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

[Richard]

My knowledge of the pension aspect is limited ,my questions would be are they in trouble because of a down market and subject to rise back up in a good economy.

You never really heard about pension problems until the market crashed then all of the sudden it is across the country that the pensions are the problem.

If the market took an upswing and the pension investments once again increased in value,other then the fraud aspect would it still be an issue?

[Wesley Mouch]

My knowledge of the pension aspect is limited ,my questions would be are they in trouble because of a down market and subject to rise back up in a good economy.

You never really heard about pension problems until the market crashed then all of the sudden it is across the country that the pensions are the problem.

If the market took an upswing and the pension investments once again increased in value,other then the fraud aspect would it still be an issue?

If the market took a sudden upswing, and the funds were wisely invested, it might change the immediate need for bankruptcy.

The down market has made it harder for insolvent cities to hide their problems from their public.

I would argue that we would be better off with bankruptcy. The rot underneath Detroit truly needs to be addressed.

Others believe the everything is great -- and a market correction will allow business as usual.

You pick.

[BankruptcyGuy]

My $0.02:

The assets of the two pension funds are indeed titled in their own names: Police and Fire Pension System of the City of Detroit, and the General Retirement System of the City of Detroit.

No, those assets are not subject to seizure or sale or anything else to pay the creditors of the City of Detroit.

There are two obligations under consideration, each of which might have a different status as far as the Michigan Constitution is concerned: a) the difference between what the retirees are getting paid right now and the amount of assets in the funds today, b) the City's obligation to pay into the funds for amounts that aren't due under [[A) now, but may be in the future, and c) the City's continuing obligation to pay into the pension fund for existing employees. My best analogy is sending two kids to college, one that’s in college and one still in middle school. You may have set aside money to pay for the 1^st kid’s college, but you know that pot is short as of today. That shortfall may get worse as conditions change, and you're on the hook for that, too. And you also need to be putting something aside for your 2nd child.

Obligation A is the underfunded portion. I don't think the pension funds are thinking straight when they are arguing with Orr's calculations--generally creditors want to make the debt look as large as possible.

Obligation B is a question of who takes the risk going forward. GM successfully offloaded this risk by funding an annuity with a private insurer. Would the City? The State?

Obligation C is a question of whether the City is required to keep adding to the pension fund going forward. That answer is more likely than not “no”.

[BankruptcyGuy]

My knowledge of the pension aspect is limited ,my questions would be are they in trouble because of a down market and subject to rise back up in a good economy.

You never really heard about pension problems until the market crashed then all of the sudden it is across the country that the pensions are the problem.

If the market took an upswing and the pension investments once again increased in value,other then the fraud aspect would it still be an issue?

You didn't hear about it because those promises didn't manifest themselves until much later. GM was once described as a pension fund that made cars on the side.

[Wesley Mouch]

Obligation A is the underfunded portion. I don't think the pension funds are thinking straight when they are arguing with Orr's calculations--generally creditors want to make the debt look as large as possible.

These guys are still fighting the last battle. The one to keep the bankruptcy judges away so the problems would surface on someone else's watch.

[emu steve]

My $0.02:

The assets of the two pension funds are indeed titled in their own names: Police and Fire Pension System of the City of Detroit, and the General Retirement System of the City of Detroit.

No, those assets are not subject to seizure or sale or anything else to pay the creditors of the City of Detroit.

There are two obligations under consideration, each of which might have a different status as far as the Michigan Constitution is concerned: a) the difference between what the retirees are getting paid right now and the amount of assets in the funds today, b) the City's obligation to pay into the funds for amounts that aren't due under [[A) now, but may be in the future, and c) the City's continuing obligation to pay into the pension fund for existing employees. My best analogy is sending two kids to college, one that’s in college and one still in middle school. You may have set aside money to pay for the 1^st kid’s college, but you know that pot is short as of today. That shortfall may get worse as conditions change, and you're on the hook for that, too. And you also need to be putting something aside for your 2nd child.

