Pay Orr Else

Detroit is embarking on a novel (after step one) stratagem to disavow pension obligations that could catch on:

1) Get actuaries to lie about real plan costs (link);

2) Get other actuaries to disagree* (link);

3) Find a scapegoat (link);

4) Default on payments to participants by 50% (link to follow).

It was reported today that:

Emergency Manager Kevyn Orr could decide next week whether to oust trustees overseeing the city’s beleaguered pension funds and take control of a system that is underfunded by about $3.5 billion.

Such a move could trigger a costly court battle with the city’s general and police & fire pension funds, which have amassed a $5 million war chest to fight Orr.

Orr is reviewing actuarial reports before deciding whether to take control of the funds and expects to decide in the next week or two, he said during a taping Wednesday of the show “MiWeek” on Detroit Public TV, Channel 56.

“I’m trying to do this in a good-faith way without any contrivance,” Orr said in the interview, which airs today at 7:30 p.m. “I want to make sure before I do that that it’s a well-documented and appropriate action to take.”

“Without any contrivance”?????

Actuarial reports for public plans are all about contrivance, and not only on the liability side.  According to a December, 2011 study on Detroit’s legacy costs:

In spite of asset losses since the sale of COPs, the city’s pension funds appear to be adequately funded when the value of the pension obligation certificates is included in fund balances. There are, however, questions about the value of some pension assets. Independent auditors’ reports by Plante & Moran dated June 30, 2010 noted that they were unable to obtain sufficient audit evidence supporting $103.0 million of alternative investments in the Police and Fire System and $113.0 million in the General System, and that financial statements include investments valued at $835.0 million in the Police and Fire System and $710.0 million in the General System “whose fair values have been estimated by management in the absence of readily determinable fair values.”

So then out of $5 billion in purported assets we have $1.761 billion in guesstimates on top of $1.5 billion in Pension Obligation Bonds that have been defaulted on.

What Emergency Manager Kevyn Orr obviously has in mind is repaying bondholders by moving that $1.5 billion in Certificates of Participation that the plan received in 2005-06 from out of the plan (and out of the control of those soon-to-be-disgraced trustees) so bondholders would have no gripes when Detroit asks for more from them.

With that money gone and Detroit in no position to make anywhere near the contributions necessary to pay $500 million in annual pensions for much longer 20,000 retirees will be told that their benefits are unsustainable and must be arbitrarily and substantially cut.  They will be totally nonplussed, in part because it would be the first time they would have ever heard a truth, however deceptively arrived at.

* For what seem to be some nice fees.

5 responses to this post.

  1. Posted by Javagold on July 5, 2013 at 6:09 pm



  2. Posted by Tough Love on July 5, 2013 at 9:36 pm

    Quoting …. “Detroit is embarking on a novel (after step one) stratagem to disavow pension obligations that could catch on”

    You make it sound like that MUST be unacceptable. Why ? Only those living under a rock do not see the DIRECT relationship between Public Sector campaign contributions and election support, and those elected officials returning the favor with pensions and benefits multiples greater in value than what these workers’ Private Sector counterparts get …. all while the Taxpayers’ contributions and the investment earnings thereon (earnings that in the absence of these excessive pension promises would have stayed in the Taxpayers’ pockets, perhaps to fund their much smaller pensions) are responsible for 80-90% of total Plan costs.

    Why should we (the Taxpayers) accept that and not say NO, we are going to disavow that portion of pensions and benefit promises such that when added to cash pay to arrive at “Total Compensation”, exceeds the Total Compensation of comparable Private Sector workers? Reversing the greed of the Unions/workers and the betrayal by our elected representatives who primary obligation is supposed to be to the Taxpayers (not to the workers) is both just and appropriate.


  3. […] ANOTHER VIEW: John Bury on the situation […]


  4. I’m not sure how “arbitrary” the pension cuts will be stacked up against a 90% cut to bondholders. It will probably be less than 90%, I think.


  5. Posted by js on July 7, 2013 at 9:47 pm

    Call me crazy, but does anyone think that creditors have attempted to create a phalanx of human public employee shields to guard against debt default? Creditors can’t vote themselves, but they can get a percentage of people to try to screw everyone else to protect debt and consequently unfounded opeb.

    Obviously bankruptcy wipes the slate as clean as possible; everyone but the tax payer loses. If 50 % are bought off, they will protect the debt at all costs.


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