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13th Check
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The 13th check refers to an extra check some pension systems may issue to its pensioners at the end of the fiscal year if a pension fund does unexpectedly well. This practice is controversial, as rates of return vary from year to year and actuaries use an average rate of return over several years to make estimates on pension health. As such, giving pensioners extra funds from the pension system in one year may reduce the pension's overall funded ratio in later years if the system performs poorly in those later years.[1]
Arguments
The major argument surrounding the 13th check is over how the government should be addressing excess funds. Some believe that 13th checks represent a necessary cost-of-living increase for pensioners, while others believe that the money should be set aside to better fund a pension plan. Proponents of the 13th check believe that pensioners are entitled to the money that results from positive returns of pension funds. Opponents, meanwhile, believe that pension managers should set that money aside for years where the rate of return is lower than expected. The idea behind this plan is that the pension system would end up having a more stable funded ratio from year to year, increasing the likelihood of maintaining (or establishing) pension health.[2][3]
Usage
There was no comprehensive list of states or systems that make use of 13th checks as of May 2015. The use of the 13th check varies among the states and even among different plans within a given state. It can therefore be difficult to trace which pension plans deliver these 13th checks and the resulting effects such checks may have on pension health. Two cities that distributed these extra checks were Philadelphia, Pennsylvania and Detroit, Michigan.
Philadelphia, Pennsylvania
According to two different articles from early 2015, Philadelphia's pension systems planned to distribute bonus checks to retired city workers. The city was required to make these payments because of legislation passed in 2007 that was sponsored by James Kenney, a candidate for Philadelphia mayor in 2015. This plan had come under fire by incumbent mayor Michael Nutter and other figures, who cited it as "fiscally irresponsible."[4]
Philadelphia's 13th check plan was called irresponsible because the legislation that allowed it overturned a previous law that only permitted 13th checks if the pension fund was funded at a rate of 76 percent or higher. As of February 2015, the city's pension plan was funded at a rate of only about 48 percent.[5]
Detroit, Michigan
Detroit's pension systems delivered 13th checks regularly to pensioners in efforts to lessen poverty among retirees. These checks came from a pool of money generated by pension investments that performed better than projected. However, when the city's pension systems reached dangerously low funding levels in 2010, the city stopped paying out these additional checks, and instead used that pool of surplus funds to meet the city's annual required contributions. The city was then sued, with plaintiffs arguing that the city had a responsibility to pay its retirees with those funds, while meeting its required contributions through other sources. Ultimately, the case proceeded to the state's Supreme Court, where the court ruled in favor of the plaintiffs, saying that the city must meet its pension funding requirements with the funds from each year, not by taking from a surplus pool from previous years.[6][7]
See also
External link
Footnotes
- ↑ Governing the States and Localities, "13th Check," accessed May 20, 2015
- ↑ Detroit Free Press, "Pension funds' 13th-check dispute goes to Michigan Supreme Court," accessed May 20, 2015
- ↑ Pension Dialog, "The 13th check," accessed May 20, 2015
- ↑ Philly.com, "As underfunded pension system doles out checks, Nutter balks," accessed May 20, 2015
- ↑ The Philadelphia Citizen, "Philly's 13th check," accessed May 20, 2015
- ↑ Detroit Free Press, "Detroit workers received $765 million in pension fund's 13th checks; retirees got $195 million," accessed May 20, 2015
- ↑ Detroit Free Press, "Court awards Wayne County's 13th check fund $32 million," accessed May 20, 2015