Obligation A is the underfunded portion. I don't think the pension funds are thinking straight when they are arguing with Orr's calculations--generally creditors want to make the debt look as large as possible.

Obligation B is a question of who takes the risk going forward. GM successfully offloaded this risk by funding an annuity with a private insurer. Would the City? The State?

Obligation C is a question of whether the City is required to keep adding to the pension fund going forward. That answer is more likely than not “no”.

You answered my main question, namely, are funds deposited [[held) for current and future retirees safe from seizure in a bankruptcy.

The question, then, becomes how are the pension fund[[s) going to get the additional income stream, other than investments, needed to pay current and future retirees?

In other words, it isn't about ASSETS but about INCOME [[other than investments) needed to grow those assets to met retiree payments.

Correct?

[Packman41]

Well, it is still about both assets and investment income.

First, hopefully, the existing asset value will not fall any farther.
You should really read the Free Press articles summarizing the poor/criminal track record of selecting investments. Click here:
http://www.freep.com/article/9999999...heme=PENSION09

The fall in asset value was self-induced by the pension board. Yes, the general market did not help much, but incompetence and criminal activity by the board, which was aided and abetted by their legal counsel, is breathtaking. Some of the assets they selected are still in the portfolio today and bear watching as their value and investment income potential is at risk. The pension funds own accountants concluded that the assets in the portfolios were of poor quality:

• Percentage of Debt Securities BELOW investment grade: P&F 66.2% GRS 81.3%
• Percentage of total assets with indeterminate fair market value: P&F 25% GRS 32%

Second, the existing and future assets have to deliver the investment income expected.
This is not likely to happen. The pension funds have been telling the retirees and workers that they are doing just fine, making a lot of income and are 99.9% funded [[Police and Fire) and 82.8% funded [[General Retirement System.) They are saying they are highly funded because they are ASSUMING they would earn 7.9% to 8.0% return on the assets they selected. Well, if the Funds believe they are so highly funded, then they have nothing to worry about – few reductions will take place.

Problem here is that the Funds are not getting the results they promised. Over the last 10 years pension funds across the USA have earned [[on average) only 5.7% return on their assets and both Detroit pension funds have performed worse than the national average. Neither are close to their 7.9% and 8.0% expectations.

In 2005 [[before the market crashed) the Kilpatrick administration sold $1.4 Billion in bonds to fully fund both pension funds. It could be said that if the pension funds had acted wisely and not going into stupid deals with stupid people, then they would NOT be in the trouble they are today.

There is a reason the FBI, the SEC, Free Press, Detroit News and Kevyn Orr is investigating what happened at the two funds. You can expect more indictments and guilty verdicts.

BTW, you can read this for fun too:
http://www.businessweek.com/articles...d-by-bad-deals

[Goose]

im trying to understand what happened with the pension... from what i've read, the money that was taken out of each employees check for the many many years of service to the city was put into a fund for furture promised pension payments...

unfortunatly, due to poor investment decisions, the return on these investements are not enough to cover the current pension demands... but the funds were put into investments, correct?

if what ive understood is true... is there ANY hope for social security, where the money is just taken and put into the general fund??? honestly???

[professorscott]

if what ive understood is true... is there ANY hope for social security, where the money is just taken and put into the general fund??? honestly???

Long term, no, not without a massive restructuring [[of the sort the current Congress is absolutely incapable).

Social Security is the purest of Ponzi schemes, where the funds paid in by investors are partly used to pay off early investors [[current retirees and disabled persons) and partly siphoned off for unrelated matters [["loaned" to the government, which has no idea how it might ever pay any of the money back).

If I was in charge of Social Security I would get a large, framed photograph of Charles Ponzi and put it on the wall over the reception desk, just to insert a tiny bit of honesty into that fraud.

[mwilbert]

if what ive understood is true... is there ANY hope for social security, where the money is just taken and put into the general fund??? honestly???

The people who are vested in the Detroit pension plans will probably get most of their promised money. The reason they are at risk for any of it is that Detroit doesn't have the excess taxing capacity to make them whole, so whatever undercontribution or underperformance have occurred can't be compensated for.

