What happened in court today

[rondinjp]

Interesting point. Under that reading, the Constitution may only prevent local governments and the state from raiding money that is already in pensions to pay for other stuff, as some entities have done in the past.

Basically, once the money's in the system it has to stay, but there is no constitutional protection for future funding or for payouts for particular individuals.

Correct. To me this seems to be a valid reading and interpretation for the clause. However, I'm still unsure whether some legislative history exists that would expressly indicate that this clause can only to be interpreted to mean the pension amounts paid to retirees--as Novine argues.

[Eber Brock Ward]

And even then, leg history is generally persuasive but not binding in Michigan.

Given the read I have on the judge, it looks like, when it is interpreted, that it might turn out good for residents [[more services), good for current employees [[more services/spending), but bad for pensioners [[duh) and bondholders [[duh).

Could just be wishful thinking on the part of this resident, though.

Either way, I'm guessing it'll be appealed to the ED Mich and, then, likely the 6th Circuit and possibly the Supreme Court.

[Novine]

Some background on what Michigan courts have said. Even though its from the Mackinac Center, it's generally free of its usual bias.

http://www.mackinac.org/16610

[Hermod]

Some background on what Michigan courts have said. Even though its from the Mackinac Center, it's generally free of its usual bias.

http://www.mackinac.org/16610

I wonder if there is any requirement to provide inflation adjustments. That could make a significant difference in the viability of a plan which is closed.

[BankruptcyGuy]

Does anyone know if there is legislative history about this clause that would lock in the interpretation that the unions have been arguing? To me it just seems you could read this clause two ways and one way would justify a reduction of retiree's payment without violation.

This clause has not been interpreted in state courts in Michigan. So exactly does it mean? Would a freeze of the pension [[no more contributions, but the benefit grows over time for those who have not retired) result in a "diminishment" of benefits? What about reductions in increases? Retroactively reducing sweetners [[like purchasing additional time)?

These will be litigated to the extent that a) Orr proposes them, and b) the pensioners don't accept them or come to a settlement.

[BankruptcyGuy]

Some background on what Michigan courts have said. Even though its from the Mackinac Center, it's generally free of its usual bias.

http://www.mackinac.org/16610

Interesting discussion in the case. Not directly on point, but you can see the analysis the court would use.

If the interpretation of this clause goes to the Michigan Supreme Court, the result might be that the legislature could change benefit structures more freely. That would likely only be in one direction--down.

[Locke09]

Interesting point. Under that reading, the Constitution may only prevent local governments and the state from raiding money that is already in pensions to pay for other stuff, as some entities have done in the past.

Basically, once the money's in the system it has to stay, but there is no constitutional protection for future funding or for payouts for particular individuals.

The very next clause says that benefits accrued in a fiscal year have to be paid into the plan that fiscal year. So theoretically, everything needed to pay every vested employee what was promised to them should already be in the plan. So yes, you could close the plan and not make any further contributions, but it would be fully funded so no one would be impaired.

The City has not been making all the contributions it should each year. The State knows this and did nothing about it. The State knows because Detroit has to do financial reporting to the State.

Accrued benefits has to do with the benefits earned and vested by employees. When you have an EDRO or QDRO that divides a pension among a divorcing couple, accrued benefits means the benefits the plan participant has vested, whether the plan has enough funds in it to cover those or not.

[rondinjp]

The very next clause says that benefits accrued in a fiscal year have to be paid into the plan that fiscal year. So theoretically, everything needed to pay every vested employee what was promised to them should already be in the plan. So yes, you could close the plan and not make any further contributions, but it would be fully funded so no one would be impaired.

The City has not been making all the contributions it should each year. The State knows this and did nothing about it. The State knows because Detroit has to do financial reporting to the State.

Accrued benefits has to do with the benefits earned and vested by employees. When you have an EDRO or QDRO that divides a pension among a divorcing couple, accrued benefits means the benefits the plan participant has vested, whether the plan has enough funds in it to cover those or not.

