Why can't Detroit [[and other government units) and corporations

[emu steve]

have the ability to put their pension-related assets in a trust which are held beneficially solely for the purposes of funding pensions?

And, of course, this should be done at all levels of government from city, county and state pensions and Social Security where taxes are collected and held for a specific purpose.

Just asking...

[professorscott]

have the ability to put their pension-related assets in a trust which are held beneficially solely for the purposes of funding pensions?

And, of course, this should be done at all levels of government from city, county and state pensions and Social Security where taxes are collected and held for a specific purpose.

Just asking...

They can and do, frequently. The problem with Detroit's pension funds aren't that they aren't in a special account; they might or might not be, and I'm sure someone will post whether or not they are.

There are two problems with Detroit's pension fund, and many other pension funds as well.

1. There is no way to know precisely, in advance, how much money has to be in the fund at any one time. It is a matter of correctly predicting the future. Thus there are varying models one can use, and Detroit, like many cities and companies, uses a model that minimizes how much they put into the fund. So in the end, there would be a strong likelihood that the fund would run short, even if they put in all the money they calculated that they were supposed to, which segues very neatly into:

2. The City has not put into the fund, all of the money that [[by its own computations) it ought to have put in.

So basically the situation is this. Imagine that you have no pension, and to be able to live comfortably in retirement, you have to save $2,000 a month. But you use a calculation that says [[incorrectly as it will turn out) that you only need to put in $1,800 a month. So you decide to do that, but reality intervenes and in fact you only put in $1,600 a month. Congratulations! You are the City of Detroit, only with fewer zeros.

[professorscott]

Oh, one more thing. Imagine in the above situation, just as I spelled it out with you not saving enough money for retirement, you get your state to pass a law [[or put into the constitution, or have God carve it into stone tablets) that says, even if there's not enough money for you to live on in retirement, you have to be able to withdraw enough, even though it isn't there and doesn't exist. A rational person would call such a regulation "insane", and would be correct.

[DetroiterOnTheWestCoast]

have the ability to put their pension-related assets in a trust which are held beneficially solely for the purposes of funding pensions?

And, of course, this should be done at all levels of government from city, county and state pensions and Social Security where taxes are collected and held for a specific purpose.

Just asking...

How do you think they are held?

[corktownyuppie]

Why Can't Detroit [[And Other Government Units) And Corporations have the ability to put their pension-related assets in a trust which are held beneficially solely for the purposes of funding pensions

They can and do, frequently. The problem with Detroit's pension funds aren't that they aren't in a special account; they might or might not be, and I'm sure someone will post whether or not they are.

I'm not an expert on the pension funds and will openly defer to others who are. Here are the things that I'm fairly confident of:
- There are two different pensions associated with city employees, the general retirement system and the police and fire system.
- The pension funds are held separately from the General Fund.
- It's a misunderstanding to ask "where" the funds are held, because there isn't such thing as a "place" where the funds are. More accurate would be to ask, "How are Detroit Pension assets titled?" For example, a pension fund might own 17 different buildings, using the rent collected from the buildings to meet their retirement obligations. There's not really a "where" that answers the question. Rather, the title [[or, more likely, some fraction of the title) of all the buildings should be in the legal name and title of one of the pension funds. So if Detroit Police and Fire owned 50% of the Kales Building, then every month after rent was collected and expenses paid, whatever is left could/would be paid by check to each of the owners...including the Police and Fire Pension.

There are two problems with Detroit's pension fund, and many other pension funds as well.

1. There is no way to know precisely, in advance, how much money has to be in the fund at any one time. It is a matter of correctly predicting the future. Thus there are varying models one can use, and Detroit, like many cities and companies, uses a model that minimizes how much they put into the fund. So in the end, there would be a strong likelihood that the fund would run short, even if they put in all the money they calculated that they were supposed to, which segues very neatly into:

2. The City has not put into the fund, all of the money that [[by its own computations) it ought to have put in.


So basically the situation is this. Imagine that you have no pension, and to be able to live comfortably in retirement, you have to save $2,000 a month. But you use a calculation that says [[incorrectly as it will turn out) that you only need to put in $1,800 a month. So you decide to do that, but reality intervenes and in fact you only put in $1,600 a month. Congratulations! You are the City of Detroit, only with fewer zeros.

This pretty much sums it up. The solvency of a pension fund includes many assumptions, all of which are on a sliding scale:

- The life expectancy of the participants of the fund.
- Future Cost of Living Adjustments that will increase payouts over time
- The expected investment rate of return inside the fund
- Is the system open vs. closed [[Thanks to Novine on this one)

So if I make the life expectancies really, really long...that's bad for the pension fund, because it makes it unlikely that there will be enough to make all the payments.