The Social Security retirement system is rather different. The Social Security retirement trust fund is not a pension fund in that sense and it is not intended to be able to pay out enough money to fund all of Social Security retirement payments. Ultimately, Social Security is funded by the taxing capacity of the United States, which is more than adequate for that.

The reason that people talk about future Social Security benefits being at risk is that under present law, after the retirement trust fund [[which does exist) is exhausted around 2033, there will only be enough revenue from currently-legislated Social Security taxes to pay about 75 percent of benefits, however that could be sustained more-or-less indefinitely [[the trustees project out 75 years, to 2087). However, Social Security is a wildly popular program and it will not require large changes in taxation and/or benefits to fix the revenue imbalance, so yes, I fully expect Social Security to be available to me, and my daughter too.

If it isn't available, it will be because the overall economy has collapsed, or we no longer have even a semblance of a democratic political system, and while either of those is possible, it isn't how I would bet. We would also have more to worry about than Social Security.

[mwilbert]

Long term, no, not without a massive restructuring [[of the sort the current Congress is absolutely incapable)..

Maybe a minor restructuring. Nothing major is needed. See previous post.

As far as the Ponzi scheme thing goes, perhaps this is a reasonable answer:

http://www.washingtonpost.com/blogs/...0dcL_blog.html

[emu steve]

One general point about investments, might it be pension funds in Detroit, California or your own 401K:

The stock market seems to have gone through long cycles. It can make everyone look like geniuses or everyone look really bad.

EDIT: Here is a chart of the S&P [[through 2012, doesn't show 2013's big upward move).

https://en.wikipedia.org/wiki/File:S...1950-12%29.jpg

I believe the 60s and 70s were a waste land. The indexes did not go up for long periods of time.

The 1980s and 1990s [[I believe up to around 1998) were great times where investors were making money like crazy.

The 1st decade of this century was not good - up and down but going no where.

The current decade, starting in 2009, if I may, has been very, very good so far.

Maybe I should be more technical and say the bull market which began in 2009 and continues today.

In March 2009 EVERYONE was hurting. Personal 401Ks, college endowments, pension funds, etc. Anyone who was invested in the stock market, housing or commercial real estate, etc.

Hopefully this decade will continue to be a good one and 401Ks, pensions, endowments, etc. will make up for what was lost last decade.

P.S. and yes, in the 1990s, financial advisers routinely told investors to plug in a 7 - 8% return of their money. It wasn't just the Detroit pension funds who were using numbers which turned out to be overly optimistic.

[emu steve]

The people who are vested in the Detroit pension plans will probably get most of their promised money. The reason they are at risk for any of it is that Detroit doesn't have the excess taxing capacity to make them whole, so whatever undercontribution or underperformance have occurred can't be compensated for.

The Social Security retirement system is rather different. The Social Security retirement trust fund is not a pension fund in that sense and it is not intended to be able to pay out enough money to fund all of Social Security retirement payments. Ultimately, Social Security is funded by the taxing capacity of the United States, which is more than adequate for that.

The reason that people talk about future Social Security benefits being at risk is that under present law, after the retirement trust fund [[which does exist) is exhausted around 2033, there will only be enough revenue from currently-legislated Social Security taxes to pay about 75 percent of benefits, however that could be sustained more-or-less indefinitely [[the trustees project out 75 years, to 2087). However, Social Security is a wildly popular program and it will not require large changes in taxation and/or benefits to fix the revenue imbalance, so yes, I fully expect Social Security to be available to me, and my daughter too.

If it isn't available, it will be because the overall economy has collapsed, or we no longer have even a semblance of a democratic political system, and while either of those is possible, it isn't how I would bet. We would also have more to worry about than Social Security.

I agree with your post.

One point I would make is that all current models, I presume, are based on very, very small family sizes which means fewer workers to support more recipients.

If the demography of the country changes [[e.g., family sizes increases) then there will be more workers to support beneficiaries.

