Beatdown of COD Pensioners Commences

[steve from virginia]

@Reuters:

"Detroit pension cuts 'function of mathematics' -investment banker"

It's hard to describe how farcical and unfair is the current round of hearings about the state of Detroit's finances in bankruptcy court.

On Friday, city financial consultant Kenneth Buckfire said he did not have to recommend to Orr that pensions for the city's retirees be cut as a way to help Detroit navigate through debts and liabilities that total $18.5 billion.

Buckfire said it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them. "It was a function of the mathematics," said Buckfire, who said he did not think it was necessary for him or anyone else to recommend pension cuts to Orr.

"Are you saying it was so self-evident that no one had to say it?" asked Claude Montgomery, attorney for a committee of retirees that was created by Rhodes.

"Yes," Buckfire answered.

Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city's pensioners, 16 cents on the dollar. There are about 23,500 city retirees.

How convenient! Investment banker Buckfire says that pensions for city workers are unaffordable; that must be true!

According to Orr & Co. it is okay for banks and others to steal workers' pensions because the enabling thief is a Detroit native. Actually ... that makes a certain amount of sense!

Bankruptcy court judge declares Buckfire is an 'expert' because ... he has a nice suit.

UAW attorney Peter DeChiara and Montgomery, the retirees committee lawyer, made arguments on Friday morning to Rhodes that Buckfire's testimony should not be allowed because he was not deemed an expert witness by the court.

[[Judge) Rhodes ruled that Buckfire's testimony would be allowed, in part because he had become an expert after in-depth study of the city's financial status.

In-depth study = he read a ten page 'report' written by an intern.

Buckfire does not offer any evidence in the form of the actual in-depth study, that is, a detailed actuarial analysis. He simply utters the magic word 'mathematics' declaring that removing retirees' pensions is self- evident ... the Judge makes approving noises!

That Buckfire might have an interest in the outcome due to his business is never examined. Also left in the gutter is what strategic outcome is intended: how exactly does reducing pensions positively effect Detroit's finance structure: IE, how many new fire trucks?

An actuarial analysis would indicate how much Detroit would have to pay year-by-year ... and how much additional if any the city would have to make up to meet any shortfall. Buckfire implies that Detroit's pension obligations have to be met at once.

The court is behaving irresponsibly. As in Spain, Greece, Portugal and Ireland, the pensions look to be fair game for secured creditors -- the banks -- who will be paid with retirees' funds. The beatdown of the retired city workers has begun.

[MikeyinBrooklyn]

Thankfully, Steve, we have someone like you to bring us an unbiased take on these events...

Detroit can't afford it's pension obligations [[in their entirety; the city can afford partial payments). I feel bad for city retirees. I would feel worse, though, if these facts were news. Detroit's spending vs revenue problems have been obvious for a few decades, though. Union bosses and liberal politicians who agreed to unaffordable payments merely hoped to be long dead when they collapsed. Regardless of the outcome of the bankruptcy case, Detroit's pensioners will never receive full promised benefits. They can't be paid out of accounts that don't have enough money. Their pensions & health benefits presuppose a population and tax base that Detroit does not come close to having.

[MikeyinBrooklyn]

Oh, and Steve, your problems with payments to the banks taking precedence over pensioners should be taken up with Congress. Debts owed to ongoing business partners get dibs over former employees, as per bankruptcy law. Unlike the auto bailout/bankruptcies, TARP will not be available to circumvent normal bankruptcy orders. It's awful but Detroit's pensioners will be shafted. How hard? To be determined.

[Hermod]

It's awful but Detroit's pensioners will be shafted. How hard? To be determined.

How hard depends on how honest/accurate the numbers are that the trustees have been waving about.

[steve from virginia]

Thank you Mr. Buckfire!

[Ray1936]

This whole matter will take years to sort out. There will be suits, counter-suits, injunctions, appeals, and writs of deleriums to be heard.

[313WX]

Detroit's broke and sacrifices have to be made, as not everyone's going to be paid what they feel they're owed. While it would be nice to just sock it all to the banks, the fact is...

1. Their debt is secured.

2. Pensions/Health Cre make up a larger share of the city's debt [[besides the DWSD debt) than the loan/interest payments to these banks.

Let's get one thing clear. No one wants to cut Grandma and Grandpa's retirement benefits. But frankly, if I had to choose between ensuring a retiree in some paid-off McMansion out in West Bloomfield receives their full pension and health insurance or making sure...

*Detroit school kids are able to ride clean, safe, reliable buses to/from school on well-lit, blight-free streets

*Detroit senior citizens are able to safely walk to their neighborhood establishments or do yard work without getting robbed/assaulted.

