By Teresa Kuhn, JD, RFC

A few days ago, a news blurb, tucked away on the digital site of the Los Angeles Times caught my attention:

“Federal Judges Dismiss Unions’ Appeal Over Pension Overhaul”

The article was a mere blip on the news radar- a seemingly mundane Federal courts appeal decision that upheld pension reforms in Cranston, Rhode Island; a town formerly known as Pawtuxet, with a population of about 80,000.

Firefighter and police unions filed the appeal, saying that governments don’t have the right to change the terms of public employee contracts, even when those governments are experiencing severe financial distress.  In other words, unions maintained that pensions are sacred and untouchable and that government entities cannot reduce them or change the terms, even if such a reduction would prevent bankruptcy.

The court disagreed, however, and upheld governments’ rights to modify contracts based on some essential tenets of contract law.  I won’t bore you with the specifics, but if you are interested you can read it here:

The point of this is simply that Cranston’s appeal is establishing a precedent for other cash-poor municipalities, counties, and states to use as they seek to reduce or even eliminate pension pay-outs.

This scenario is playing out again and again, as cities, trying to achieve some measure of fiscal responsibility, try to trim the largest item on their bloated budgets: so-called “unfunded liabilities”, the lions share of which involves government employee pensions.

In California, for example, a meltdown of epic proportions is on the horizon.  In 2015, Pew Charitable Trust reported that the state’s two largest pension funds gathered just 79% of the nearly $18.9 billion they needed to keep their pension debts from increasing.

Since that time, things have continued to worsen with some government entities’ funding levels dropping as low as 64%!  Adding to this is an increasing number of state appellate court decisions challenging the so-called “California Rule.”  The California Rule has long been interpreted to prohibit any changes to public pension benefits and has served as a model for other states as well.  But with more and more cities in the red, challenges to the California Rule and to the idea that pensions are untouchable are increasing.  The math has finally caught up to free-spending politicians who are being forced to enact pension reform , whether they want to or not.

What does this mean for YOU?

Pension woes aren’t exclusive to California and New York, but have also had an impact in Michigan, Kentucky, Alabama, Pennsylvania, Rhode Island, and Idaho.  According to the website, there have been 61 municipal bankruptcy filings in the US since 2010.

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Many other states and localities are in poor financial health, and the only way they can turn it around is to slash city services and/or trim pension costs.  This means, that although it’s great if you have a government pension, you MUST build up your Plan B in case that pension experiences changes which could severely impact your retirement plans.

At Living Wealthy Financial, we believe that pro-actively managing your wealth is the only way to ensure that your life after work will be less stressful and more fulfilling.  We build our clients’ financial future on a solid foundation, taking into account their unique situations and incorporating the power of specially structured cash value whole life insurance.  We’d love to talk to you about how we can help you create the financial future of which you’ve always dreamed.  Call us today for your initial consultation at (800)382-0830.

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