Like the stock market, housing markets, etc. family sizes go through their own cycles, probably somewhat based on economic conditions.

If the economy improves significantly family sizes could increase and the worker : beneficiary ratio will change over the decades ahead.

[emu steve]

One more point about Social Security:

I believe recently it has been in the 'red' - paid out more than it took in.

BUT the immediate cause, I believe, is that the President and Congress decided to have a 2% reduction in payroll taxes [[which ended Jan 1, 2013).

I assume FICA is 7% from the employer and 7% from the employee for a total of 14% of salary.

Cut that from 14% to 12% [[7% + 5%) and that is a 14% reduction [[2 / 14) in FICA taxes the government collects within a year.

A 14% cut in Social Security revenues is a lot.

[mwilbert]

One more point about Social Security:

I believe recently it has been in the 'red' - paid out more than it took in.

BUT the immediate cause, I believe, is that the President and Congress decided to have a 2% reduction in payroll taxes [[which ended Jan 1, 2013).

I assume FICA is 7% from the employer and 7% from the employee for a total of 14% of salary.

Cut that from 14% to 12% [[7% + 5%) and that is a 14% reduction [[2 / 14) in FICA taxes the government collects within a year.

A 14% cut in Social Security revenues is a lot.

You accurately describe the FICA tax cut, but that isn't why the fund went into deficit, as the lost revenue was made up by revenue from the general fund. It was because of the weak job market. If you include the interest that the trust fund earns on its bonds, I think the fund was still cash-flow positive even so. However, in a few years that will no longer be true, barring some changes to the system, which is why the trust fund is projected to be exhausted in 20 years.

[Wesley Mouch]

im trying to understand what happened with the pension... from what i've read, the money that was taken out of each employees check for the many many years of service to the city was put into a fund for furture promised pension payments.....

I've always assumed that for city employees, the amount isn't taken 'out of' each check, but is a contribution in addition to each check.

I don't know how they determine the contribution. Is the employer's base pension contribution in any way based on wages, or is it solely based on the actuarial expectations of cost to pay out pensions in the future?

[mwilbert]

I've always assumed that for city employees, the amount isn't taken 'out of' each check, but is a contribution in addition to each check.

I don't know how they determine the contribution. Is the employer's base pension contribution in any way based on wages, or is it solely based on the actuarial expectations of cost to pay out pensions in the future?

I don't know the details of the Detroit system, but the governmental defined benefit pension systems I am familiar with generally have an employee contribution based upon a percentage of salary, and then the governmental unit has to pony up more to make the fund actuarially sound. In those jurisdictions, the employee contribution rates have risen substantially over the years, so there is a big difference in the contributions of employees depending upon when they were hired, but the employee contribution rates aren't directly tied to the actuarial requirements of the pensions.

[Scottathew]

Get rid of pensions for all future employees. If Detroit's former workers had 401ks they'd all be sitting pretty right now with no worries.

[mwilbert]

If Detroit's former workers had 401ks they'd all be sitting pretty right now with no worries.

Was that intended to be sarcastic? I couldn't tell. If it wasn't then I disagree. They wouldn't face the loss of whatever they had saved, but they probably wouldn't have saved all that much.

See, for instance, http://www.huffingtonpost.com/david-...b_1574834.html

Now I think they can work for some people, but the idea that having a 401K is preferable to having a pension is pretty dubious. Even the Detroit retirees will probably not take enough of a haircut to have made a 401K more attractive, although we will have to see how it plays out.

[Scottathew]

Was that intended to be sarcastic? I couldn't tell. If it wasn't then I disagree. They wouldn't face the loss of whatever they had saved, but they probably wouldn't have saved all that much.

See, for instance, http://www.huffingtonpost.com/david-...b_1574834.html

Now I think they can work for some people, but the idea that having a 401K is preferable to having a pension is pretty dubious. Even the Detroit retirees will probably not take enough of a haircut to have made a 401K more attractive, although we will have to see how it plays out.

