Detroit Pension Cuts

According to a story in the Detroit Free Press:

Orr proposed 34% cuts to the pension checks of general city retirees and 10% to police and fire retirees.

But those cuts would be reduced to 26% and 4%, respectively, if the city’s two independently controlled pension boards agree to support the plan of adjustment.

The difference is probably because retirees in the General City plan likely get Social Security benefits.

The bottom line:

  • Benefit accruals under the current formulas cease as of June 30, 2014
  • GRS benefits cut 34% for retirees and beneficiaries with the July, 2014 check, 34% (and maybe more) for those still working, and no mention of vested terminees
  • PFRS benefits cut 10% for retirees and beneficiaries with the July, 2014 check, 10% (and maybe more) for those still working, and no mention of vested terminees
  • Hybrid plans to be set up for workers to accrue benefits after July 1, 2014 as part of a “hybrid program that will contain rules to shift funding risk to participants in the event of underfunding of hybrid pensions”
  • A bizarre carrot allowing for an undefined “restoration payment” in 2023 if a plan is 80% funded but requiring the interest rate used for valuing liabilities to be 6.25% for GRS and 6.5% for PFRS.

The full text of the plan is out and here are the excerpts relevant to the Detroit GRS and PFRS:

Definitions:

59. “Current Accrued Annual Pension” means, with respect to any Holder of a Pension Claim, the amount of annual pension benefits that the applicable Retirement System (a) is obligated to pay to such Holder as of June 30, 2014 to the extent such Holder is retired and receiving, or terminated from City employment and eligible to receive, a monthly pension as of such date or (b) would pay such Holder were such Holder to terminate active employment with the City on June 30, 2014 and defer his or her vested pension, in either case as reflected on the books and records of the applicable Retirement System as of such date, but in no case shall such Current Accrued Annual Pension include a right to supplemental pension benefits to be paid after July 1, 2014 in respect of cost of living allowances.

137. “GRS” means the General Retirement System for the City of Detroit.

138. “GRS Adjusted Pension Amount” means, with respect to a Holder of a GRS Pension Claim, the Current Accrued Annual Pension payable to such Holder as adjusted in accordance with the following formula: (a) for such a Holder who is either retired and receiving a monthly pension or a surviving beneficiary, a 34% reduction in the monthly pension amount; and (b) for such a Holder who is an Active Employee, a 34% reduction in the monthly pension amount; provided that, with respect to Holders who are Active Employees, in the event the unfunded liabilities of the GRS for the plan year ending June 30, 2014 are greater than the unfunded liabilities of the GRS as of June 30, 2013, the reduction in the monthly pension amount shall be increased to the extent necessary to ensure that there is no change in the amount of the underfunding between Fiscal Years 2013 and 2014.

139. “GRS Claim” means, with respect to any Holder of a GRS Pension Claim, (a) such GRS Pension Claim and (b) any OPEB Claim held by such Holder.

140. “GRS Hybrid Pension Formula” means an accrual rate for active employee participants in the GRS for benefits earned for service on or after July 1, 2014 that equals the product of (a) 1.5% multiplied by (b) such employee’s average base compensation over an employee’s final 10 years of service, multiplied by (c) such employee’s years of service after July 1, 2014. For purposes of this definition, base compensation will exclude overtime, longevity or other bonuses, and unused sick leave, and the GRS Hybrid Pension Formula will be part of a hybrid program that will contain rules to shift funding risk to participants in the event of underfunding of hybrid pensions, and mandate minimum retirement ages for unreduced pensions and other material terms as set forth in Exhibit I.A.140.

141. “GRS Pension Claim” means any Claim (other than an OPEB Claim), whether asserted by current or former employees of the City, their heirs or beneficiaries or by the GRS or any trustee thereof or any other Entity acting on the GRS’s behalf, against the City or any fund managed by the City (including, but not limited to, the General Fund, the water fund, the sewage disposal fund, the Detroit General Retirement System Service Corporation fund or the pension funds) based upon, arising under or related to any agreement, commitment or other obligation, whether evidenced by contract, agreement, rule, regulation, ordinance, statute or law for (a) any pension, disability or other post-retirement payment or distribution to be made by the GRS in respect of the employment of current or former employees or (b) the payment by the GRS to persons who at any time participated in, were beneficiaries of or accrued post-retirement pension or financial benefits under the GRS.

142. “GRS Restoration Payment” means an addition to the pension benefits that comprise the GRS Adjusted Pension Amount during the period ending June 30, 2023. A GRS Restoration Payment may be made and approved only by the trustees of the GRS, or of any successor trust or pension plan, and only in the event that the funding level of the GRS for Fiscal Year 2023 is projected to exceed 80%, based on the then-market value of assets projected forward at an assumed 6.25% investment return rate. For purposes of calculating a GRS Restoration Payment, market value of assets shall not include any City contributions other than those listed on Exhibit II.B.3.u.ii.A. A GRS Restoration Payment may be made in amounts, and only to the extent, that the projected funding level of the GRS for Fiscal Year 2023 as an immediate consequence of such GRS Restoration Payment is not less than 80%.

