New pension fund management [[maybe)

[BankruptcyGuy]

"According to the proposed agreements, both new boards would include five voting members with an annual stipend of $36,000 and two non-voting members and a CEO. The board members must have financial expertise and cannot be employees of the city or affiliated with any of its unions. It’s not clear who would appoint the trustees."

Contrast that to the current boards, who are ALL current or former employees and many of who receive the position as a political appointment.

http://www.freep.com/article/2014033...ESS/303310151/

[Wesley Mouch]

http://www.freep.com/article/2014033...ESS/303310151/

"According to the proposed agreements, both new boards would include five voting members with an annual stipend of $36,000 and two non-voting members and a CEO. The board members must have financial expertise and cannot be employees of the city or affiliated with any of its unions. It’s not clear who would appoint the trustees."

Contrast that to the current boards, who are ALL current or former employees and many of who receive the position as a political appointment.

I would hope all other covered employees and retirees and grabbing their pitchforks and torches and DEMANDING reform. It must be clear to everyone now that pension board memberships aren't perks to be handed out to friends, but are positions of great responsibility.

i do accept the reality of Detroit's financial crisis. But I do think that prudent fund management from the start would have significantly reduced the pain retirees will feel here.

BG, is the $36k 'stipend' reasonable? Who typically fills these boards? $36k is probably not full-time. Is full-time needed? How much effort is required? I think we could all learn something here.

[Hermod]

Place the names of all of the Michigan cities except Detroit in a hat. Draw out five names. Allow the mayors of those five cities to each nominate a member of the board. Hopefully, you will get disinterested but competent individuals.

[BankruptcyGuy]

BG, is the $36k 'stipend' reasonable? Who typically fills these boards? $36k is probably not full-time. Is full-time needed? How much effort is required? I think we could all learn something here.

That's probably 1-2 meetings a month, so about $1,500 to $3,000 a meeting. That's in the range of reasonableness. You don't want them to be uncompensated because, as they say, you get what you pay for.

That's pretty close to the compensation of a board of directors of a small public company.

[corktownyuppie]

http://www.freep.com/article/2014033...ESS/303310151/

"According to the proposed agreements, both new boards would include five voting members with an annual stipend of $36,000 and two non-voting members and a CEO. The board members must have financial expertise and cannot be employees of the city or affiliated with any of its unions. It’s not clear who would appoint the trustees."

Contrast that to the current boards, who are ALL current or former employees and many of who receive the position as a political appointment.

Man, I'm not sure I really understand the bargaining position of the retiree committee. I'd say most everyone -- including me -- wants their pension not to be unduly harmed. But no one seems to want to answer the question, "Where will the money come from?"

Are they coming from the position that the city's plan to re-tool the city and improve services is somehow too flush?

I don't get it. If someone was offering me close to $1 Billion in cash, protecting the control of the pension fund would be the last of my concerns.

http://www.freep.com/article/2014040...-pensions-cuts

Still, Wayne State University law professor Laura Beth Bartell said the retiree strategy of holding out for something better than the DIA-pension deal and pursuing sales of DIA art poses serious dangers for pensioners.“This is a very high risk gamble,” said Bartell, who teaches bankruptcy courses. “Judge Rhodes has already indicated he does not view liquidation of city assets as the solution to the city’s financial difficulties.”
Bartell said that retirees’ rejection of the city’s proposal could undercut their stature in court.
“That’s a very difficult position to be in before the judge,” she said. “I wouldn’t want to be in that position, after rejecting $815 million and then complaining that you’re not getting enough.”

[Wesley Mouch]

Man, I'm not sure I really understand the bargaining position of the retiree committee. ...<snip>...protecting the control of the pension fund would be the last of my concerns....<snip>

You don't understand because you are thinking about what's best for the retirees. This has nothing to do with what's in their best interest. Has everything to do with power.

To me, this is just like the fight against Charter Schools. Or the fight for black political power in Detroit. Nothing to do with helping kids or citizens. Everything to do with power and money. Stay away Rick Snyder. This is our sandbox and our toys. Our approach is best for kids and citizens. And you hate us, too.

[Smirnoff]

Turn it over to Fidelity & let them invest & manage it......btw, they do this type of work for a living & produce excellent results!

How do you like this very subjective quote: "The board members must have financial expertise".....like, I have a checkbook, maybe?

[Honky Tonk]

Turn it over to Fidelity & let them invest & manage it......btw, they do this type of work for a living & produce excellent results!

How do you like this very subjective quote: "The board members must have financial expertise".....like, I have a checkbook, maybe?

"I can't be overdrawn, I still have checks left!!!!"