If I make the rate of return really small...that's also bad, because the investments inside the fund won't grow as much.

If I promise to give all the pensioners a 3% raise every year...or a 13th bonus check...that adds strain to the pension fund. [[A 3% raise will cause pensions to double in approx. 25 years).

So the problem is that all of these numbers are adjustable, depending on how conservative you want to be. If I presume that everyone dies at 70 years old, the funds inside grow at 12% per year, and nobody gets any raises every year....MAGIC! There's more than enough to cover all the payments!

If I presume that everyone dies at 95, the funds inside grow at 3% per year, and we bump up everyone's check every year with a cost-of-living adjustment...OH NOES! WE'LL RUN OUT OF MONEY in 20 years.

So where is the answer? It's probably somewhere in the middle, and people will have to debate where.

But I will say this, when you have firefighters claiming that their fund is 96% funded, they're basically saying that there's almost enough money in the fund to cover all the pension payments. If that's actually true, then it means that there are enough funds -- held separately from the city -- to cover 96% of the payments.

I won't be thrilled about losing Cost of Living Adjustments for 3-4 years, but that's a relatively small sacrifice to make sure that no one gets too screwed. AND, it won't be relying on the city for any money.

[Wesley Mouch]

have the ability to put their pension-related assets in a trust which are held beneficially solely for the purposes of funding pensions?

And, of course, this should be done at all levels of government from city, county and state pensions and Social Security where taxes are collected and held for a specific purpose.

Just asking...

The pension-related assets are almost certainly held in such an account for Detroit and every level of gov't.

But as another posted said, the exact amount to be 'squirreled away' is uncertain. Why?

The money isn't stuffed in a mattress. Its invested. So investment returns may be more or less than expected. That's the big one.

And that's the big problem right now. The trustees are making more aggressive assumptions than Mr. Orr. So the trustees have said they're 93% funded. And that's not irresponsible. Orr is saying they're really only 65% funded. That's a big problem.

The real problem is that there don't seem to be proper rules to know what's really going on. How much should be put away each month for the future? We don't know. Everyone's answer is different.

And everyone's answer is self-serving. The city wanted to put away as little as possible so they could spend the money elsewhere instead. And the trustees went along for that ride. Some trustees should be taken out behind the shed by some retired officers and given a stern talking to. Who let Detroit spent their pension money unwisely? Not Snyder. The city bureaucrats and their trustees.

[corktownyuppie]

And everyone's answer is self-serving.

And this is where the pension trustees are really gonna be in a tough spot. It's really hard to argue:

- That we've saved so well and invested so well that we are almost fully funded
- and that we are desperately relying on the city to fork over the much-needed funds so that our pensioners don't starve

...at the same time.

[Locke09]

Oh, one more thing. Imagine in the above situation, just as I spelled it out with you not saving enough money for retirement, you get your state to pass a law [[or put into the constitution, or have God carve it into stone tablets) that says, even if there's not enough money for you to live on in retirement, you have to be able to withdraw enough, even though it isn't there and doesn't exist. A rational person would call such a regulation "insane", and would be correct.

Most of what you have said is accurate. I would disagree that the "regulation" is insane. Remember that part of the regulation says that each year, the amount needed to fund the vested portion must be paid into the fund that year. The insane part is that no one has made the city comply.

The pension boards thought they were doing the city a favor by letting them defer payments. They did not believe the city would ultimately file bankruptcy and default.

The state is also complicit in this. So I do also blame Snyder and other governors. They get financial reports. They absolutely know when Detroit is not making pension payments. They could have been forcing Detroit to do so. But then the state hasn't been making the payments it should have been making in the state employees retirement funds. They are more underfunded than Detroit's and use the same assumptions for determining the level of funding.

[Wesley Mouch]

...
The state is also complicit in this. So I do also blame Snyder and other governors. They get financial reports. They absolutely know when Detroit is not making pension payments. They could have been forcing Detroit to do so. But then the state hasn't been making the payments it should have been making in the state employees retirement funds. They are more underfunded than Detroit's and use the same assumptions for determining the level of funding.

I think trying to shove a consent agreement and emergency management down Detroit's throats was a little like trying to give a kid castor oil, no?

Curious about your last statement -- can you back that up? Sounds a lot like a talking point of the local pension boards defending their actions. But I'm open to hearing.

[professorscott]

Most of what you have said is accurate. I would disagree that the "regulation" is insane. Remember that part of the regulation says that each year, the amount needed to fund the vested portion must be paid into the fund that year. The insane part is that no one has made the city comply.

