Vallejo, CA Declares Bankruptcy to Avoid Pensions

June 20th, 2008  |  Published in Pensions  |  1 Comment

Usually a debt obligation, such as a bond, by the federal government, state, or city is reliable and dependable. In fact, it’s so reliable that there’s a suit being raised against bond rating agencies over that very issue. Well, a pension is essentially a debt obligation and while we expect companies to potentially go bankrupt, thus effectively killing a pension (in reality the pension goes to the PBGC, Pension Benefit Guaranty Corporation, and pays pennies on the dollar), you don’t expect cities to.

Enter Vallejo, California.

You can partially blame the housing burst on sagging tax revenues but the real issue was the generous salaries and pensions offered by the city:

Thanks to retroactive benefit enhancements approved by the city council in 2000, police officers and firefighters can now retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to help keep pace with inflation. The old plan had given the workers a pension equal to 60% of their final pay at age 50.

So a Vallejo police sergeant making $150,000 a year can now retire at age 50 and receive an annual pension of $135,000, increased each year for inflation. To put that amount in context, you would need to amass a retirement nest egg equal to about $3.5 million to produce a similar retirement income on your own.

Police and firefighters were simply the example in the story but plenty of public employees have the same benefits and this same scenario is playing out in plenty of cities.

I don’t think any defined benefit plans are dependable, you need to supplement it with a solid retirement plan that doesn’t depend on someone else.

  

Responses

  1. Carnival of Personal Finance #158 : Vampire Slaying Edition says:

    June 23rd, 2008 at 7:52 am (#)

    […] My Happy Retirement Blog, we learn that Vallejo, CA declared bankruptcy to avoid pensions. Scary enough when companies go bankrupt to avoid their pension obligations, but much more […]