What About Michigan’s Plans?

US News is asking whether Section 24 of Article IX of Michigan’s constitution is outdated.

The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof and shall not be diminished or impaired thereby.

I wonder if it’s even applicable – to Detroit now and Michigan later.

How can a state guarantee benefits promised by another government, albeit within its borders, over which it has no say as to the level of benefits or the means of funding them (or not)?  Or is that clause saying that Detroit must pay those benefits once promised and, if so, how is that different from any other promise that a city entering bankruptcy is allowed to break? Or is that clause only applicable to plans sponsored by Michigan which may mean it will soon be tested.

Michigan sponsors three main retirement plans for Municipal, State, and Public School Employees.  On paper (actuarial report paper) they’re even worse off than Detroit and after introducing some doses of reality:

OFFICIAL NUMBERS @ fiscal 2011 (in billions)
……………………………MUNI……….STATE…SCHOOL.……TOTAL
Actuarial Assets………7.15…………10.21………41.04…………..58.40
Liabilities……………….9.84………15.60……….63.43…………..88.87
Deficit………………….-2.69…………-5.39…….-22.39…………-30.47
Funded Ratio………..72.7%………65.4%…….64.7%………….65.7%

The funds did not really have $58.4 billion in assets. The ‘actuarial value’ in this case means a phony value which in the private sector is used to ‘smooth’ valuations but in the public sector is used to distort. Here are the figures when we use market value of assets:

OFFICIAL NUMBERS WITH ASSETS AT MARKET (in billions)
……………………………MUNI……….STATE…SCHOOL.……TOTAL
Actuarial Assets………5.94………….8.78………34.67…………..49.39
Liabilities……………….9.84…..……15.60……..63.43…………..88.87
Deficit………………….-3.90…………-6.82…….-22.39…………-39.48
Funded Ratio………..60.4%………56.3%…….54.7%………….55.6%

Next we turn to the liability side of the ledger where a 50% bump-up is likely conservative:

BURY NUMBERS WITH MARKET VALUE (in billions)
……………………………MUNI……….STATE…SCHOOL.……TOTAL
Actuarial Assets………5.94…….….8.78………34.67…………..49.39
Liabilities…………….14.76…………23.40……..95.15…………133.31
Deficit………………….-8.82….……-14.62…….-60.48…………-83.92
Funded Ratio………..40.2%………37.5%…….36.4%………….37.0%

Detroit took the bankruptcy route to diminish their $3.5 billion+ burden.  Where is Michigan going with their $84 billion?

Incidentally, the machinations that the Michigan Municipal plan goes through to pretend they have $7.15 billion in assets instead of $5.94 billion are a prime example of how public plan actuaries are enabling this deception of solvency.  This methoology was not devised by anyone other than an actuary tasked with lowering contributions by whatever opaque means.

4 responses to this post.

  1. Posted by Tough Love on July 23, 2013 at 7:19 pm

    Seems like the answer is that Michigan can still kick the can down the road for a bit longer, as it doesn’t have quite the cash flow crunch … helped of course by offloading expenses formerly paid by the State down to local governments.

    Reply

  2. Posted by Al Moncrief on July 24, 2013 at 3:19 pm

    “How can a state guarantee benefits promised by another government, albeit within its borders . . .”

    States regulate contractual relationships within their borders, both public sector contracts and private sector contracts. This constitutional regulation of contracts supports property rights within state borders. Of course, conservatives also support the sanctity of contracts fixed in state constitutions since the free market in the U.S. depends upon these legal protections.

    DETROIT HAS A $ MULTI-BILLION COLLECTION OF ART THAT CAN BE SOLD . . . THE CITY CAN AFFORD TO PAY ITS DEBTS.

    Detroit owns 60,000 works of art valued in the BILLIONS, the city can afford to pay its debts. I am certain that Sothebys could liquidate this collection quite readily over the next two years, freeing up billions to meet municipal debt obligations.

    Public pension benefits are part of a worker’s earnings (deferred pension compensation.)
    Bonds are investments. The possibility of default is assumed by an investor in bonds, and the investor is compensated through the receipt of interest (coupon payments on the bonds.) These are two very different things. The Contract Clause of the U.S. Constitution requires payment of earned employee compensation when the employee has performed under the contract.

    “‘They basically let us know that the collection was not off the table,’ said museum director Graham Beal.”

