I must admit that I’m a pretty sappy guy when it comes to movie selections, and my choices often get me abused by my sons, although my daughters don’t hold back either. The title of this post reminds me of a movie that I have watched more than a few times, “It Could Happen To You”, which is a Nicolas Cage and Bridget Fonda movie about a winning lottery ticket, and the subsequent troubles that follow. However, in the end all is just grand.
Unfortunately, what I am about to highlight for you does not have a fairy tale outcome, and it might just be the tip of the iceberg for cities around the country. If you haven’t heard about the pension crisis in Loyalton, CA, you should make sure to get up to speed rather quickly.
Loyalton is a city in Sierra County, CA. As of the 2010 U.S. Census the population was 769, reflecting a decline of 93 from the 862 counted in 2000. According to Wikipedia, many of the population are ranchers, loggers, former loggers, or suburbanites escaping from the San Francisco Bay Area, Sacramento, and the growing Reno-Tahoe area.
The trouble begins in 2013 when town officials decided to withdraw from CalPERS, upon the retirement of its last guaranteed pensioner. For council members, it just made sense — after all, the town had been fully paying its required annual contributions all along. What they didn’t count on was the $1.6 million termination fee demanded by CalPERS to cover unfunded liabilities that CalPERS had allowed to grow for the last 17 years. The fee amounts to a whopping $320,000 per each of Loyalton’s five retirees, an amount that is impossible for the town to pay. And now CalPERS has put the retirees on notice that their monthly checks will be cut.
Unfortunately, this is what can happen when cities run out of money and their pension plans are underfunded. Regrettably, this is not an isolated situation, but it is likely the most dramatic to date. Furthermore, this is not exclusive to public pension plans, as we’ve seen large withdrawal penalties assessed on multi-employer plans, too.
Defined Benefit plans need to be preserved, but in order to insure that future Loyalton’s don’t continue to occur, sponsors need to change their focus from trying to achieve the ROA. It is time to take the path less traveled.