Exactly what mechanism did the state have available to it, over the past ten years before Mr. Orr was appointed, to make Detroit do anything whatever? The insane part of the second paragraph is that it isn't tied to the first. If the second part had begun with "If a unit of government complies with the first paragraph, then" it would be perfectly sane and reasonable.

The pension boards thought they were doing the city a favor by letting them defer payments. They did not believe the city would ultimately file bankruptcy and default.

True, and this puts them in an awful bind, legally. The pension boards have to say, "okay, it was fine for US to allow Detroit to violate the FIRST paragraph of this section of the constitution repeatedly, Mr. Justice, but now YOU have to FORCE Detroit to uphold the SECOND paragraph."

The interesting question to me, though, is the legal one. Exactly what does that second paragraph actually disallow? I suspect its meaning will be construed narrowly, that pension funds can't be misused for other purposes, not that promises made to retirees must be unconditionally upheld. But we shall see.

[Locke09]

I think trying to shove a consent agreement and emergency management down Detroit's throats was a little like trying to give a kid castor oil, no?

Curious about your last statement -- can you back that up? Sounds a lot like a talking point of the local pension boards defending their actions. But I'm open to hearing.

First, the state didn't need a consent decree or emergency manager to make the city pay it's contribution. Just like they diverted revenue sharing when the city wasn't doing other things they wanted the city to do, they could have done so for that as well.

As for state pensions, I have never been a talking points person. Even as a child I questioned everything and I always want to see data [[preferably raw data).

MERS - for Michigan municipalities - posts their financial reports. ORS - for state employees - posts theirs as well. Let's just look at the state's numbers although I have reviewed both in the past:

State assumes 8% investment return - CofD assumes 7.9%

State uses 5 year smoothing for losses - CofD was using 5 years but switched to 7 last year at the request of the administration so they could justify putting in less money. The longer the smoothing, the better your finances look. Btw, MERS uses 10 years [[Lol) and they also use 8% investment return.

State is 65.5% funded using the same assumptions Detroit uses to say they are 77% - 96%. So if Detroit's assumptions are wrong and they are worse off than they thought, what does that say about the state?

The State uses Gabriel Roeder & Smith as actuaries just like Detroit does. So again - if you can't trust GRS, then the state might only be about 50% funded.

i believe the state might use a different mortuary table than Detroit, I'll have to recheck.

But anyway, information is readily available for analysis, for those who like doing analysis.

[Locke09]

P.S. MERS overall funding level is 72.6%, but some municipalities are better off than others. Of 721 municipalities in MERS, 84 [[12%) are under 60% funded. 309 [[43%) are 60-80% funded. The rest are 80% or more, which is considered pretty good.

[Wesley Mouch]

P.S. MERS overall funding level is 72.6%, but some municipalities are better off than others. Of 721 municipalities in MERS, 84 [[12%) are under 60% funded. 309 [[43%) are 60-80% funded. The rest are 80% or more, which is considered pretty good.

Great stats. Alarming. But great.

[Novine]

"And this is where the pension trustees are really gonna be in a tough spot. It's really hard to argue:

- That we've saved so well and invested so well that we are almost fully funded
- and that we are desperately relying on the city to fork over the much-needed funds so that our pensioners don't starve

...at the same time."

Why are these mutually exclusive? The actuarial assumptions don't say "the pension funds will never need another cent of city contributions in order to meet the obligations of the pension fund". What makes you think they do?

[professorscott]

Novine's point nicely ties back to my legal question. How does one interpret the constitutional provision as meaning the obligations of the fund must be met, and precisely how does one define what those obligations are? I see neither. Granted, I'm not a lawyer, but I speak English fluently.

[Wesley Mouch]

"And this is where the pension trustees are really gonna be in a tough spot. It's really hard to argue:

- That we've saved so well and invested so well that we are almost fully funded
- and that we are desperately relying on the city to fork over the much-needed funds so that our pensioners don't starve

...at the same time."

Why are these mutually exclusive? The actuarial assumptions don't say "the pension funds will never need another cent of city contributions in order to meet the obligations of the pension fund". What makes you think they do?

Because you can't both say you have enough money in your fund, and that you need someone else's money at the same time. Those ideas are mutually exclusive.

[Novine]

"Those ideas are mutually exclusive."

Only if you don't understand what is being asked to be done in bankruptcy court. The city's trying to get out of its past, current and future obligations to the retirees. The pension system assumptions are based on the city fulfilling those obligations. When it doesn't, all the assumptions that are the basis for stating that the fund is "fully funded" go out the window.

[skeptic]

I am trying to understand references I see to a 13th [[extra monthly) check from the pension funds. Did all the CoD pensions do that or only some of them? Did the trustees have authority to issue an extra check? Was that taken into account by the actuaries? I haven't seen much analysis or discussion of the "13th check" issue [[sorry if I've missed it here).