*Detroit citizens receive a 5-10 minute response time from the police/ambulance/fire when there's an emergency.

I will stand on the side of the latter.

If the retirees should be fighting anyone, it should be the State of Michigan, not the city of Detroit. Obviously the city can't afford it, but it's the state that's trying to relieve its obligation through the bankruptcy proceeding.

[MikeyinBrooklyn]

Thank you Mr. Buckfire!

You're welcome.

[MikeyinBrooklyn]

This whole matter will take years to sort out. There will be suits, counter-suits, injunctions, appeals, and writs of deleriums to be heard.

You are totally correct, but in the end retirees can't be paid with Monopoly Money. There isn't the cash in the till, and there is no prospect for it to be. There will never be full payment on Detroit's existing pension obligations.

[MikeyinBrooklyn]

313, I agree with just about everything you posted above, except the last paragraph. The 9 million and change residents of this state who did not elect decades of corrupt and incompetent leaders should not have any obligation to pay the debts for those that did. With self-determination comes responsibility. Even with a bankruptcy [[if approved), we have well earned the lean years ahead. The suburbs and the rest of the state did not dig this hole.

[313WX]

313, I agree with just about everything you posted above, except the last paragraph. The 9 million and change residents of this state who did not elect decades of corrupt and incompetent leaders should not have any obligation to pay the debts for those that did. With self-determination comes responsibility. Even with a bankruptcy [[if approved), we have well earned the lean years ahead. The suburbs and the rest of the state did not dig this hole.

I understand why the State of Michigan and the suburbs may FEEL they shouldn't "bail out" Detroit, in a manner of speaking. But this will all be fought out and decided in the bankruptcy proceeding [[if approved).

It does say clearly in the constitution that the state guarantees all accrued pension benefits [[not health care benefits of course), which would include COD pensions since it's a creature of the state. The State of Michigan is betting that Federal law will trump the state's constitution, and thus the pensions can be cut. If Judge Rhodes, or any judge this issue is presented in front of, decides that the state should honor its guarantee in the constitution and inherit Detroit's obligations [[even if not inherit them outright, but just send an actual check to the city to cover the obligations), then the state has no choice but to do so.

[MikeyinBrooklyn]

If the state were forced to pay the city's pension bills, I would do so in legislation dissolving the city's government outright. I would have a state appointed city manager in perpetuity. No sense sending good money after bad.

Although, the US Constitution makes clear that federal law does trump state law where they are in conflict; US Bankruptcy law would need to be deemed unconstitutional in order for the judge to allow the state constitution to be followed over federal bankruptcy law.

[Gistok]

"Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city's pensioners, 16 cents on the dollar. There are about 23,500 city retirees."

You do of course realize that this is only for the unfunded portion of the pensions?

According to the Police/Fire Pension Systems, they're 96% funded, and the General Retirement System is 77% funded.

So yes that would impact the General Retirement Fund much more than the Police/Firemen... and not include the medical/dental/optical... but it's not JUST a 16% payout as your initial post seems to imply...

[Wesley Mouch]

I understand why the State of Michigan and the suburbs may FEEL they shouldn't "bail out" Detroit, in a manner of speaking. But this will all be fought out and decided in the bankruptcy proceeding [[if approved).

It does say clearly in the constitution that the state guarantees all accrued pension benefits [[not health care benefits of course), which would include COD pensions since it's a creature of the state. The State of Michigan is betting that Federal law will trump the state's constitution, and thus the pensions can be cut. If Judge Rhodes, or any judge this issue is presented in front of, decides that the state should honor its guarantee in the constitution and inherit Detroit's obligations [[even if not inherit them outright, but just send an actual check to the city to cover the obligations), then the state has no choice but to do so.

We've beaten this issue to death. The state constitution does say accrued pension benefits are protected. And federal law says those who don't have the cash can have an orderly reorganization. So its just a legal question of which conflicting law takes precedence.

With no benefit of legal knowledge, I side with the ability to reasonably adjust pensions. Why should a particular Michigan statute take precedence of bankruptcy? If you allow that kind of power to usurp the money of others with utter disregard for your own failings, you create a tremendous moral hazard.

There's no reason why pensioners should be 100% protected. I hope the end result here is 90% or more protection. Most pensioners deserve protection. But not absolute protection for everyone.

Oh, and 313WX's post wins my best of the week. They have it right.

Let's get one thing clear. No one wants to cut Grandma and Grandpa's retirement benefits. But frankly, if I had to choose between ensuring a retiree in some paid-off McMansion out in West Bloomfield receives their full pension and health insurance or making sure...

