Looking at the pension deal
From what I've been able to piece together from various news sources, I have some questions about what the city is presenting:
Are they really re-allocating $100 million in grant money from the US government for blight removal to fund pensions? How exactly does that not run afoul of the law?
Did the City's required contributions to the fund change, or, in great political fashion, did the City simply allow the funds to increase their expected rate of return, in order to reduce cuts today [[meaning that if the return targets are not met, cuts will be reduced further in later years)?
Did the City's contribution to health care go up or down? When GM and Chrysler set up VEBAs, they funded them with large [[billions) stock contributions? With what are these healthcare VEBAs being funded?
If anyone can point me to the actual term sheet or press release on the deal to enlighten me, I'd appreciate it.
While we're answering questions....
It's clear that over the last 6 days, the leverage has shifted toward the city against all of its creditors. Once the swaps settlement was approved, the threat of a cram-down became imminent. In that regard, I can't imagine that the city gave that many [[if any) concessions in mediation over the last 4 days.
Which makes me wonder...what deal was being floated back and forth up in mediation up until last week? I can't imagine it was the 25% cut...Is this is a situation where the 25% cut is a threat in a cram-down, but while we're in mediation, we will offer a 5% cut with no COLAs?
Because man, if that was the city's offer behind-the-scenes-this whole time, that was a pretty sweet deal, not sure I understand why it took so long to accept. Perhaps the precedent it set?
Actuarial Math Sometimes More Art Than Science
Quote:
Originally Posted by
BankruptcyGuy
What would really interest me is knowing what the City's overall contributions to the funds were in the first plan and the revised plan. If they are the same number, then the pensioners are either being misled now about the health of their funds or were misled in the first draft. If the City is contributing a much larger number, where are those funds coming from?
This is one of the fundamental problems in the system, IMHO. The purpose of bankruptcy is to reduce/minimize the city's liabilities.
But when we talk about the pensions, they are framed from the perspective of "what will the pensioners get" instead of "what will the city be able to give".
I digress.
I believe that the pension fund has been the beneficiary of a raging bull market within the equity and private equity markets. Consequently, they are working with a starting balance that is 15-20% higher right now than at the time of bankruptcy filing. Quite clearly, that could be enough to fill a gigantic gap.
Another concession is that Orr agreed to use a 6.75% assumed rate of return rather than 6.5% that he proposed; and that helped bridge the gap even more.
So it's plausible that all of the above could take place without affecting the city contribution to pensioners.
The elimination of the COLA is a major concession from the unions. It doesn't get the headlines, because reducing someone's COLA has a graduated impact over time in comparison to "This pensioner is only receiving half his pension check starting in July". Despite the fact the impact is essentially the same.
Lastly, some of this might be part of the "dark arts of bankruptcy", in that Orr and his team can make arguments to offer the lowest plausible settlement in the plan of adjustment in order to create leverage for creditors to settle and get on board with the plan, right? As I mentioned above, I have no idea what offer was being floated back and forth in mediation, but when threatened with a cramdown and a 25% pension cut, that certainly makes a 5% cut and COLA elimination seem like a gift.
Compare that to a pre-bankruptcy scenario from 12 months ago....if Mayor Bing went to the unions and asked them to voluntarily drop health care coverage, eliminate the COLA, and drop the benefit by 5%, I'm sure we can all imagine how that conversation will go.
The key for the city going forward is whether or not the impact to our cashflow is positive enough to execute a turnaround. And even though that's supposed to be Orr's prime concern, it probably falls secondary to exiting bankruptcy on time.
But you know who has the most to lose if we don't do this right the first time? I'd say Judge Rhodes. He's made it crystal clear that he will not approve a settlement that will result in us coming back to do Chapter 9 a second time.
My questions are these:
[[1) Will the bankruptcy improve our balance sheet and cashflow enough to make some real structural changes needed?
[[2) Will the state legislature screw this up and block the Grand Bargain?
[[3) Will Rhodes rule that the settlements are both equitable while making sure that the experts he chooses believe that we are properly poised to recover?
[[4) And will the political protections be in place to make sure that the financial controls are in place to set us up for sound financial practices?
We will see.....