143. “GRS Settlement Benefit Amount” means, with respect to any Electing GRS Holder, an amount equal to such Holder’s Pro Rata share (calculated by reference to the GRS Pension Claims held by Electing GRS Holders) of such percentage of the State GRS Consideration as is equal to the ratio of Electing GRS Holders to all Holders of GRS Pension Claims, which GRS Settlement Benefit Amount is estimated to equal 8.0% of such Electing GRS Holder’s Current Accrued Annual Pension.

192. “PFRS” means the Police and Fire Retirement System for the City of Detroit.

193. “PFRS Adjusted Pension Amount” means, with respect to a Holder of a PFRS Pension Claim, the Current Accrued Annual Pension payable to such Holder as adjusted in accordance with the following formula: (a) for such a Holder who is either retired and receiving a monthly pension or a surviving beneficiary, a 10% reduction in the monthly pension amount; and (b) for such a Holder who is an Active Employee, elimination of the deferred retirement option plan feature of PFRS and a 10% reduction in the monthly pension amount; provided that, with respect to Holders that are Active Employees, in the event the unfunded liabilities of the PFRS for the plan year ending June 30, 2014 are greater than the unfunded liabilities of the PFRS as of June 30, 2013, the reduction in the monthly pension amount shall be increased to the extent necessary to ensure that there is no change in the amount of the underfunding between plan years ending 2013 and 2014.

194. “PFRS Claim” means, with respect to any Holder of a PFRS Pension Claim, (a) such PFRS Pension Claim and (b) any OPEB Claim held by such Holder.

195. “PFRS Hybrid Pension Formula” means an accrual rate for active employee participants in the PFRS for benefits earned on or after July 1, 2014 that equals the product of (a) 2.0% multiplied by (b) an employee’s average base compensation over the employee’s final 10 years of service, multiplied by (c) such employee’s years of service after July 1, 2014. For purposes of this definition, base compensation will mean the actual employee’s base compensation and will exclude overtime, longevity or other bonuses, and unused sick leave, and the PFRS Hybrid Pension Formula will be part of a hybrid program that will contain rules to shift funding risk to participants in the event of underfunding of hybrid pensions, and mandate minimum retirement ages for unreduced pensions and other material terms as set forth on Exhibit I.A.195.

196. “PFRS Pension Claim” means any Claims (other than an OPEB Claim), whether asserted by current or former employees of the City, their heirs or beneficiaries or by the PFRS or any trustee thereof or any other Entity acting on the PFRS’s behalf, against the City or any fund managed by the City (including, but not limited to, the General Fund, the Police and Fire Retirement System Service Corporation fund or the pension funds) based upon, arising under or related to any agreement, commitment or other obligation, whether evidenced by contract, agreement, rule, regulation, ordinance, statute or law for (a) any pension, disability, or other post-retirement payment or distribution to be made by the PFRS in respect of the employment of such current or former employees or (b) the payment by the PFRS to persons who at any time participated in, were beneficiaries of or accrued post-retirement pension or financial benefits under the PFRS.

197. “PFRS Restoration Payment” means an addition to the pension benefits that comprise the PFRS Adjusted Pension Amount during the period ending June 30, 2023. A PFRS Restoration Payment may be made and approved only by the trustees of the PFRS, or of any successor trust or pension plan, and only in the event that the funding level of the PFRS for Fiscal Year 2023 is projected to exceed 80%, based on the then-market value of assets projected forward at an assumed 6.50% investment return rate. For purposes of calculating a PFRS Restoration Payment, market value of assets shall not include any City contributions other than those listed on Exhibit II.B.3.t.ii.A. A PFRS Restoration Payment may be made in amounts, and only to the extent, that the projected funding level of the PFRS for Fiscal Year 2023 as an immediate consequence of such PFRS Restoration Payment is not less than 80%.

198. “PFRS Settlement Benefit Amount” means, with respect to any Electing PFRS Holder, an amount equal to such Holder’s Pro Rata share (calculated by reference to the PFRS Pension Claims held by Electing PFRS Holders) of such percentage of the State PFRS Consideration as is equal to the ratio of Electing PFRS Holders to all Holders of PFRS Pension Claims, which PFRS Settlement Benefit Amount is estimated to equal 4.0% of such Electing PFRS Holder’s Current Accrued Annual Pension.

1. Funding Contributions.
The DIA Settlement will be funded as follows: (a) an irrevocable commitment of at least $365 million by the Foundations; and (b) in addition to its continuing commitments outside of the DIA Settlement, an irrevocable commitment from DIA Corp. to raise at least $100 million from its donors. The foregoing commitments shall be funded over the course of the 20-year period immediately following the Effective Date (subject to the annual confirmation of the City’s continuing compliance with the terms of the DIA Settlement). Amounts committed by the Foundations will be paid to the CFSEM Supporting Organization, which will (a) transfer such amounts for the purpose of funding the Retirement Systems upon the City’s satisfaction of certain conditions and (b) not be subject to claims of creditors of the Community Foundation for Southeast Michigan.