*Detroit school kids are able to ride clean, safe, reliable buses to/from school on well-lit, blight-free streets....[[and ...)

Glad someone else has pointed out adjusting pensions might increase fairness. We all want to protect pensions for those truly in need -- but not every pensioner is truly in need. I'd like to see some pensioners get their pensions cut so others could get 110% of what they are owed.

[noise]

*Detroit school kids are able to ride clean, safe, reliable buses to/from school on well-lit, blight-free streets

*Detroit senior citizens are able to safely walk to their neighborhood establishments or do yard work without getting robbed/assaulted.

*Detroit citizens receive a 5-10 minute response time from the police/ambulance/fire when there's an emergency.

Are these things realistic?

I think the city paying what was promised for work completed is more important than pipe dreams.

[Locke09]

Although, the US Constitution makes clear that federal law does trump state law where they are in conflict; US Bankruptcy law would need to be deemed unconstitutional in order for the judge to allow the state constitution to be followed over federal bankruptcy law.

Municipal bankruptcy law is not written to trample upon state's rights. That's why Chapter 9 bankruptcy law does not allow the judge to determine what Detroit's plan is. The judge can only approve or reject the plan that is submitted. The plan has to be rejected if it requires the city to do something that is not "lawful". The argument will be that cutting a pension in Michigan is not lawful for the city and therefore cannot be part of any approved plan.

Now if the judge says, but now that you are in bankruptcy, it is lawful, then the retirees will say, "We argued that you should keep Detroit out of bankruptcy or mandate that Detroit can only enter bankruptcy if it doesn't put pensions on the line, so that the city wouldn't be in a position to violate the Constitution. You decided that now was not the time for that argument and it should be raised once Detroit is in bankruptcy [[this assumes of course that the judge is not going to accept those arguments now and is going to let the city go into bankruptcy)"

In other words, if the court uses that federal law vs. State Constitution argument once it allows Detroit to enter bankruptcy, then the judge will have intentionally or unintentionally put the retirees in a Catch-22 situation. You can't argue that point because it hasn't happened yet. Later, you can't argue that point because it's too late. I can't see a judge wanting to do that.

So, I see the pensions being unharmed unless someone can argue that the State Constitution never really intended to protect pensions in municipalities that are in financial trouble.

Just my layperson's opinion.

[313WX]

Are these things realistic?

I think the city paying what was promised for work completed is more important than pipe dreams.

Freeing up some of our limited funds going towards debt obligations would be a good start in helping us reach those goals.

Obviously we will need competent administrators as well to run the show.

[noise]

Freeing up some of our limited funds going towards debt obligations would be a good start in helping us reach those goals.

Obviously we will need competent administrators as well to run the show.

Perhaps. I think my own honor code has trouble dealing with the idea that the city wouldn't make good on its promise. Especially when it comes to employee pay for work completed.

[313WX]

Perhaps. I think my own honor code has trouble dealing with the idea that the city wouldn't make good on its promise. Especially when it comes to employee pay for work completed.

Detroit has to find some way to stop bleeding citizens/taxpayers at such a rapid pace [[which is part of the reason why Detroit is pressed for cash now, pretty much a negative feedback loop). The only way this will happen is if Detroiters can see that the city is making a valiant attempt to deliver a decent level of city services.

Yeah, we have some marginal gentrification/growth happening in Midtown/Downtown with the help of DMC, WSU and Dan Gilbert. However, that isn't nearly enough to make up for the rapid decline taking place in the rest of the city.

There was an article posted somewhere recently that showed Property and Income Tax revenue for the city of Detroit declined another 17% and 5% respectfully. That has to somehow be reversed and fast.

[noise]

Detroit has to find some way to stop bleeding citizens/taxpayers at such a rapid pace [[which is part of the reason why Detroit is pressed for cash now, pretty much a negative feedback loop). The only way this will happen is if Detroiters can see that the city is making a valiant attempt to deliver a decent level of city services.

Yeah, you have some marginal gentrification happening in Midtown/Downtown with the help of DMC, WSU and Dan Gilbert. However, tht isn't nearly enough to stem the rapid decline taking place in the rest of the city.

I agree. I'm not sure screwing people over to potentially help them is the answer.

[313WX]

I agree. I'm not sure screwing people over to potentially help them is the answer.

Well what other option do you suggest? You can't squeeze blood out of a turnip.

[MikeyinBrooklyn]

Perhaps. I think my own honor code has trouble dealing with the idea that the city wouldn't make good on its promise. Especially when it comes to employee pay for work completed.