Correct. The next clause states: "Financial benefits arising on account of service rendered in each fiscal year shall be funded during thatyear and such funding shall not be used for financing unfunded accrued liabilities."

But this has to do with funding the "pension plan" which is separate from my question regarding diminishing or impairing the "pension plan". You are right that this clause indicates the financial benefits were supposed to be funded each year -- but were not. But now that the "pension funds" are woefully underfunded what do you do? Detroit can't afford to make up the difference.

Also, I agree with you that "theoretically, everything needed to pay every vested employee what was promised to them should already be in the plan." But it is not. So if we close the plan and make no further contributions we will not have enough to pay the retirees.

That is why I was looking at the language of the first clause and trying to determine whether [[1) the contractual obligation is directed toward the retiree's set pension rate [[e.g., $20k/year) or [[2) whether the clause means that you can't diminish what is left in the "pension plan" even though it is under-funded.

I still think both interpretations have valid arguments. I am just wondering if there is any guidance [[either legislative or judicial) regarding how this is supposed to be construed. Like I said earlier, I have heard the retirees argue one side. But reading the entire clause in context allows a second [[and in my opinion valid) interpretation.

[Cincinnati_Kid]

"The fact that nobody white ran for ANY position in Detroit government in at least 10 years that I can recall, leaves a lot to be desired. "

Shelia Cockrel and Maryanne Mahaffey - not white? Who knew?

Ok, I'll give you Cockrel, but Mahaffey was at least 10 years ago, like I said.

[Novine]

"That is why I was looking at the language of the first clause and trying to determine whether [[1) the contractual obligation is directed toward the retiree's set pension rate [[e.g., $20k/year) or [[2) whether the clause means that you can't diminish what is left in the "pension plan" even though it is under-funded."

Again, this kind of interpretation isn't logical. Benefits were granted to individuals, not the plan. Benefits accrue to individuals, not the plan. Trying to interpret the language by writing out the existence of the individual beneficiaries is contrary to the basic concept of a pension plan.

[rondinjp]

"That is why I was looking at the language of the first clause and trying to determine whether [[1) the contractual obligation is directed toward the retiree's set pension rate [[e.g., $20k/year) or [[2) whether the clause means that you can't diminish what is left in the "pension plan" even though it is under-funded."

Again, this kind of interpretation isn't logical. Benefits were granted to individuals, not the plan. Benefits accrue to individuals, not the plan. Trying to interpret the language by writing out the existence of the individual beneficiaries is contrary to the basic concept of a pension plan.

Novine, I am not trying to fight about this clause and have agreed that you could interpret the pension "contract clause" as meaning the benefits accrued by the individual. However, it is a completely logical to interpret the "pension plan" as meaning the fund that all retirees draw their pensions from. The actual language supports this interpretation.

I am also not "writing out the existence of the individual beneficiaries" because [[as I have stated) they would still receive checks from what exists of the "pension fund." The only difference is their check may be reduced because there is not enough cash in the "pension fund" to provide the disbursement they were receiving before.

My original post questioned whether there was any support to construe this clause as I have continually heard union reps state in the news it should be interpreted. I still haven't seen any support.

I read the Michigan SC case that was cited in the link you provided but, as BankruptcyGuy correctly noted, that case was not on point. Instead, the court in that case was reviewing whether health care benefits were an "accrued benefit."

I have yet to see any case law or support that the term "pension plan" specifically means an individual retirees pension. Or that a retiree is "guaranteed" by the "contract clause" that the amount he/she could withdraw from the "pension fund" is not allowed to be reduced. Again, you would not be diminishing the "pension fund" if that is the pool of money all the retirees are pulling from.

