DetNews: Detroit Pension Trustees “Effectively Robbed” Funds

[Gistok]

Locke09... I think that your reputation on this forum took a hit when you mentioned in another thread that the city is not bankrupt, and that the city CAN pay its' obligations... I'm sure you were well in the minority on that idea [[although maybe Tom Barrow would agree with you).

Now your defense of the Detroit Pension Fund Board again is admirable... athough somewhat misplaced. For whatever good the City Pension Fund trustees may have done... they in all probability should have been fired 20 years ago, and replaced with a professional team...

Does anyone on this board remember GRAND TRAVERSE RESORT in Acme Michigan? That was a BIG Detroit pension fund boondoggle that lost the pension fund TENS OF MILLIONS...

And if folks on this forum are not familiar with this gross incompetence in the city's pension fund management... these 2 articles will inform you about how it started...

http://www.webgolfer.com/sept01/history.html

And how it ended up...
http://static.record-eagle.com/2002/aug/23resort.htm

But what it leaves out is this... [[3rd topic down)... the gross incompetence of the trustees...

http://www.engagingnews.us/select/KS...tion-Corp.html

"Detroit Free Press Doron Levin Column.[[Originated from Detroit Free Press)[[Column)
Knight Ridder/Tribune Business News [[Fri, 22 Aug 1997) Aug. 22--GRAND TRAVERSE HURT PENSION FUND LITTLE: The $45-million sale of Grand Traverse Resort to KSL Recreation Corp. of La Quinta, Calif., this month closes an embarrassing decade-long chapter for the City of Detroit's pension fund, which lent the project $70 million in the 1980s and then spent another $40 million to buy it at foreclosure in 1993. Net loss to the pension fund: $25 million, in addition to the lost opportunity to invest $70 million in a roaring bull market or elsewhere, rather than have it tied up in a floundering golf resort. In hindsight, the fund certainly shouldn't have lent so much money to a single real estate project..."


You can say what you will... the history of the fund trustees speaks for itself... and this is just ONE example of their investments gone awry....

[Locke09]

Locke09... I think that your reputation on this forum took a hit when you mentioned in another thread that the city is not bankrupt, and that the city CAN pay its' obligations... I'm sure you were well in the minority on that idea [[although maybe Tom Barrow would agree with you).

You can say what you will... the history of the fund trustees speaks for itself... and this is just ONE example of their investments gone awry....

I'm not at all worried about my reputation on this forum. When I make a statement, it's not based on the opinions or summary reports I read from someone else. It's based on math and critical analysis of data. If I make a mathematical error or am missing some data, or misrepresent a fact, I'll own up to it, unlike those who just spout opinions, make sarcastic remarks or point to articles in the newspaper.

The City of Detroit is not bankrupt, and Tom Barrow is not the only other person saying this. Many financial experts outside of Michigan are saying Detroit did not have to file bankruptcy as well. That they are in the minority doesn't mean they aren't right. The City had cash flow problems, but it wasn't missing any of the debt payments until Kevyn chose to miss them. The City also had concerns that it could not raise the cash needed to do service improvements without eliminating some of it's debt. The City has concerns about losing further population, and then truly being unable to pay it's bills in the future if that happens. But today, the City can pay it's bills if it wants to. Instead, it is starting many more costly projects.

Even the casino money Kevyn says must be freed up, he expects to use that for improvements, not to pay bills that couldn't be paid.

Back to the pensions. I made no assertion about the competence of the boards over the last 20 years. I simply said the article has errors in some places and is misleading in others.

I acknowledge that the 13th check never made any sense because the pension portion is all city contribution [[although as the Free Press says, that is the norm nationally for public pensions).

But if I have 100K that I placed out of my pocket in a deferred annuity, and it earns 24% interest, I can make a case that I should reap some of the benefit of that extra interest. You might counter that you are giving me a guaranteed 7.9%, but I will still say we should share the excess. Anyone with a deferred annuity will tell you that there is a formula for sharing excess earnings - generally called dividends. The dividends aren't sent to the employees in a check, it remains in the fund for reinvestment. But the Detroit News gives the impression that the money is lost to the funds. The Free Press article today is more thorough and more accurate.

You might say put experts in charge. Okay, but does the State have experts? Because their pension fund is quite a bit worse off than Detroit's. Detroit's fund has always received high marks from the industry in terms of stability. But if you change the assumptions, as Kevyn is trying to do, you can make any fund look worse. And if you apply Kevyn's new formula to the rest of the state, well then everyone just gets even worse than they are now, because they all use fundamentally the same formulas.

It might also be a good idea to ask Milliman what assumptions they recommend to their other customers, because it's not the same very conservative assumptions they are recommending for Detroit.

In short, I don't need any credibility. I'm just another person posting comments. I just need people to think and do research for themselves.

[corktownyuppie]

I acknowledge that the 13th check never made any sense because the pension portion is all city contribution [[although as the Free Press says, that is the norm nationally for public pensions).

But if I have 100K that I placed out of my pocket in a deferred annuity, and it earns 24% interest, I can make a case that I should reap some of the benefit of that extra interest. You might counter that you are giving me a guaranteed 7.9%, but I will still say we should share the excess. Anyone with a deferred annuity will tell you that there is a formula for sharing excess earnings - generally called dividends. The dividends aren't sent to the employees in a check, it remains in the fund for reinvestment. But the Detroit News gives the impression that the money is lost to the funds. The Free Press article today is more thorough and more accurate.

Well, I agree with your analysis here. The only thing is that if you are entitled to share in the excess, then you are also obligated to share in the shortfalls.

As for your statement about bankruptcy, there are several ways of looking at insolvency. One is that you are insolvent once you are no longer able to pay your bills and have to miss an obligated payment.


You are correct in saying that we are not there.

Another way of looking at it is that the structural deficiencies in the finances are so abysmal, that unless changes are made, we will arrive at the first definition. We definitely meet this scenario.

And so we have a choice. We could wait til we get there. Or we could pull the plug now and use the remaining resources that are available and stop the bleeding before the whole thing goes to oblivion.

[Locke09]

Well, I agree with your analysis here. The only thing is that if you are entitled to share in the excess, then you are also obligated to share in the shortfalls.

As for your statement about bankruptcy, there are several ways of looking at insolvency. One is that you are insolvent once you are no longer able to pay your bills and have to miss an obligated payment.


You are correct in saying that we are not there.

Another way of looking at it is that the structural deficiencies in the finances are so abysmal, that unless changes are made, we will arrive at the first definition. We definitely meet this scenario.

And so we have a choice. We could wait til we get there. Or we could pull the plug now and use the remaining resources that are available and stop the bleeding before the whole thing goes to oblivion.

I respect your critique of the specific arguments I made. Some offering annuity savings will say just that, "If I am giving you a minimum guarantee, then the excess is mine." Others will say, "The minimum guarantee will be low, and you can get some small percentage of any excess, smoothed out over X years." Since the City guarantees 7.9 percent, I can see a case for saying the City should keep the excess.

I agree with your statement about bankruptcy too. But I have pointed elsewhere to some specific things, outside of bankruptcy, that the City can easily do to reduce the structural deficiencies, which the City says are about 85-100 million per year. Healthcare changes for retirees alone would take care of that and wouldn't require bankruptcy to do it. By my estimates, what Orr proposes to do to retiree healthcare saves $135 million per year.

I welcome anyone to check my math.