Your point would have tons of merit if two things weren't true:
1) Lots of institutions and governments fail to make good on promises, specifically including debt. When deferring any form of payment by anyone occurs, there is always the risk that circumstances will change and prevent repayment. I am not saying that it is honorable or right, but there is no alternative. The amount of a tax hike or further reduction in services [[i.e. the police) would cause even more people to leave and snuff out downtown's revival. Even if the city decided it wanted to pay all that it owes everyone, I truly don't think it could. If we liquidated every single piece of property the city owns, it would not equal $18B. We need to avoid a Detroit "Treaty of Versailles". You know the treaty that forced post WW1 Germany to pay reparations it could not afford?

2) I remember as a child 30+ years ago that Detroit was losing population. All economic indicators have been steeply pointing downward for at least 3-4 decades. City workers and their unions were aware of that. Detroit's pending bankruptcy is only even slightly surprising in the sense that it took this long. I feel bad for people who will- and they will- lose a good chunk of their retirement money. But they knew it, or were willfully blind to it. I had conversations in econ class at MSU about the consequences of Detroit's downward spiral. Among the consequences? Inability to pay pensions. That was about 1994. Detroit's inability to meet its obligations is not a surprise.

[professorscott]

Since we're talking about the law, let's be precise. [[Remember: though your kindly old professor has been admitted to a great many bars over the years, Tom's Tavern being the favorite, he has never been admitted to the bar.)

The Michigan Constitution does not say the State guarantees pensions. Let's not put words into the Constitution's mouth. Let's look at the actual language, and surmise what a judge might determine based on what it really says.

What the Michigan constitution actually says:


“Sec. 24.
The accrued financial benefits of each pension plan and retirement system of the state and its
political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired
thereby.”

What Investopedia says an “accrued benefit” is:

Accrued benefits are another form of income employees receive, but this income is not paid immediately. For example, a worker will accrue vacation time and still receive a regular salary when off on vacation. Other accrued benefits can include a profit-sharing plan, a stock bonus plan, an employee stock ownership plan [[ESOP), a thrift plan, a target benefit plan or a money purchase pension plan.

“Diminish” is a common enough word, a synonym for “reduce”.

“Impair” in this context means the same thing: American Heritage Dictionary says it means “to cause to diminish”.

So there are several things here to interpret, not a simple task. First, precisely what are the “accrued financial benefits” of these systems? Are they the money in the retirement funds – in which case the pension boards are the only ones who could have impaired them, and the bankruptcy can’t, since it won’t touch any funded portion of a pension – or are they the payouts the retirees think they are going to get, in which case they have already been impaired illegally by the actions of the pension boards?

Second, this section only says that they benefits [[whatever they are) may not be diminished or impaired by “the state and its political subdivisions”, based on the final “thereby”. If Mr. Orr’s team recommends reduced payments to Hon. Mr. Rhodes, then they have not impaired anything; they have just made a suggestion [[which is the most they can do). If Mr. Rhodes, a Federal judge, accepts the recommendation, it is his order that will cause the impairment, and Mr. Rhodes is not an instrument of the state or any of its political subdivisions.

That the accrued financial benefits are a "contractual obligation" of the state and its political subdivisions will carry no weight in bankruptcy. To get rid of unfavorable contracts is one of the reasons to go to the judge with hat in hand, and contracts are routinely dissolved in bankruptcies, no matter what document created the contract.

The only certainty: in the end, this case will make its way into the law school textbooks.

[BankruptcyGuy]

A few points:

1. While I've written that the court will find Detroit eligible for bankruptcy, it is not clear that a plan will be proposed that reduces accrued pension benefits. Remember that health care, COLAs or 13th checks are not accrued benefits. Nor are the benefits to unvested [[under 8 or 10 years, depending on the group) employees. Nor is there a constitutional right not to have your pension frozen.

2. I'm guessing that the AG has taken the position that accrued pension benefits can't be reduced in bankruptcy because the state thinks they may be on the hook for them. As noted by me and others, if that's true, it will likely be in the form of state takeover of all state pensions.

3. The city has, through its plan, the unequivocal right to pay for operations [[police, fire, etc.) before paying any other creditor.

4. Judge Rhodes foreshadowed his opinion of Sec 24 of the Michigan Constitution by asking, "How can [the state] promise that, if they can't print money?" Ultimately, however, the interpretation of the Michigan Constitution is likely in the hands of a Michigan court.

[MikeyinBrooklyn]

Excellent post, Prof.

If the judge were to rule that the state has to pay the missing chunk of pension money, I think the city should hire every resident, sign them to a one-day work contract with a $1M annual pension after one day's service. On the second day, when the city's treasury couldn't pay it, the state would then end poverty in our fair city. Terrific plan, if the judge rules the right way.