A Path to State Bankruptcy

Oh, Mama, can this really be the end?
To be stuck inside of Mobile
With the Memphis blues again?”
-Bob Dylan

To be stuck inside of Mobile with the Memphis blues again is to describe the bankruptcy filing in 2009 by Mobile suburb Prichard, Alabama. The city’s lawyer said it was forced to file Chapter 9 bankruptcy because it “simply ran out of money to pay its pension obligations.”

“Right now we are looking at a major squeeze on municipalities, and I would fully expect more cases to be filed than traditionally have been,” says law professor David Skeel of the University of Pennsylvania Law School. He advocates that states should be allowed to file for bankruptcy, which is currently not permitted under Chapter 9.

Beginning in 2012, Rhode Island taxpayers will be on the hook for a $620-million annual payment to the state’s unfunded pension liability of $6.8 billion. This year, 20% of what taxpayers contribute to the entire state budget will go toward paying for vacuous promises politicians made to get elected.

Teachers and state workers will continue to contribute only 9.5% and 8.75% of their salaries, while taxpayers will see their liability increase to 35.35% and 36.34% of teachers’ and state workers’ salaries. Meanwhile, most private-sector workers had their tough pension changes made the old-fashioned way—by force. httpv://www.youtube.com/watch?v=aZ9LDBEtKK4
In 1985, 80% of employees participating in retirement and capital accumulation plans at medium and large private establishments were in a defined benefit or pension plan. But companies wanted a retirement plan where both employer and employees shared in the retirement risk.

As a result, since 1985, the percentage of defined benefit plans at medium and large companies shrank to 30% while defined contribution plans like the 401(k) grew to 54%.

In contrast to the rapid change in the private sector, at the state and local government level reform has come slowly. The percent of employees enrolled in defined benefit plans has fallen from 93% to 87% since 1987, an improvement of only six percentage points.

Former Rhode Island House Speaker William Murphy publicly endorsed the idea of changing public employees to a 401(k)-style retirement plan and created a commission for further study. Unions wanted nothing to do with such a move. According to The Providence Journal:

[Robert Walsh, Jr.], of the National Education Association Rhode Island, wanted to focus on the massive unfunded liability, perhaps through refinancing. He argued that current benefits weren’t the problem; the lion’s share of taxpayer payments into the retirement system was going toward the unfunded liability.

You would think Mr. Walsh would care more about the retirees depending on the unfunded liability than about keeping benefits the same. It appears he’s more concerned about the gravy train of dues from the current workers that keep his union boat afloat.

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E.J. Smith - Your Survival Guy

Preparing your investments and family for when disaster strikes.

E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.