Thank you--that was a very clear explanation.

I do need to investigate further, though, because "over the years" sounds
like this
underfunding problem has perhaps been going on longer than just since the
stock
market drop of a few years ago.

Karen

Tad Borek wrote:

- quote -

(snip)

Karen Younge wrote:
- quote -

Karen,
You should be concerned but some of those other posts are way overboard.

My attempt at plain-english: "based on the current value of the
investments, the plan hasn't set aside enough money to pay all of the
benefits promised to employees. The plan has 83 cents for every $1.00
needed. We'd like to have 95 cents (or more). This is because the
investments haven't done as well as expected - because the economy
hasn't rebounded as expected. Still we're in better shape than 96% of
the other public pension plans out there, so don't fire us yet!"

The tricky part of a defined benefit plan, for the employer, is that
they don't know what kind of investment returns they're going to get
between now, when money is being set aside, and your retirement, when
money will be paid out. They promise to pay out, let's say, $1000 per
month ten years from now, and make similar promises to the other
employees. But they don't know exactly how much they need to set aside
right now to cover that, because they don't know how much today's
dollars are going to grow once they're invested. (They also don't know
how long you'll live & other things like that but fortunately there are
so many dollars in these kinds of plans that they have a lot of data to
help with estimating that.)

So the pension fund comes up with a predicted long-term rate of return
on its investments. Using that they figure out how much needs to be set
aside now, to meet the predicted future payments...based on the number
of employees in the plan, their expected retirement dates, etc. Maybe
it'll say that it expects returns of 6.5% per year.

If all the money currently in the plan, when compounded into the future
at 6.5% per year, isn't enough to pay the benefits, the plan is said to
be "underfunded." That's the 83.35% figure, apparently your plan is at
83% of the target amount, based on their assumed returns - so it's
underfunded. For every dollar they think they need to have in the plan
there's actually just 83 cents.

Is this a problem? Maybe not. Most pension plans are expected to shift
between being overfunded & underfunded because investment returns vary a
lot from year to year. The plan might assume 6.5% per year and be
correct, but only because the stock market goes up 42% in 2007. For
example in 2003 stocks went up a lot (+30% wasn't uncommon) so if you
looked at your plan's ratios they probably looked grim in early 2003 and
a lot better in early 2004. And chances are when the stock market was
booming in 1999-2000 your plan was overfunded. In fact your plan's
figures may have improved since the Aug 31 date of that report.

The problem happens times like now when there's been 5 years of low
stock-market returns (at least, from beginning to end) and bonds are
paying very low interest rates. The plan keeps expecting 6.5% per year,
or whatever it is, and it's not happening. So the plan keeps getting
more and more underfunded.

When does it hit the crisis point? With a company like GM it's when the
plan is so underfunded that they're required (by laws about the plans)
to put a chunk of cash in the plan to make up the difference. GM just
did this recently in fact - and it was so extreme that they ended up
using every dollar they'd earned to try to catch up with their pension
plan obligations.

With a city, it's different. GM can't keep car raising prices to raise
cash to add to its underfunded pension plan, because people will stop
buying GM cars and buy them from companies that haven't made similar
promises to employees. But a city has that nearly bottomless resource
called "taxes".

So questions I'd ask your plan:
1. what sort of investment returns are factored into those calculations
of whether the plan is over/underfunded? Are they 10% or 4% or in
between? They're probably some reasonable middle of the road number but
you may be curious to find out.

2. to what extent can the city raise taxes, or divert revenue from other
things in the city budget (eg reduce staff) to make up the difference?

You may find out that they're assuming really low investment returns,
and that they have a lot of leeway to make up the difference with taxes,
or through other budget tricks. I hope for your sake that's what
happens. But don't sound the alarm just yet.

-Tad

Karen Younge wrote:
- quote -

Your employer is unlikely to make a change in the retirement system
that would leave you at a disadvantage for postponing retirement.

If you quit early, do you have to take the retirement immediately or
can you work elsewhere and take the retirement at later date?

How would medical insurance be handled if you retired early?
--
Ron

So, what does one do? Retire at the earliest possible opportunity before
they change
the deal, or work as long as possible so even after they cut your benefit in
half there's
something left? I am eligible to retire 37 months from now, but not for
enough of a
pension at that time to cover even basic expenses. And no, I haven't done
much retirement
saving yet. My plan is to retire from the City ASAP, sell my house, and use
the proceeds to buy
another, less expensive house, which would leave me debt free. I just got
the estimate of
pension benefits I requested. The City has a defined benefit (not defined
contribution)
plan, and there's one option where you can receive a lump sum of the full
amount of
pension contributions over the years, plus a monthly pension payment of half
the "straight
benefit", or a lump sum of half your accumulated contributions and 3/4 of
the
the straight benefit amount every month. Maybe I better think about
those....But I've been
looking at my pension report year by year and thinking there's no way I can
make the
same monthly income by investing my pension contributions, that (at least
theoretically)
I would get in pension benefits if I just took the straight benefit. The
contributions amount
to less than three years of my best income, but the annual pension benefit
at age 52 is a little
over 1/3 of the average of my two highest paid years...I just haven't seen
how they can
possibly make this work, particularly with the high proportion of the
employees that will
become eligible in the next 10 or 15 years. Maybe they can't.....

Karen

"John A. Weeks III" wrote:

- quote -

The
- quote -

It sounds somewhat underfunded to me. However, in Alaska, the Public
Employees Retirement System has been determined IN COURT to be a contract
between the governmental agencies and their employees. It is a contract that
must be honored, so that even if there isn't enough money in the system to
pay its obligations, the taxpayers would have to cough up the money. I don't
know how that would work, but I'm guessing the State wouldn't file
bankruptcy. The last report I saw, Alaska PERS is funded at 94%, so we seem
to be ticking along.

Elizabeth Richardson

In article <41B921C8.5FE09429[at]earthlink.net> , Karen Younge
<karenyounge[at]earthlink.net> wrote:

- quote -

It means that you are all but screwed. It sounds like they are
far underfunded on the pension plan, and they have taken no action
to fix it other than to hold a few non-productive meetings. I hope
you have funded your IRA's and Roth accounts when you had the chance.
Otherwise, your retirement era might arrive with far less money
available than what you might have been lead to believe. That is
not good news, but then again, it is better than the deal that the
steel workers got when the big mills went toes up.

-john-

--
================================================== ==================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ==================

A couple of quotes from the column "Your Pension News" in the
Association of Retired City Employees
newspaper in my town. I'm eligible to retire from my job with the City
in about three years, so I picked up
the paper for my own information.


Quote #1
"Early in the year many financial professionals forecast an
economic recovery for this quarter.
Judging from the Retirement Fund August 31st report estimated
funding level at 83.35% it has not begun to
happen. Despite the uncertain financial climate we can be
proud that the City of ----- Retirement System re-
mains in the upper 4 percentile of public pension funds."

Quote #2
"As you well know, over the years, several suggestions have
been offered to supplement the long
wait to reach 95% funding. We had a one and a half hour
discussion on the critical retiree need and the issue
of maintaining a funding ratio."

These two statements are "all Greek to me". What are they saying? Can I
conclude anything about the sound-
ness (or reverse) of the pension system from these remarks? To
investigate further, what questions should I
ask and what answers should I want to hear from my pension system? The
Department I work for has about
1100 employees, with only 77 of them under 30 years of age, and my guess
is the age spread in other depart-
ments is about the same. Is this a financial train wreck waiting to
happen?

Karen