Sunday's Freep article raises an interesting pension question...

**BankruptcyGuy** · September-09-13, 06:39 PM

If you didn't read it, it's here:

http://www.freep.com/article/2013090...ptcy-Kevyn-Orr

If a pension fund granted a 13th check, annuity, or other enhancement that was not "accrued" -- that is, a mandatory payment, have the pensioners got more than what is constitutionally-mandated? Can the city prevail if it argues that, if these payments are $1B as the Free Press reports, that the "accrued" benefits are not unpaid, when unaccrued benefits were paid?

I'll bet you may hear that argument.

As I've indicated, the pension funds will likely reach a settlement because they don't want the precedential effects of losing, and I'm not sure they want more of these rocks turned over.

[[P.S. This really applies to DGRS and not DPFPS. The latter had much less of this stuff.)

**Packman41** · September-09-13, 06:45 PM

+1 I had the same, exact thoughts.

**Novine** · September-10-13, 01:28 PM

No. If you had an annuity and the insurance company cut you an extra payment each year, they are still on the hook for the contractual payments. I'm surprised a guy who's speciality should include contract law would think otherwise.

**motz** · September-11-13, 09:44 AM

Originally Posted by Novine

No. If you had an annuity and the insurance company cut you an extra payment each year, they are still on the hook for the contractual payments. I'm surprised a guy who's speciality should include contract law would think otherwise.

I think their is an argument to be had that if they had followed their contract instead of granting more than contractually obligated, that they wouldn't be where they are today. Whether that has any relevence in court, I don't know, since I am not a lawyer. But it is definitely something to consider.

**Wesley Mouch** · September-11-13, 10:44 AM

Originally Posted by Novine

No. If you had an annuity and the insurance company cut you an extra payment each year, they are still on the hook for the contractual payments. I'm surprised a guy who's speciality should include contract law would think otherwise.

Sure, except remember that breaking 'contracts' is allowed in bankruptcy. I'm also not a lawyer -- but in the end I just hope that some decent common sense prevails here and that our pensioners get a fair, but not absolutely protected pension.

**BankruptcyGuy** · September-11-13, 12:31 PM

Originally Posted by Novine

No. If you had an annuity and the insurance company cut you an extra payment each year, they are still on the hook for the contractual payments. I'm surprised a guy who's speciality should include contract law would think otherwise.

The issue isn't the pension contract, which can unquestionably be broken in Chapter 9, but the State guarantee.

This question presupposes that the City cuts pension benefits to some extent in their plan, and the pensioners bring the State into the picture.

Between the State, which guarantees "accrued" pension benefits, and pensioners, who arguably received some of those benefits in advance, I'm not quite sure. I'll bet you see that argument.

**Huggybear** · September-12-13, 08:18 AM

Originally Posted by BankruptcyGuy

Between the State, which guarantees "accrued" pension benefits, and pensioners, who arguably received some of those benefits in advance, I'm not quite sure. I'll bet you see that argument.

As an argument, it can be boiled down to something more simple - the drain was open while the city trying to fill the bathtub. The assumption seems to have been that there was an infinite amount of water available.

I'm kind of curious - if 13th checks were unregulated [[or tacitly allowed by the city), what stopped the funds from writing whatever amount they wanted and then coming after the city to make it up later? Seems that an arrangement like that was almost designed to defeat the budgeting process.

If this does not settle, and the pensioners take a haircut, it would not surprise me if the pensioners turned on the pension management.

HB

**Hermod** · September-12-13, 10:17 AM

Originally Posted by BankruptcyGuy

they don't want the precedential effects of losing

BG, I normally am not an internet grammar nazi and usually just let the players play the game without calling every typo, misspelled word, or subject-verb agreement, but that word just didn't sound right to my ear.

The basic dictionary didn't help with the word. I had to go to the unabridged OED, but I think precedentary might be a better fit here than precedential.

BTW, I agree with your post.

**BankruptcyGuy** · September-12-13, 01:46 PM

Hermod, I do not fear the grammar gestapo [[i.e. I love learning something new).

http://www.thefreedictionary.com/precedential

"constituting a precedent"

Am I wrong?

**BankruptcyGuy** · September-12-13, 01:47 PM

Originally Posted by Huggybear

what stopped the funds from writing whatever amount they wanted and then coming after the city to make it up later?

HB

See also, Wayne County.

That's why I've argued that if the State has to chip in, local control of pensions will go away just as quickly.

**Novine** · September-12-13, 01:50 PM

Locke09 seems to have a good handle on the actual terms of the pension plans. But if I recall accurately what I read about these plans, the "13th check" is effectively mandated by the terms of the plans when the returns on investments exceeded "X" percent. Why those were done when "X" was not reached is a good question but the amount seems to be dictated by the plan documents, not something pulled out of thin air.

**Wesley Mouch** · September-13-13, 01:18 AM

Originally Posted by BankruptcyGuy

See also, Wayne County.

That's why I've argued that if the State has to chip in, local control of pensions will go away just as quickly.

As it probably should. Is there any valid reason why local control of pensions is better?

Generally, I'm against federal power -- but sometimes it is better.

**Novine** · September-13-13, 08:20 AM

What's the state of the state's pension funds? The state of Michigan doesn't have a very good track record.

**Wesley Mouch** · September-13-13, 11:34 AM

Originally Posted by Novine

What's the state of the state's pension funds? The state of Michigan doesn't have a very good track record.