2. Transfer of DIA Assets.
On the Effective Date, the City shall irrevocably transfer the DIA Assets to DIA Corp., as trustee, to be held in perpetual charitable trust, and within the City limits, for the primary benefit of the residents of the City and the Counties and the citizens of the State.

3. Conditions to the Foundations’ Participation.
The Foundations’ participation in the DIA Settlement is conditioned upon, among other things, the following: (i) the irrevocable commitment from the DIA Corp. described in Section IV.F.1; (ii) the acceptance of the Plan by Classes 10 and 11; (iii) the irrevocable transfer by the City of the DIA Assets described in Section IV.F.2; (iv) the existence of appropriate governance and oversight structures at DIA Corp. that include representation of the City, the DIA Funding Parties and other stakeholders; (v) the earmarking of all funds provided by the DIA Funding Parties towards the recoveries upon Pension Claims under the Plan for Holders of Claims in Classes 10 and 11; (vi) the existence of appropriate prospective governance and financial oversight mechanisms for the Retirement Systems; (vii) the affirmation by County authorities of certain existing funding obligations with respect to DIA Corp.; (viii) the approval of the DIA Settlement by the Attorney General for the State; (ix) the agreement of the State to provide the State GRS Consideration and the State PFRS Consideration in an aggregate amount up to $350 million; (x) the occurrence of the Confirmation Date no later than December 31, 2014; and (xi) the City’s agreement to indemnify and hold harmless the Foundations and the CFSEM Supporting Organization pursuant to, and in accordance with, the terms of the DIA Settlement Documents.

10 responses to this post.

  1. Posted by Eric on February 21, 2014 at 4:03 pm

    John:
    I would assume that the amounts would be “capped” and not have a lowly paid worker receiving the same percentage reduction as a highly paid, “connected” retiree.
    Eric

    Reply

  2. Posted by Tough Love on February 21, 2014 at 10:27 pm

    How much they can continue to pay to current retirees is dependent on the money available, which to a large extent is highly correlated to how badly they screw the bondholders. From reading this my guess is that the bondholder are getting a royal screwing.

    Going forward is a different thing. Your bullet:

    Hybrid plans to be set up for workers to accrue benefits after July 1, 2014 as part of a “hybrid program that will contain rules to shift funding risk to participants in the event of underfunding of hybrid pensions”

    …….. sounds quite promising if, as well as risk-transfer to the workers, the generosity of prospective pensions is seriously reduced. With Public Sector workers of the mindset that even the MOST generous PRIVATE Sector pensions are piddly in value, and with prospective Public Sector pensions even that generous clearly unaffordable to a BROKE BROKE BROKE city, it will be interesting to see the detail of the future-service pension formulas and provisions.

    Reply

    • The new formula is defined in the plan:
      1.5% times 10-yr-aveg-pay times per Years of Service after 7/1/14 for GRS and 2% for PFRS.

      How they intend to shift funding risk to participants is the big question.

      Reply

      • Posted by Tough Love on February 22, 2014 at 12:07 am

        Thanks ……. what are the workers contributions as a level annual % of pay, and what (if any) are post-retirement COLA provisions ?

        Reply

        • Specifically in there that there would be no COLA for the hybrid plan but no mention of employee contributions (or employer contributions for that matter).

          Reply

          • Posted by Tough Love on February 22, 2014 at 1:06 am

            I just ran some # through a spreadsheet ….

            The 2% (per year of service) PFRS factor with 10-year final average salary averaging, 30 years working, 25 years in retirement, and no COLA (EVER) and using a 6% earnings assumption during the working 30 years, and 5% in the payout years, requires a TOTAL (EE plus ER) level annual contribution of 21.25% of pay to fully fund over the w 30-year working career of the officer.

            If the Police picked up HALF the cost (10.625% of pay) the remaining 10.625% is just about what Private Sector workers typically get …. a 6.2 % SS employer contribution on their behalf plus a 3-5% of pay 401K Plan employer “match”.

            That would seem fair to taxpayers.

          • Posted by Tough Love on February 22, 2014 at 1:12 am

            Follow-up …. the above is “fair” assuming the Police Officers are NOT in Social Security. If they are, it’s too generous by just about the employer cost of SS on the employee’s behalf, 6.2% of pay.

  3. Posted by Richard on February 24, 2014 at 3:25 pm

    Some of the news coverage indicated that in addition to the marquee cuts, that the COLA would be suspended for 10 years. If so, the effective cuts would be far larger.

    Reply

  4. Posted by LGreene on March 16, 2014 at 6:32 am

    One of the reasons employers provide benefits is to recruit and retain employees. Under these new proposed benefit plans,How would police and fire be recruited or retained? given the high cost of training for these positions ?

    One can debate whether or not benefits are too high, but if they are the ” same as private sector” , then what is incentive for safety workers to take on the risks they take in their line of work?

    For NON-Safety personnel, and teachers, the same applies. We want to recruit and retain….but of course not overpay nor overpromise. The private sector 401(k) sounds more like a ” floor” vs a benchmark. Too many seem to demonize public sector employees, until there is a need for them.

    Reply

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