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More municipal bankruptcies? April 21, 2009

Posted by shaferfinancial in Finance.
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Pacific Grove, California is the next town seriously looking at bankruptcy protection.  Ever since the city of Vallejo got a ruling from a Federal Bankruptcy Judge it could void union contracts in its bankruptcy other towns and cities have had that tool in their back pocket.  I have posted on this issue several times over the last couple of years.  As a warning, folks who are depending upon their union contract to keep their over-the-top benefits might start a private savings/investment plan as a back up.  There is only so far municipalities can go in reducing services before Chapter 9 Bankruptcy starts to come up!  And the first thing they will go after is those benefits!

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1. Another Investor - April 21, 2009

State and local retirement systems (defined benefit plans) are controlled by separate entities and the assets cannot be attached in a bankruptcy. What can be done is to reduce or eliminate future contributions and reduce the percentage promised at retirement for currently employed workers. Bottom line, if you are near retirement you are relatively safe. If your employer gets close to declaring bankruptcy and you are close to retirement, it would be wise to investigate what would happen to your contracted pension amount and health insurance in a bankruptcy. If they are likely to get cut, it might be time to retire and move on before the bankruptcy.

Younger people should be aware there are concerted efforts by various interested parties to reduce or eliminate public employee defined benefit plans. A lot of pension benefits were increased during the go-go years of the stock market based on continued portfolio growth and retirement system portfolios may not be able to support the increased benefits. Now a lot of press is given to “fat public employee pensions” to convince the general public that public employees are getting something others are not and the benefits are undeserved. Expect benefit cuts in the future, and plan accordingly.

2. shaferfinancial - April 21, 2009

Thanks for your detailed explanation. The main threat as you point out is for people who aren’t close to retirement. Bottom line if they run out of money the promises made become not worth the paper they are written on. The pension guarantees are only as good as the ability to pay out and these funds are now generally underfunded. If they have to, they will try to increase taxes to cover. But what a mess that will be putting the interest of retirees against everyone else! Better have your own private retirement strategies for safety in my opinion. Then when you get your government pension as promised the private retirement strategy is icing on the cake.

And by the way, the first thing municipalities attempt to do in bankruptcy is to invalidate those union contracts to diminish the benefit package. My point is to plan for that possibility going forward.


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