Have they defaulted? Have they taken loans or stopped making contributions? Or is this just a talking point by those opposed to 'state takeover'? I am willing to accept the the State has over-promised and under-funded. Bring it on. Locke09?

**Locke09** · September-13-13, 04:29 PM

Per the State of Michigan's last CAFR [[2012), MSERS is funded at 65.5% as of Sept. 30, 2011. Over the past 5 years, they received an annualized rate of return of 1.5%. [[Pause for laughter!)

Okay, I'll cut them some slack because those include mostly the years of the Great Recession. But the City of Detroit GRS received 2.96% over those same bleak years.

Since they use 8% rate of investment return while the City uses 7.9%, if you apply the same assumptions to the State that Orr is applying to the City, then obviously they would be even less funded. So it's just basic math. Under any scenario, the State is doing worse with its investments than the City.

Just from a management of investments perspective, Detroit annually, especially in good years, receives more on its investments than the State does. Just check each fund's CAFRs.

They haven't taken out any loans or stopped making contributions. But they did close the plan many years ago and it doesn't seem to have helped much.

Like I said before, I don't do talking points. I look at data.

**Locke09** · September-13-13, 04:41 PM

Originally Posted by Wesley Mouch

As it probably should. Is there any valid reason why local control of pensions is better?

Generally, I'm against federal power -- but sometimes it is better.

Local control of Pensions is better for the same reason that states rail against the federal government about returning tax revenue to the states.

Detroit's pension funds have been used to stimulate Detroit's economy by investing in local businesses and ventures. Sure some of those investments didn't pan out, but some of the State's didn't either [[like Raleigh Studios in Pontiac). Detroit's pension funds bailed out the City in the CAY administration. Before anyone sneers, the funds were all repaid and CAY created a rainy day fund for Detroit that still had millions when he left office.

The point is, if local money creates the funds, the funds should be where local entities can have a voice. If the State decides to make some contributions, the State should have a voice in how the funds are managed that is commensurate with its contribution.

**Ray1936** · September-13-13, 06:18 PM

Originally Posted by Locke09

The point is, if local money creates the funds, the funds should be where local entities can have a voice. If the State decides to make some contributions, the State should have a voice in how the funds are managed that is commensurate with its contribution.

In other words, you're saying, invest in your heart, not your wallet. Well, as we now see, that's the way to bankruptcy.

**Novine** · September-14-13, 09:21 AM

Versus investing in real estate in Dubai? I'm not going to defend the dealings of the Pension Board but there's something to be said for investing in what you know versus what you don't.

**Wesley Mouch** · September-14-13, 11:44 AM

Originally Posted by Locke09

Local control of Pensions is better for the same reason that states rail against the federal government about returning tax revenue to the states.

Detroit's pension funds have been used to stimulate Detroit's economy by investing in local businesses and ventures. Sure some of those investments didn't pan out, but some of the State's didn't either [[like Raleigh Studios in Pontiac). Detroit's pension funds bailed out the City in the CAY administration. Before anyone sneers, the funds were all repaid and CAY created a rainy day fund for Detroit that still had millions when he left office.

The point is, if local money creates the funds, the funds should be where local entities can have a voice. If the State decides to make some contributions, the State should have a voice in how the funds are managed that is commensurate with its contribution.

Nothing to sneer about. In good times, I can see how local control might be valuable.

For me, I'd rather that pension funds only focus on maximizing returns -- so local taxes are as low as possible. I think that's better economic development than relying on good or bad pension boards to make active community investments. Besides -- investing locally is putting too many eggs in one basket.

Retirees and their community would be better served by simple index investing.

**Novine** · September-14-13, 12:23 PM

"For me, I'd rather that pension funds only focus on maximizing returns"

That's what the funds were doing. Real estate ventures often promise double digit returns.

"Retirees and their community would be better served by simple index investing."

Index investing is great but I don't think it can generate the returns these funds need over the long haul. They have to take on more risk seeking greater returns.

**mwilbert** · September-14-13, 03:36 PM

That's what the funds were doing. Real estate ventures often promise double digit returns.

Guaranteeing mezzanine debt as part of a Byzantine financing structure for a hotel redevelopment is not exactly a "real estate venture", nor is it something a pension fund with no expertise in writing insurance should do.

**daddeeo** · September-14-13, 04:48 PM

Unless the get this straightened out, you'll see old people rioting in the streets.

**Novine** · September-14-13, 07:40 PM

"Guaranteeing mezzanine debt as part of a Byzantine financing structure for a hotel redevelopment is not exactly a "real estate venture", nor is it something a pension fund with no expertise in writing insurance should do."

Agreed and I'm not going to defend that deal but it's not the only deal the fund invested into seeking higher returns than they could get from index investing.

**Locke09** · September-15-13, 07:22 PM

It doesn't have to be and isn't supposed to be all of one thing or another. the investments are to be diversified. If they make local investments you would expect them to evaluate those investments by the same standards as any other investments.

I don't think it's bad for a percentage of investments to be used to help the local economy - but not to be done recklessly or because of bribery or political favors.

**Wesley Mouch** · September-16-13, 12:48 AM

Originally Posted by Locke09

It doesn't have to be and isn't supposed to be all of one thing or another. the investments are to be diversified. If they make local investments you would expect them to evaluate those investments by the same standards as any other investments.

I don't think it's bad for a percentage of investments to be used to help the local economy - but not to be done recklessly or because of bribery or political favors.

Locke -- do you really believe you can 'buy local' and 'buy without political favors'? Dream on.

I prefer the more pragmatic approach. Bad local investment because political influence is unavoidable in politics.