their fear is that even when the economy
recovers, the shortfalls will not disappear, because many state and
local governments have so much debt — several trillion dollars’ worth,
with much of it off the books and largely hidden from view — that it
could overwhelm them in the next few years.

“It seems to me that crying wolf is probably a good thing to do at this point,” said Felix Rohatyn, the financier who helped save New York City from bankruptcy in the 1970s.

Some of the same people who warned of the looming subprime crisis two
years ago are ringing alarm bells again. Their message: Not just small
towns or dying Rust Belt cities, but also large states like Illinois and
California are increasingly at risk.

Municipal bankruptcies or defaults have been extremely rare — no state has defaulted since the Great Depression, and only a handful of cities have declared bankruptcy or are considering doing so.

But the finances of some state and local governments are so distressed
that some analysts say they are reminded of the run-up to the subprime
mortgage meltdown or of the debt crisis hitting nations in Europe.

Analysts fear that at some point — no one knows when — investors could
balk at lending to the weakest states, setting off a crisis that could
spread to the stronger ones, much as the turmoil in Europe has spread
from country to country.

Mr. Rohatyn warned that while municipal bankruptcies were rare, they
appeared increasingly possible. And the imbalances are so large in some
places that the federal government will probably have to step in at some
point, he said, even if that seems unlikely in the current political
climate.

“I don’t like to play the scared rabbit, but I just don’t see where the end of this is,” he added.

Read more of this article.

Retirement Calculator:  How secure is your retirement plan?  Hopefully better than California’s and Illinois’, but perhaps not.  Find out what the best way forward is at NewRetirement.com.

For the overwhelming majority of Americans, having secure retirement
income in the future doesn’t seem like a very sure thing. Consider the
traditional “three-legged stool” that past generations had in place to
support their retirement:

• First and foremost, a pension or some form of defined contribution
plan from a company where you have worked. Sadly, these plans have all
but disappeared. In their place are 401(k) plans where the
responsibility is on the individual to contribute to his or her
personal retirement.

• Second, Social Security. For those of us age 50 or younger, there
are serious concerns as to the long-term solvency of this program. At a
minimum, it would be realistic to assume that qualifying ages to
receive Social Security will continue to be raised, and perhaps even
some form of “means testing” introduced. The bottom line? Over the long
run, this benefit simply won’t continue as it always has, and in the
same form.

• The third leg is personal savings. In the past, savings were an
additional supplement to the above retirement finance components. With
the extinction of traditional pension plans and widely anticipated
alterations in the social security safety system, this is now the most
important leg of the stool.

The key for investors today is to find ways to translate personal
savings into more assured income streams in retirement—in effect, to
create one’s own personal pension plan. Here are two strategies that
most average investors can adopt:

Read more of this article.

Retirement Calculator:  Crafting a personal retirement plan is not easy, and requires both good information and a broad view of the options available to you.  Our Retirement Calculator can help you figure out what is available to you.

Earlier this year, Illinois said it had found a way to save billions of
dollars. It would slash the pensions of workers it had not yet hired.
The real-world savings would not materialize for decades, of course, but
thanks to an actuarial trick, the state could start counting the
savings this year and use it to help balance its budget.

Actuaries, including some who serve on the profession’s governing
boards, got wind of what Illinois was doing and began to look more
closely. Many thought Illinois was using an unorthodox maneuver to
starve its pension fund of billions of dollars, while papering over a
widening gap between what it owed and how much it had. Alarmed, they
began looking for a way to discourage Illinois’s method before other
states could adopt it.

They are too late. The maneuver, and techniques that have similar
effects, are already in use in Rhode Island, Texas, Ohio, Arkansas and a
number of other places, allowing those states to harvest savings today
by imposing cuts on workers in the future.

Texas saved millions of dollars this year after raising its retirement
age for future hires and barring them from counting unused sick leave in
their pensions. More savings will appear in coming years. Rhode Island
also raised its retirement age for future retirees last year, after
being told it could save $90 million in the first year alone.

Actuaries have been using the method for years, it turns out, but nobody
noticed, in part because official documents usually describe it in
language few can understand.

The technique is fairly innocuous in normal times, allowing governments
to smooth out their labor costs over many years. But it becomes much
riskier when pension funds have big shortfalls, when they need several
decades to pay down their losses and when they are cutting benefits for
future workers — precisely the conditions that exist today.

“In a plan that is not well funded, I wouldn’t recommend it,” said Norm
Jones, chief actuary for Gabriel Roeder Smith & Company, an
actuarial firm that helps Illinois and a number of other states that
have adopted the method. He said the firm’s actuaries informed officials
of the risks and it was the officials’ decision to use the technique.

Struggling states and cities need to save money, but they run into legal
problems if they tamper with the pensions their current workers are
building up year by year. So most places have opted to let current
workers and retirees go unscathed. Colorado, Minnesota and South Dakota
are the exceptions, dialing back cost-of-living increases for people who
have already retired. All three states have reaped meaningful savings
right away, and all three are being sued.

Read more of this article.

Retirement Calculator:  Are you covered if your pension goes belly-up?  What adjustments will you need to make in these cases?  Find out what your retirement needs might really be with our Retirement Calculator.

Recently some critics have accused me of bullying
state employees. Headlines in California papers this month have been
screaming “Gov assails state workers” and “Schwarzenegger threatens
state workers.”

I’m doing no such thing. State employees are
hard-working and valuable contributors to our society. But here’s the
plain truth: California simply cannot solve its budgetary problems
without addressing government-employee compensation and benefits.

As former Speaker of the State Assembly and San Francisco Mayor
Willie Brown pointed out earlier this year in the San Francisco
Chronicle, roughly 80 cents of every government dollar in California
goes to employee compensation and benefits. Those costs have been rising
fast. Spending on California’s state employees over the past decade
rose at nearly three times the rate our revenues grew, crowding out
programs of great importance to our citizens. Neglected priorities
include higher education, environmental protection, parks and
recreation, and more.

Much bigger
increases in employee costs are on the horizon. Thanks to huge unfunded
pension and retirement health-care promises granted by past governments,
and also to deceptive pension-fund accounting that understated
liabilities and overstated future investment returns, California is now
saddled with $550 billion of retirement debt.

The
cost of servicing that debt has grown at a rate of more than 15%
annually over the last decade. This year, retirement benefits—more than
$6 billion—will exceed what the state is spending on higher education.
Next year, retirement costs will rise another 15%. In fact, they are
destined to grow so much faster than state revenues that they threaten
to suck up the money for every other program in the state budget. (See
the nearby chart.)

I’ve held a
stricter line on government employment and salary increases than any
governor in the modern era (overall year-to-year spending has increased
just 1.4% on my watch). Nevertheless, employee costs will keep marching
upwards because of pension promises, and they will never stop doing so
until we get reform.

At the same
time that government-employee costs have been climbing, the
private-sector workers whose taxes pay for them have been hurting. Since
2007, one million private jobs have been lost in California. Median
incomes of workers in the state’s private sector have stagnated for more
than a decade. To make matters worse, the retirement accounts of those
workers in California have declined. The average 401(k) is down
nationally nearly 20% since 2007. Meanwhile, the defined benefit
retirement plans of government employees—for which private-sector
workers are on the hook—have risen in value.

Few
Californians in the private sector have $1 million in savings, but
that’s effectively the retirement account they guarantee to public
employees who opt to retire at age 55 and are entitled to a monthly,
inflation-protected check of $3,000 for the rest of their lives.

Read more of this article.