Nope, not sarcastic. I own my 401k, and even if the company I work for goes out of business, I still own it. As I get closer to retirement my retirement shifts away from stocks and into safer investments.

However, I also am in favor of Obamacare as well. That would make it much easier to retire with a 401k.

My wife is a school teacher, she's in the last bunch that have a shot at a good pension and healthcare [[based off of hiring date). I will benefit greatly from my wife's pension, but I still think we ought to get rid of pensions for all new government employees.

[BankruptcyGuy]

You answered my main question, namely, are funds deposited [[held) for current and future retirees safe from seizure in a bankruptcy.

The question, then, becomes how are the pension fund[[s) going to get the additional income stream, other than investments, needed to pay current and future retirees?

In other words, it isn't about ASSETS but about INCOME [[other than investments) needed to grow those assets to met retiree payments.

Correct?

Conceptually, the income stream produced by the assets [[bond payments if they're holding bonds, dividends/capital gains on their stocks, income from real estate and alternatives) should be sufficient to pay the accrued benefits. That is, if the City of Detroit was allowed to and decided to freeze their pensions, then a 100% funded pension would pay out 100% of the accrued benefits to pensioners.

There are two problems: 1) the pension isn't 100% funded, using actual rates of return instead of the actuary-allowed theoretical rates, and 2) current employees keep accruing benefits, making the hole deeper.

I'm guessing Section 24 of the constitution protects pensioners from #1, not #2.

[Wesley Mouch]

...There are two problems: 1) the pension isn't 100% funded, using actual rates of return instead of the actuary-allowed theoretical rates, and 2) current employees keep accruing benefits, making the hole deeper.

I'm guessing Section 24 of the constitution protects pensioners from #1, not #2.

BG, any comments on whether you think federal bankruptcy law will defer to state constitution, or the other way around.

Also, am I right that the Michigan Constitutional protections were more likely to stand under State EFM and less likely to stand under Federal bankruptcy law?

I've wondered why many were fighting against EFM-land when it seemed like a better place to politically fight for sacred cows than BK.

Meanwhile, in San Francisco..."BART management [[in current negotiations) has asked workers, who earn a median salary of about $80,000, to contribute to their pensions. BART employees currently pay nothing into the pension system." [[LA Times)

[Novine]

Why are you surprised by that? It's deferred compensation. Employees give up pay now for the promise of a payment down the road. Unlike a 401k, which an employee can take with them when they leave the job or even tap into for a loan, someone in a pension plan doesn't get a payment every month going into a retirement account. They get an IOU. If they are fortunate and are still around when they qualify for retirement, they start getting those pension payments.

[Wesley Mouch]

Why are you surprised by that? It's deferred compensation. Employees give up pay now for the promise of a payment down the road. Unlike a 401k, which an employee can take with them when they leave the job or even tap into for a loan, someone in a pension plan doesn't get a payment every month going into a retirement account. They get an IOU. If they are fortunate and are still around when they qualify for retirement, they start getting those pension payments.

Fine theory -- but please explain exactly what wages were 'given up'. I don't see that workers took wage reductions very often. You could say they took less of an increase than they might have -- but from what I've seen -- they got market rate increases in wages PLUS pension increases well above market.

[professorscott]

Fine theory -- but please explain exactly what wages were 'given up'. I don't see that workers took wage reductions very often. You could say they took less of an increase than they might have -- but from what I've seen -- they got market rate increases in wages PLUS pension increases well above market.

Anyhow, the promise doesn't matter if it flies in the face of reality. Arithmetic doesn't care what your laws are. If I promise to pay you later, then "later" comes and I don't have money, you don't get paid. People can pass all the laws they want. I can pass a law that says pigs have to fart gold and that everyone in Ferndale gets a trillion dollars a week. [[California has a rich history of this type of legislation.) It's very sad for the pensioners, since they are likely to take a bit of a hit [[not massive, most probably), but their money was unfortunately entrusted to people unworthy of the trust.

The hit to retiree [[and current employee) health care is going to have much more of an impact to peoples' lives, and is in worse shape and more certainly changeable.