STUMP » Articles » Public Pensions Watch: Detroit Deal - the Basics » 9 April 2014, 21:11

Just like I had an intro to the Chicago deal (before it got altered….pray it is not further altered), it’s time to look in on the deal being proffered to the retirees and current public employees of Detroit.

I’m going to assume you know that Detroit is bankrupt.

If you don’t know that already, I can’t help you.

Now, Detroit being bankrupt would not necessarily be a problem for current retirees, or even the accumulated earned benefits for those employees of Detroit who have yet to retire. IF the Detroit pension plans had full contributions from the Detroit government before it went bankrupt, then those promises would be safe and fulfilled. Detroit pension funds are not part of Detroit, and so if there were enough assets, they could just freeze any further accumulations, but be able to pay off the promises to date.

OH WAIT.

THAT’S ASSUMING QUITE A BIT, ISN’T IT.

It’s going to take some time as tease apart the actual status of the Detroit pensions, but it seems that they weren’t quite all that fully funded as originally advertised. Part of the problem is that the “funding” was replaced with IOUs at a particular point.

Oh, don’t you worry, I will get back to the evil that are Pension Obligation Bonds (and their variants) in the future.

Let’s look at what Kevyn Orr, the emergency manager of Detroit, has offered the Detroit pension plans:

According to an announcement from the city, for Police and Fire Retirement System participants, voting ‘yes’ for the plan would mean a pension benefit reduction of 6% and elimination of cost of living adjustments (COLA). Voting ‘no’ would mean a 14% benefit reduction and COLA elimination.

As for General Retirement System participants, voting ‘yes’ would mean a 26% pension benefit reduction and elimination of cost of living adjustments. Voting ‘no’ would mean a 34% pension benefit reduction and COLA elimination.

The amended filing also offers greater detail regarding the plan that the city proposed in February, as well as the city’s restructuring efforts. According to the announcement from the city, Detroit expects to file further amendments to the plan and disclosure statement before the scheduled April 14 hearing for approving the statement. City officials say they expect Detroit to exit the bankruptcy process by late summer.

If you want to look at the official docs, you can go here.

So, that’s what has been put forth. I do not know if that’s the level of cuts required (or, rather, it’s the level of cuts that Detroit can continue to fulfill the (cut) promises), but that is the basic item put forth.

I might as well give you some initial reactions.

This is what the unions put out

Detroit — The city’s largest labor union predicted Monday that Detroit would be beset with more crime, poverty and further social decay if the city is allowed to slash pensions for nearly 34,000 retirees and municipal workers.

The American Federation of State, County and Municipal Employees Council 25’s dire warning was among a new round of objections filed by creditors Monday to the debt-cutting reorganization plan Detroit intends to send to creditors for a vote by month’s end.

Monday was the deadline for creditors to object to the contents of a 602-page Disclosure Statement that details how the city proposes cutting debt, improving city services and reorganizing City Hall in the largest municipal bankruptcy case in U.S. history.

Emergency Manager Kevyn Orr said Monday the city’s legal team is working to fulfill U.S. Bankruptcy Judge Steven Rhodes’ demand that the document spell out cuts to pensions and other debts in “plain English.”

To break in for a moment, it’s not clear to me (disclosure: not a pension specialist, but a highly interested part) the exact cuts being proposed and why they decided to propose that particular approach.

Back to the story:

Detroit’s two pension funds also raised questions late Monday about the city’s plan to establish a hardship fund for pensioners to keep them from falling into poverty. The pension funds said the disclosure statement lacks detail of how pensioners could qualify for assistance and how much money would be available.

That’s the first I’ve heard of a hardship fund. Interesting.

Anyway, I happen to think that not being able to pay current employees, as opposed to those already retired (who can’t strike …well, they can, but it’s not like people will notice that the retirees are no longer…. retiring), may cause more of a problem for public safety.

A message for the Detroit public employee unions

Gov. Rick Snyder said Tuesday that Detroit’s pension funds need to find a way to reach a settlement with the city of Detroit this month so the state can secure $350 million in financial assistance for the city next month.

“The real issue is we need some settlement agreement to come to pass first, and I hope that takes place this month,” said Snyder, who spoke at an engineering conference in Detroit. “I really view that next month, hopefully, is available to get it through the legislative process.”

….
However, the city’s two pension funds have challenged the city’s ability to even qualify for Chapter 9 bankruptcy and have filed objections to the city’s restructuring plan.

Last week, after Detroit filed its revised restructuring plan, the pension funds released a joint statement, calling Detroit emergency manager Kevyn Orr’s proposal for replacement of the pension boards “tantamount to a takeover.”

That is nice, but there’s a reason they would be taken over.

The alternative is that they would be cut loose, and then whatever assets they have, that’s it.

No matter what the official actuarial reports say, I’m willing to be that official funded status will not stand up well against reality.