Once upon a time in America, television sets had rabbit ears, junior took a baloney sandwich to school in his Davy Crockett lunchbox, mom sealed the sofas in plastic slipcovers, and dad looked forward to a fat pension at retirement.
Today, most of that scenario is baloney, especially the part about the pension.
The era of the defined benefits pension, a once-common perk that guaranteed a monthly retirement check for life, drew to a close when costs rose in recent years to levels most employers could not sustain.
In the Jewish community, the shift had serious financial implications for 14 Bay Area Jewish agencies and 1,150 of their past and current vested employees who were counting on that promised monthly check for their golden years.
This is the story of how the Bay Area Jewish community set its best minds to the task of fulfilling that promise for its employees.
Since 1959, the 14 agencies have been enrolled in a community pension plan, created by the S.F.-based Jewish Community Federation and uncommon in that it pulled together so many organizations under one umbrella.
For decades the workers did their job, the agencies paid into the pension plan, and when it was time to retire, the workers began receiving their checks. It all went like clockwork.
By the turn of the century, however, costs of maintaining the plan spiraled out of control. As of Dec. 31, 2007, with recession around the corner, the federation had frozen the plan, meaning no new employees could join and the amount due retirees became set in stone, even if salaries rose.
But that wasn’t enough to solve the problem.
Every year, these local agencies collectively paid in millions of dollars to keep the pension funded at levels required by law. Despite that, the gap between the fund’s assets and the amount needed to cover promised pensions ballooned alarmingly from $5 million in 2007 to more than $33 million in 2014.
To address the gap, ever-increasing amounts were poured into the plan, but with interest rates at historic lows and the fund earning so little, the agencies could not keep pace. This hurt the nonprofits where it counted, with too many dollars going into the pension fund rather than into important community work.
The federation realized something permanent had to be done to stop the red ink. Several years ago, representatives from each of the affected organizations began holding meetings led by the federation retirement committee to discuss options. By last year, the main question on the table: If the plan were to be terminated, how could the institutions honor their obligations to employees without going broke?
After much wrangling with complicated pension law, earlier this year they found a way to do both: terminate the plan and offer vested employees a choice between a long-term annuity administered by an independent annuity company, or an immediate lump sum payment.
Letters explaining the new plan went out last month to the 1,150 participants. They soon will receive an update that specifies their options, with 60 days to choose between the buyout and the annuity.
“This was a very tangible way we could convene the community and create a plan that would benefit the people who dedicated their working lives to the bettering of the Jewish community,” said Steve Leibman, chief human resources officer with the federation, which has administered the pension plan. “Their long service and commitment should be rewarded.”
In addition to the federation, participating agencies are Camp Tawonga, Hebrew Free Loan, the JCC of San Francisco, the Jewish Community Relations Council, Jewish Family and Children’s Services, the Jewish Home, Menorah Park, Jewish LearningWorks, Jewish Vocational Service, the Osher Marin JCC, the Oshman Family JCC, the Peninsula JCC and J., the Jewish news weekly of Northern California.
How the federation and agencies faced and fixed their collective pension problem may not make for a good spy thriller. But what once seemed like mission impossible became an imperative for the team tasked with finding a solution.
When the federation created the community pension plan in 1959, the typical American man lived 68 years. Pensions were for life, but life was considerably shorter than today’s average lifespan — and sometimes nasty and brutish, too.
In 1963, the Studebaker car company abruptly terminated its employee pension plan. In those days, no federal protections existed the way, say, the FDIC insures bank accounts today, and 4,000 Studebaker workers found themselves without pensions.
Reacting to public outrage, Congress approved legislation that established the federal Pension Benefit Guaranty Corp. in 1974. PBGC guarantees more than 24,000 private pension plans, but it comes at a cost to employers, who must pay it hefty fees.
As Americans lived longer, expensive pension plans deepened the financial burden to employers. With the advent of the 401(k) in the 1980s, corporate America began to swap defined benefit plans for defined contribution plans, putting responsibility for retirement planning on the shoulders of employees.
Yet the federation plan soldiered on, with each of the 14 entities dutifully paying in, although some community watchdogs saw early warning signs.
“If the benefit is defined and guaranteed, [the law] says you can’t take it away once earned,” said Barry Sachs, an attorney specializing in pension law and longtime chair of the federation’s retirement committee. “It means the employer is guaranteeing it irrespective of performance of the securities market that backs it. If that takes a nosedive, then the employer is on the hook to make up for that loss.”
Jewish community pension fund managers had the foresight to freeze the plan just in time, on the last day of 2007. In 2008, Lehman Bros. collapsed, AIG nearly failed, General Motors became a ward of the state, and global capitalism almost flatlined.
