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    Rhode Island’s Pension Cliff

    Rhode Island’s Pension Cliff

    I know you know about Rhode Island’s public sector employee pension problem, because I’ve posted about it so many times.

    But take a look at this chart which shows how household contributions to public sector pensions (state employees and teachers) is expected to climb to just over $2000 per household by 2018 unless there is drastic reform now:

    [Material removed at request of Providence Journal]

    This is devastating, and will drive people out of the state, continuing the death spiral of fewer and fewer people paying a higher and higher debt burden.  As reported by The Providence Journal:

    [Material removed at request of Providence Journal]

    Guess which public sector employees place the highest per capita burden on taxpayers.  Judges.  While the overall judicial pension burden is not high relative to the total state burden, judicial pensions are straining the court system budget, with fully 10% allocated to judicial pensions, with many judges retiring on six-figure annual pensions.

    Yet the unions are fighting tooth and nail to prevent reform, even obtaining a judicial ruling that they have a contractual right to prevent changes to pensions for employees who are not yet retired but are vested in the system (10 years of service).

    It’s so far beyond out of control it’s unimaginable.


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    Actually, on the contract claim, the Unions have a point. Any new administration cannot simply come in and undo the prior contract by writing a new contract if rights have vested.

    However there is nothing preventing the municipalities (or the state, for that matter) from declaring bankruptcy under Chapter 9 of the Bankruptcy Code and seeking to have the contract set aside.

    That’s the problem with a “pension” and why I advise my negotiation clients on the employee side to NEVER take one. It’s just a contract claim, and an unsecured contract claim at that. In a Bankruptcy proceeding, it can be set aside, reduced, or subjected to the reduction as an unsecured creditor. The Pension Benefit Guarantee Corp will try to ride to the rescue and call it a “preferred” claim, but that often fails. If there are insufficient assets after the secured parties are paid, you only get what the PBGC pays, which is something like a paltry 30% of your claim.

    Much better to have a 401(k) which the employee owns himself, can directly monitor and control it, and be making tax deductible contributions.

      Sorry. Forgot a paragraph –

      Further, there’s nothing stopping a new administration from coming in and negotiating a new contract with those individuals who’s rights have not yet vested (no contract claim of consideration by performance).

    Vanity Fair has a very good article by Michael Lewis called “California and Bust” which discusses, among other things, the pension problem in Vallejo. Here’s what ended up happening when Vallejo went through bankruptcy:

    “In August 2011, the same week that Standard & Poor’s downgraded the debt of the United States government, a judge approved the bankruptcy plan for Vallejo, California. Vallejo’s creditors ended up with 5 cents on the dollar, public employees with something like 20 and 30 cents on the dollar.”

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