Faith in the Detroit Farce

The New York Times feels that the issue is ‘good faith’ in the just-concluded trial to see if Detroit can use bankruptcy rules to slash public pensions with union lawyers arguing that a “cloak of secrecy” surrounds the governor’s bankruptcy strategy making it almost impossible to negotiate on pensions. “You don’t know how or what is going to be cut,” Sharon Levine, representing AFSCME, said. “How could you make a counterproposal without the very basic, simple facts?”

Which is exactly why this trial has been a farce and the only issue to be decided is how much those who were never promised any Detroit tax money (bankruptcy lawyers, managers, consultants. et. alia) will siphon from those who were (bondholders and public employees).   But one thing has become clear – the reason.

On page 109 of Kevyn Orr’s Proposal to Creditors released in June:

Claims for Unfunded Pension Liabilities.

  • As set forth above, preliminary analysis indicates that the underfunding in the GRS and the PFRS is approximately $3.5 billion. At this level of underfunding, the City would have to contribute approximately $200 million to $350 million annually to fully fund currently accrued, vested benefits. Such contributions will not be made under the plan.
  • Claims for the underfunding will be exchanged for a pro rata (relative to all unsecured claims) principal amount of new Notes.
  • Because the amounts realized on the underfunding claims will be substantially less than the underfunding amount, there must be significant cuts in accrued, vested pension amounts for both active and currently retired persons.

Active and currently retired persons believe the Michigan constitution protects their benefits. Apparently Detroit’s current brain-trust agrees which is why they had to make the Michigan constitution irrelevant.

As to the verdict, our warped legal system allows for arguments to justify any position but what I see happening, not necessarily in this order, is:

  • The bankruptcy being upheld
  • Pension money being used to repay those Pension Obligation Bonds so Detroit is allowed to keep borrowing recklessly like every other government in this country
  • Annuities being purchased with the remaining trust assets (which should allow for maybe 30 cents on the dollar depending on how much of those pension assets are phantom)
  • Rioting in the streets (and courthouses) of Detroit (and wherever those retirees fled).



10 responses to this post.

  1. Posted by Tough Love on November 10, 2013 at 2:10 am

    John, If you are (in part) calling the trial a farce because Orr did not lay specific pension cuts on the table to “negotiate”, I believe that you are being more than a bit naive.

    Clearly, with the huge financial mess Detroit is in (and assuming both bondholders and pensioners share equally in the pain), the pension reduction are likely 10 TIMES anything the the Unions might “offer”.

    Why bother ?


  2. Posted by Tough Love on November 10, 2013 at 2:23 am

    John, A commentator with the handle TEXAS DAWG posted the following as a comment on another post. It could have been posted on almost any of the many many discussions on Public Sector pensions, and sums up the situation quite well. Here it is:

    “Initially, public sector employees took less money in salary than their public sector brethren. In return they were promised earlier retirement and a life long pension. Fast forward to today. Now with public sector unions, they make in MANY cases more than the same job in the private sector all the while retaining the early retirement and pension. This has finally reached the point to where there is no money left to pay the unrealistic promises extracted from weak kneed politicians by the unions. The day of reckoning has come. The over taxed public has no stomach for turning over more of their hard earned dollars to pay public sector employees that they feel have a much sweeter deal than they do.”

    Bottom line …. it’s time for the Public Sector workers/pensioners to become the balancing item. Either pay more (a LOT more) or get less (a LOT less).


  3. My proposed solution to the Detroit bankruptcy is this. All the abandoned property held by the city, and all the property that become abandoned in the next 10 years as people are forced to pay taxes without services again, would be put into a “Detroit REIT” the shares of which would be given the crediors in lieu of bonds/pension underfunding.

    Rather than just draining the city as they did before bankruptcy expecting someone else to pay someday, therefore, those retirees, bondholders and other creditors would have a stake in its future. And would be in a position to plan for its future.

    Of course the property would be worth nothing today, and for years to come. But that could change, as it did in some other older central cities.

    Detroit’s creditors can’t expect the city’s poor to pay for obligations to the past after everyone else has left. And they can’t expect anyone else to move in if all their tax dollars would go to those obligations with nothing in return, while they sit out in the sururbs and collect.


    • Posted by Anonymous on November 11, 2013 at 4:56 pm

      Sounds to me as though they keep re-shuffling the deck chairs on the Titanic. It’s going down one way or another. A few will walk away intact most others will perish ( financially ). If people were stupid enough to trust the same bozos year after year you deserve what you get hopefully pennies on the dollar.


  4. A MUNICIPAL BANKING EXPERT James Spiotto has offered a way to deal with cities’ rising pension obligations.


    • In New York City in the 1970s public services collapsed. Crime was out of control, the infrastructure fell apart, the bag ladies were left to die in the street, parts of the city burned, and the first of several generations of schoolchildren were not educated. Even as taxes soared. The wages and benefits of future public employee were slashed, to the point were by the 1990s they were the lowest in the metro area.

      The bondholders and pensioners got paid. Tha’s what this guy wants. Screw the next generations, unto the generations.

      Screw you Generation Greed. You have done to NYC what the prior generation that fled to the suburbs did to NYC. And you’ve done the same thing for much of the country.


      • Posted by Tough Love on November 12, 2013 at 11:44 am

        While the older generation (those 70+) have received, and the much larger baby boomers have been promised much more than what they have (and still will) pay in…..and I agree, VERY unjustly (since for a large groups, there really is no 3-rd party outside payor w/o sticking it to the next generation) ,…NONE of this justifies the VASTLY over-promised, unnecessarily generous, and unjust promises made to Public Sector workers …. everywhere.


        • Posted by Anonymous on November 12, 2013 at 12:43 pm

          Ok so the greedy pensioners will get paid or will take cuts? The problem with the younger generation is that fewer and fewer are working and most already have a ton of student Loan debt. Factor in the excess is welfare and disability recipients coupled with much lower wages and benefits for those who do work. Sounds like the perfect storm? Thoughts?


          • Posted by Tough Love on November 12, 2013 at 1:34 pm

            Quoting…”Ok so the greedy pensioners will get paid or will take cuts?”

            Rightfully,their pensions should be materially less than promised….. because the over-generous promises are CLEARLY the result of their Unions BUYING (with campaign contributions and election support) the favorable votes of the elected officials who granted these pensions.

            And I agree that that storm is coming on many fronts. America is Greece in the making. The first chapter may be a whole lot of really angry (gun-carrying) Detroit Public Sector retirees taking deep cuts in their pensions.

  5. Posted by Anonymous on November 12, 2013 at 9:37 pm

    Anybody know what Obamacare will mean for current and retired publics and health care benefits


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