Pension failures were part of that picture. The second largest pension fund failure in history occurred in 2009, when the Delphi Automotive Corp. filed for bankruptcy and reneged on its pension obligations. The PBGC paid out $6.1 billion to Delphi employees and retirees.
The largest pension failure of all time took place in 2005, as United Airlines was coming out of bankruptcy. The PBGC paid out $7.4 billion in that case.
It’s not only happening in the private sector. A 2014 study from Bridgewater Associates predicted that 85 percent of public pension funds could fail over the next three decades due to a gap between assets and promised payouts.
Thus, Sachs noted, “It was very prescient before the 2008 crash to freeze the [Bay Area Jewish community] plan, which stopped any further benefit growth. It turned out that [the fund] was still $5 million underfunded. We said, ‘Let’s see if the shortfall could be overcome.’ ”
Hebrew Free Loan executive director Cindy Rogoway said the 2007 freeze “was the moment of truth for employees, when they realized they would not get what they bargained for. There was no big outcry, no dealing with unions, no one was negotiating. It was just very clear this is what had to happen.”
Even with the freeze, the fund took a hit from the plummeting stock market and falling interest rates. The handwriting was on the wall; the plan would have to be terminated somehow.
“The financial liability was growing,” Leibman recalled. “It’s a complex formulation of a lot of factors: interest rates, the volatility of stocks, mortality tables and government costs. We believed we were doing the community a service to freeze the plan in 2007, then work as expeditiously as possible to terminate the plan.”
Termination wouldn’t come cheaply. After the freeze, the gap between the value of the fund and the value of benefits increased by tens of millions of dollars. Moving ahead was prohibitively expensive. Doing nothing made any eventual solution more costly, with PBGC premiums set to rise the next year.
With 270 active and retired employees vested in the plan, the Jewish Home in San Francisco had been paying in close to $1 million a year.
“It’s very complicated stuff,” said CEO Daniel Ruth. “The Home was motivated to terminate the plan because of the future financial impact. We needed to shed the expense.”
For the smaller Hebrew Free Loan, the figure totaled some $30,000, still a “hefty chunk,” as Rogoway put it.
“It was a huge hit to the budget each year,” she said. “And it would have only increased. It was a clear-cut decision. We were one of the first to say we have to buy out of the plan.”
For the termination to work, each of the 14 agencies had to sign on to the strategy, but it required tough choices. For example, institutions had to decide whether to pay off beneficiaries by borrowing money or drawing on their own resources.
The collective price tag to terminate the plan topped $30 million — a huge amount for the agencies involved, but at least a known quantity.
While the cost of paying off the fund might have gone up or down in the coming years, depending on interest rates and the stock market, agency heads knew they needed to avoid that kind of risk. The sensible thing to do, they decided, was to pay it off while it was feasible and make sure employees received the pensions they expected.
“At that point we needed to see if there was any way to fully terminate this plan,” the federation’s then-interim CEO Jim Offel recalled. “If we could come together as a community and figure this out, it would do more to ensure that all 14 agencies can sustain themselves and be financially sound in the future.”
They did come together. Agencies that could afford the buyout would do so. The rest would be able to borrow from the federation, which would take out a loan to cover the costs. Federation CFO Holden Lee played a key role in securing it.
Why borrow? Although the federation had an $80 million unrestricted endowment, a $30 million buyout would have decimated it. So the decision was made to “go out on a big limb,” as Offel said, by borrowing the money using federation real estate as collateral, then loaning that money at the same interest rate to the agencies in need.
Half of the agencies chose to borrow from the federation. The Jewish Home was one of them, to the tune of an estimated $12 million.
“We were all financially motivated to terminate the plan,” Ruth said. “Jim Offel did a fabulous job in providing leadership, shepherding the different agencies. Going forward, our income and balance sheet will be a lot cleaner.”
Unlike the Jewish Home, Hebrew Free Loan executives and board decided to pay for their termination in cash. The buyout might cause financial strain, but waiting would have hurt more in the long run, they felt.
“It will take us a while to recover from this,” Rogoway said. “It’s not like taking a little out of savings to buy a car.”
Even so, she said it is a great relief to her and her board to put the pension worries behind them. Six other agencies will similarly pay for the termination out of cash reserves, while the remaining seven will participate in the loan program.
Whether the 1,150 employees choose the lump sum or the annuity, they will receive their promised benefits. Organizers hope to have the process completed by early 2016.
Everyone involved stressed the challenging nature of the fix, having to ride a steep learning curve of pension regulations. They say they were driven not only by financial urgency, but also by the Jewish values that demanded a solution.
“The discussion at each agency epitomized a sense of mishpocha,” said Rogoway, using the Yiddish word for family. “We had to find a way to help people who dedicated their lives to the Jewish community, who will one day retire and who will be counting on that money.”