Posts Tagged ‘detroit’

Detroit Paving Way for Bankruptcy Route to Public Benefit Cuts

A few minutes ago a judge approved Detroit’s bankruptcy plan which included these benefit cuts that Detroit retirees approved back in July:

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Fingering Public Pension Actuaries

It is only a matter of time before the public pension crisis, as enabled by a cabal of actuaries devising assumptions and methods primarily to understate contributions, finds fall guys.  It happened this week in Detroit and to Gabriel Roeder Smith & Company (GRS) as reported in the New York Times:

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What Should Scare New Jersey Public Retirees

In preparing for a presentation that I will give to a group of retired New Jersey police and firefighters on Wednesday I came across a spreadsheet created from official actuarial reports that tell a story far scarier than anything coming out of Detroit, especially these four numbers:

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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:

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Detroit’s Official Valuation Reports are “No Proof”

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:

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Russell Mueller Was Right

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.

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Fact Checking Detroit Pension Coverage

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?

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