[Novine]

"I read the Michigan SC case that was cited in the link you provided but, as BankruptcyGuy correctly noted, that case was not on point. Instead, the court in that case was reviewing whether health care benefits were an "accrued benefit." "

The case dealt with health care benefits but part of the analysis dealt with what constitutes "accrued financial benefits". It's clear from that case that the Michigan Supreme Court at that time felt that pension benefits are entitled a higher level of legal protection and that the language of the state constitution compels the state and local units to pay those benefits which have been promised to pensioners.

[Eber Brock Ward]

You also have to consider, though, Novine, that our Supreme Court is composed of different folks now.

[Wesley Mouch]

... But instead I could see a judge reduce a retiree's higher pension amount by a greater percentage than someone earning a much lower pension amount.

True equality of outcome would not be a percentage reduction, but a reduction to a similar amount. A cap. If legal to modify, the remaining funds and perhaps some state funding should provide all retirees with a basic pension -- say $24,000. And that's it. Sorry to those who retired with more. But the idea of anyone getting a pension over $50,000 while other lifelong retirees get $8,000 a year is not acceptable to me. I'm a closet socialist.

[rondinjp]

"I read the Michigan SC case that was cited in the link you provided but, as BankruptcyGuy correctly noted, that case was not on point. Instead, the court in that case was reviewing whether health care benefits were an "accrued benefit." "

The case dealt with health care benefits but part of the analysis dealt with what constitutes "accrued financial benefits". It's clear from that case that the Michigan Supreme Court at that time felt that pension benefits are entitled a higher level of legal protection and that the language of the state constitution compels the state and local units to pay those benefits which have been promised to pensioners.

Here is a quote from the case that I find interesting:

That art 9, § 24 only protects those financial benefits that increase or grow over time is not only supported but, indeed, confirmed by the interaction between the first and second clauses of that provision. Specifically, the first clause contractually binds the state and its political subdivisions to pay for retired public employees’ “accrued financial benefits . . . .” Thereafter, the second clause seeks to ensure that the state and its political subdivisions will be able to fulfill this contractual obligation by requiring them to set aside funding each year for those “[f]inancial benefits arising on account of service rendered in each fiscal year . . . .” Thus, because the second clause only requires the state and its political subdivision to set aside funding for “[f]inancial benefits arising on account of service rendered in each fiscal year” to fulfill their contractual obligation of paying for “accrued financial benefits,” it reasonably follows that “accrued” financial benefits consist only of those “[f]inancial benefits arising on account of service rendered in each fiscal year . . . .”

Under the court's reasoning "the accrued financial benefits" are what is placed into the "pension plan" for each retiree. Those "financial benefits" within the "pension plan" are supposed to "accrue" or grow over time. That is what is contractually guaranteed.

Presently, the "financial benefits" within the "pension plan" did not grow enough to cover what every retiree was told they would receive. The "pension plan" which consists of the "financial benefits" is not being diminished. The "pension plan" simply is not large enough.

From what I have read the pension plan has had investments made by its board that simply did not provide the rate of return that was necessary to cover the amount being pulled by all the retirees. This does not mean that the "financial benefits" did not accrue or grow. It simply means that the growth was not enough to cover the amount being withdrawn by the retirees.

This case could be argued that the "percentage" or "pension amount/year" a retiree was told they would receive is not protected by the "contract clause." Instead, one could argue this case indicates that it is the "financial benefits" within the "pension plan" that is "guaranteed." Under that interpretation, you could lower the amount or percentage a retiree withdraws from the plan in order to sustain the plan for all the retirees.

[BankruptcyGuy]

You both raise an important point: to the extent of pension obligations, pensioners are not creditors of the City, only the funds are. That's why the two largest creditors of the City are the two pension funds.

The pension funds are pass-through entities; whatever they have, they distribute. So if the City's obligation to the funds is eliminated or reduced in the bankruptcy case, the pensioners will take less as a result.

Someone wisely raised the concept of uneven distribution of the haircut, as it were. I'm not sure if that would violate ERISA or whatever state laws govern the pensions. I'm not sure how that would occur--by vote?