[Wesley Mouch]

"Those ideas are mutually exclusive."

Only if you don't understand what is being asked to be done in bankruptcy court. The city's trying to get out of its past, current and future obligations to the retirees. The pension system assumptions are based on the city fulfilling those obligations. When it doesn't, all the assumptions that are the basis for stating that the fund is "fully funded" go out the window.

I get your point, but I don't agree.

Why do you think the city is 'trying to get out of its ... obligations'. AFAIK, Orr is asking for those assets to be in discussion. To me, that means that pensions could be adjusted. 'Get out of' suggests 0%, or at least 0% future payments. I don't necessarily think this is what Orr will recommend in bankruptcy. He hopes to recommend something less than 100%. That might be 99.5% -- or it might be 80%. It might be less for some and more for others. If that's legal. Who knows? That's the point. Orr is asking for flexibility -- not 'getting out of'.

[emu steve]

Couple of my thoughts:

1). Can creditors get to ANY of those funds held in trust for current and future retirees?

2). Is Detroit, through bankruptcy, attempting to abrogate their legal requirements for pensions? That is not paying dollar for dollar what retirees are owed per the retirement agreements.

3). The next one is about the Social Security trust fund. Is it true that the federal government's general fund owes the Social Security trust fund [[i.e., Social Security for decades collected more than it paid out resulting in an accumulated funds? I believe folks say the U.S. government is 17B in debt yet counts a couple trillion owed by the general fund to the Social Security trust fund [[IF that is true, Social Security is FAR from going broke with say 2T IOUs ).

[professorscott]

1). Can creditors get to ANY of those funds held in trust for current and future retirees?

Depends upon who owns the funds. If the City owns the funds, then the funds are part of the bankruptcy estate. Keep in mind when you say "creditors" that includes the pensioners themselves. Mr. Orr is unlikely to suggest using the already-underfunded pension dollars to pay OTHER creditors. Nobody has those funds as security on a loan.

2). Is Detroit, through bankruptcy, attempting to abrogate their legal requirements for pensions? That is not paying dollar for dollar what retirees are owed per the retirement agreements.

I haven't seen any of the labor agreements between the City and its former or current employees, but what I do know is that such an agreement is legally a contract, and yes, bankruptcy allows for the abrogation of contractual duties. The interesting questions, as mentioned above, are: [[1) what does the Michigan constitution actually attempt to protect; and [[2) does that matter under the supremacy clause of the U.S. Constitution at all.

[MikeyinBrooklyn]

2). Is Detroit, through bankruptcy, attempting to abrogate their legal requirements for pensions? That is not paying dollar for dollar what retirees are owed per the retirement agreements.

As opposed to their legal obligations to pay other creditors? Vendors doing business with the city are not all trillionaire businessmen. They have have employees who need to be paid, families that need to be fed, etc, too. Even investment companies/banks have a lot of their stocks owned by working stiffs, or pension funds serving the working stiffs. The city employees in my opinion were severely disserved by the politicians and their union reps [[who were FULLY AWARE the city couldn't pay out the benefits they negotiated), but are not entitled to better treatment than other creditors. Although the Michigan Constitution "protects" public pensions, the bankruptcy is in federal court, where the only applicable law is federal bankruptcy law. No matter how f'd some people are by the bankruptcy situation, hopefully there will be a moratorium on Detroit having the ability to borrow [[i.e., spend other people's money) for a generation or so.

[mwilbert]

Depends upon who owns the funds.

The reason that they are in a trust is so that the city doesn't control them. I haven't seen anyone who thinks that the funds that are actually in the trusts are vulnerable. I could imagine somewhat making the argument that proceeds from the pension bonds could be recovered, but it was long enough ago that I doubt that could possibly fly.

No matter how f'd some people are by the bankruptcy situation, hopefully there will be a moratorium on Detroit having the ability to borrow [[i.e., spend other people's money) for a generation or so.

Unless you think a generation is less than five years or so, I doubt it very much.

[professorscott]

hopefully there will be a moratorium on Detroit having the ability to borrow [[i.e., spend other people's money) for a generation or so.

You don't know banks, Mikey. Detroit will be borrowing money again, and soon. I object to the parenthetical phrase; Cities are all day long spending other people's money. At least the lenders freely chose to give the money to the city, hoping [[and, recently, fantasizing) that they would get it back plus the vigorish. The interest rate is determined by the level of risk - so Detroit won't be able to borrow inexpensively for a little while.

[Wheels]

The Detroit Pension Fund does not have a very good track record of investment. http://archives.record-eagle.com/2003/mar/05timeli.htm