    “Nowling conceded that while the city has not made any plans to sell assets, ‘it is possible that
    the city’s creditors could demand the city use its assets to settle its debts.’ Beal maintains that DIA’s collection is among the top six in the Western Hemisphere. While he could not specify a value, Beal said it would likely be in the billions of dollars.”

    “Laura Bartell, a bankruptcy law professor at Wayne State University in Detroit, said she
    believes Orr is just doing his job and that it would be irresponsible for him not to consider what assets Detroit has and what they are worth. ‘I don’t think anyone argues that Detroit
    does not have the legal authority to sell something that Detroit owns. It’s a question of whether Detroit will — and if Detroit should,’ said Bartell.”

    “Gov. Snyder has been working with Orr to try to ward off the city’s bankruptcy and the sale of
    the DIA’s art. However, Snyder admitted that he is not legally empowered to declare the collection hands-off.”

    http://www.cnn.com/2013/05/31/us/michigan-detroit-art

    DIA Museum Counsel:

    “‘Chapter 9 of the federal bankruptcy code is different than most people realize. Under Chapter 9, state law cannot be overriden,’ Pirich said.”

    http://www.freep.com/article/20130604/NEWS06/306040086/dia-artwork-senate-museum-detroit

    (My comment: Of course, the Michigan State Constitution, state law I presume, deems public pension contractual rights inviolate.)

    “There’s not a lot of previous case law that tells us what’s going to happen here,” said Paul Secunda, a Marquette University law professor who specializes in labor and benefits issues.
    “It’s not just an issue of bankruptcy law and pension law, it’s also an issue of federalism,” Secunda said. “Can a federal bankruptcy court basically ignore a state constitutional provision and allow a city like Detroit to ignore its previous promises concerning public employee pensions?”
    “It’s essentially similar to salary – you just don’t reach inside somebody’s savings account and take their pay back, nor should you reach inside their pension and deny them their pension benefits,” said Steve Kreisberg, director of collective bargaining and pensions for the American Federation of State, County and Municipal Employees.
    http://m.apnews.mobi/ap/db_6776/contentdetail.htm?contentguid=ujtMI3hk

    “If the city declares bankruptcy, the state-appointed emergency manager, Kevyn Orr, can sell off its assets to repay creditors—and artworks housed in the 128-year-old museum are not exempt. The city’s debt about equals the worth of the museum’s holdings.”

    “Senate Majority Leader Randy Richardville recently introduced a bill that would protect the museum’s collection from being sold off during bankruptcy proceedings. Even if that legislation passes, it may not help the museum: Federal bankruptcy laws tend to trump state laws in
    court.”

    http://www.businessweek.com/articles/2013-06-04/in-bankruptcy-detroit-could-sell-off-its-art-collection

    “A Metro Detroit bankruptcy expert already has indicated Schuette’s opinion may be for naught.
    ‘Federal law trumps state law’ in a Chapter 9 municipal bankruptcy, said Douglas Bernstein, a bankruptcy attorney at the Plunkett Cooney law firm in Bloomfield Hills, so DIA art would not be protected from sale to satisfy creditors.”

    http://www.detroitnews.com/article/20130613/METRO01/306130115

    Earned, accrued, contracted public pension benefits (deferred compensation for work performed over decades) are also “treasured assets,” property protected by the Takings Clause. Works of art are relatively liquid assets of the city, and may very well be used to meet municipal debt obligations. The art could be sold to other public institutions where it would continue to be available to the public. Even if the art were to be sold to private individuals, much of it will eventually return to public institutions in coming decades.

    Detroit’s pensioners should not to forced to surrender contracted benefits earned over a lifetime in order that elite Detroit art lovers may more easily engage in their hobby.
    Support public pension contractual rights and the rule of law in the USA. Contribute at saveperacola.com, Friend Save Pera Cola on Facebook!

    Reply

    • Posted by Tough Love on July 24, 2013 at 4:48 pm

      Hey AL, How’d you like the Federal Bankruptcy Court Judge (essentially) telling the Detroit County Court Judge that she’s an idiot if she thought had the authority to stop an ALREADY FILED Federal Court Bankruptcy case ?

      Reply

  3. Posted by Anonymous on July 24, 2013 at 5:33 pm

    Sorry Al, bankruptcy aka reduced benefits coming soon to a town or city near you!

    Reply

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