The judge’s written decision to allow the Detroit bankruptcy is a fascinating read. I am on my twentieth scan of pages 11 thr0ugh 16 which purportedly explain the COPs and Swaps Transactions and am still looking to unlock the mysteries of those words. But it is the reference to the supposed $3.5 billion unfunded pension obligations on page 8 that validates a point that I have been trying to make here for years:
Archive for the ‘Public Pensions – General’ Category
Mary Williams Walsh in a New York Times article trying to put some perspective on the impending Detroit pension default ended referencing a 1978 report (available here) on ERISA applying to public plans:
Members of Congress wanted the funding rules to cover state and city pensions, too. Russell Mueller, an actuary who spent months researching public pensions for a House subcommittee, filed a report in 1978 describing a pension Wild West, where the federal government was running dozens of plans that no one seemed to know about, and the states and cities had more than 7,000 overlapping plans. The accounting was so haphazard that when Mr. Mueller totaled the forgotten assets, the discrepancy had a material effect on the gross national product.
The report quoted a Michigan state representative, Dan Angel, complaining about the way pensions in his state were being granted: “This takes place in a totally political atmosphere, without any regard for how the bill will be paid, by whom, and when,” he said. “Employees had better get concerned that there is enough cash on hand to meet retirement needs, and taxpayers had better get concerned with these massive and increasing debt obligations.”
“Public pension legislation is inevitable,” Mr. Mueller concluded in his report.
But he was wrong. State and local officials shot down the proposed federal funding requirements. Mr. Mueller’s research was filed away and forgotten for the next 35 years, leaving governments and their workers to rely on state laws and constitutions, whose protection now has been called into serious question.
Propagandists for the status quo will look to portray Detroit as an anomaly when it is actually a bellwether.
Detroit cutting pensions has hit the mainstream as have some dodgy ‘facts’. For example, Huff Post reported:
Are retirees going to lose their pensions?
Maybe. Rhodes ruled Tuesday that pensions, like any contracts in bankruptcy, can be broken. But he also warned city officials that they’ll need to justify any deep cuts that could threaten the lives of retired workers. There are about 23,000 retirees and 9,000 city workers. Most of them receive pensions that are less than $20,000 annually.
Where did those numbers come from?
Detroit bankruptcy is a go so now the question becomes how much retirement benefits will be cut. Emergency manager Kevyn Orr provided some clues in these pension-related excerpts from his press conference today:
Based on these remarks my original timeline prediction changes a bit:
Illinois politicians needed to come up with something that they could pass off as fully funding the state pension systems before the year 2045. Ideally they would have wanted to go with:
- Eliminate all employee contributions
- Eliminate all state contributions
- Put in $1 trillion in 2044.
The proposal they put out comes damn close. Below, in order of importance, is what I see them trying to accomplish based on the points laid out officially:
Illinois lawmakers announced on the slowest news day of the year that they had come up with (in secret) a plan to fix the state’s underfunded pension system without releasing any details and this somehow qualified as news even though this story did not originate on facebook or twitter (presumably).
Of interest is not the plan itself, which seems to be modeled on what New Jersey tried in 2011 (cut COLAs, lower benefits for new hires, guarantee that contributions will be made), but aspects of the propaganda campaigns being rolled out, some of which are funny without comment:
Next Tuesday, December 3, at 9:am, according to a notice released this afternoon, is when Judge Steven W. Rhodes will render his decision on whether Detroit can go bankrupt to avoid pension and OPEB obligations. Considering that our system of ‘justice’ often succumbs to the vagaries of expediency and whatever decision is read will almost certainly be appealed, I still have a hunch as to what will happen.
Institutional Investor put together a list of their 40 people and, as far as public pensions go, I do not entirely agree. For example, all those union officials may have influence (to the extent they bribe politicians) but as far as impacting independent thought (though not in ways I would always agree with) I would go with the group in this video:
A report came out this week arguing that Detroit should not renege on public pensions but instead renege on:
- bank counterparties in swap transactions;
- bondholders of the 2005-6 Certificates of Participation; and
- those who got tax subsidies for moving into downtown Detroit
on the premise that these people can afford to take the hit* and, besides, it’s Detroit…didn’t they know what they were getting into?
However, the interesting (in the sense of being completely bogus) aspects of the Demos report are the two arguments proffered pooh-poohing the severity of Detroit’s pension crisis: