Municipal and other public pensions took a legal and legislative whammy in the last few days.
A U.S. bankruptcy judge in Detroit ruled that the federal bankruptcy law trumps any protections afforded by Michigan's constitution. According to Barron's Income Investing blog, Moody's, the bond-rating service, summed up the potential nationwide impact of the decision:
The court held that the city may reduce accrued pension benefits because federal bankruptcy law, which allows for the impairment of contracts, will supersede the state constitutional language that prevents diminishment or impairment of earned benefits. Today's ruling sets an important judicial precedent establishing that pension benefits are unsecured contractual claims in Michigan and could be cited as precedent in other jurisdictions.
Meanwhile, two states away, the Illinois legislature mustered enough votes from both Democrats and Republicans to overhaul the deeply indebted state pension plan, which is only about 40 percent funded. The deal will cut benefits to retirees as well as current workers in order to shore up the pension system over the next 30 years.
If you are receiving a public pension -- or expecting one -- this is unsettling news no matter where you live.
Mark Mitchell, a Certified Financial Planner and retirement planning expert in the Detroit suburb of South Lyon, is a retired police officer. Many of his clients are also current and former public employees. In the wake of the action in Detroit, his phone has been ringing off the hook. He's been telling these anxious people -- who are worried about their retirements -- to stay calm.
"I'm saying, 'Don't do anything rash. This isn't the final straw because there is going to be a court appeal and that is going to take a long time,'" he says.
He also points to recent court decisions in San Bernardino and Stockton, Calif., two other cities facing bankruptcy, where courts have been more sympathetic to pensioners.
In the meantime, Mitchell is emphasizing to his clients the importance of maximizing the defined contribution plans most have in addition to their defined benefit pensions. These plans are similar to 401(k) plans but are labeled 457 plans when they are held by government employees.
"I'm telling people their 457 plans are federally protected. Nobody can go after them. They can't be attached by creditors. This is their money and their safeguard," Mitchell says.
For some, this will be nearly all they have because they didn't pay into Social Security. And even if they did have outside jobs that were covered by Social Security, what they are entitled to is greatly diminished by WEP, the Windfall Elimination Provision, a federal law that limits double dipping by public employees.
While he doesn't believe many public pensioners will actually lose their benefits, he does urge all of them to engage in smart retirement planning -- whether their current or former employer is in financial trouble or not. "One or two bad administrations can ruin everything," he says.