[Smirnoff]

"I can't be overdrawn, I still have checks left!!!!"

Exactly - LOL!

[Dumpling]

As a City of Detroit employee [[and probable soon-to-be "retiree" if the 80%
drop in water department head count takes place if the system is
privatized), let me just say that it appears to me that the city employees who serve on the General Retirement System pension board have done an overall good though not excellent job of running the pension system given some very serious constraints such as reduced pay-ins due to the City of Detroit's financial straits and that local businesses such as the Book Cadillac
or Meijers at State Fair want to be invested in all the time, whether or not they are good as an investment and last but not least, that there are many more retirees than active members and so the fund must be managed conservatively.
There is actually a two layer system running the pension system. There are
the board members from the city, including both city employees and city administration. Employees are elected, serve a term, and very often IMHO require some specialized training [[even in Hawaii, even for $20,000 a pop) to
better understand their roles and fiduciary duties. [[If the City Council had
a bit more training in financial matters, would they have unanimously approved that swaps deal that went south, the one that Mayor Kilpatrick received an award for helping to broker? The training would have been worth the money?)
Then there is a layer of professionals, who do only money management for their real job, that the pension board members work with. I would guess they
do money management for other retirement systems too but I don't know.
Given that the return for the annuity was cut from a generous seven percent, as advocated by Nolan Finley and others, down to zero, and given that
I can't take my savings out from it unless I leave the employ of the city, I have a proportional amount of confidence that the proposed changes to the pension board makeup will be beneficial to the employees and retirees.
There is another thread on here started by slick that wonders what to make
of the 2012 GRS pension statement and I should go back to that soon.

[corktownyuppie]

Given that the return for the annuity was cut from a generous seven percent, as advocated by Nolan Finley and others, down to zero, and given that I can't take my savings out from it unless I leave the employ of the city, I have a proportional amount of confidence that the proposed changes to the pension board makeup will be beneficial to the employees and retirees.

Dumpling, I'm not one to readily side with Finley on much. I think the difference between the way you and I are looking at things is that you are evaluating how good the annuity is by how beneficial it is to the employees.

I'm looking at how good the annuity is by how confident I am that they can actually pay what is promised.

There is nowhere in the financial world right now that can guarantee a 7% return on your savings. When you deposit the money in that account, the city is turning around and investing it somewhere in order to give you the guaranteed return. If the investments do better than 7%, then the accounts are safe. If the investments do worse, then the city is on the hook for the difference. And, of course, since the city is bankrupt.....

So I'm not excited that anyone is taking away this benefit from the employees or retirees. But what's far more important is that whatever benefits are promised can actually be paid for. Otherwise you're just going to be dealing with the pension cuts like today's retirees.

And you're already experiencing some of this. Yeah, the 7% is guaranteed. Until it's not guaranteed, but you're still stuck in it earning 1-2% until the city can recover the money they've already promised from the past years that they haven't yet earned.

That's why I'm advocating for moving the annuity into a different type of system. I'd rather have the 4% that is real and reliable than the 7-8% promise from someone who will never be able to follow through.

[Dumpling]

CTY, thank you for your concern, but here's what happened with the annuity: City employees were putting a portion of their paychecks aside in it because that was a very good, predictable deal at seven percent. It was not a get rich quick scheme. It was saving appropriately for one's retirement. People were preferentially putting their retirement savings in the annuity
rather than in the infinity of other retirement vehicles because it was apparently a good, secure deal. Seven percent was thought to be what the stock market would return over many years but would be more secure.
And the truth now is, all of this money is now STUCK [[unless one is leaving the employ of the city), and the money earns, NOT EVEN one or two percent,
but ZERO percent such that even a CD or credit union savings account is
a better deal. We are experiencing that the savings of the employees are not being cared for. One could argue that they were being overly cared for before at seven percent, but at zero percent, or anything below market rate, they are being used. With this kind of TLC [[along with other instances) I can see why the executive boards at Oakland and Macomb Counties are rather concerned about the proposed water deal and are not eager to sign on. There is every chance they are only loved for their money.

[Lowell]

The following is being posted on request by Packman41 who is experiencing computer issues:

Dumpling: Some analysts considered that “annuity” stealing.

The Detroit News an article on September 6, 2013, but the article is no longer available online for reference. It described an analyst’s report how the GRS, “ “effectively robbing’ the city’s pension funds and contributed to a ‘significant underfunding’ of the city’s pension funds…”

According to that report, pension fund trustees allowed ACTIVE employees to set up an additional annuity savings account that was separate from the defined benefit plan. Seems the annuity account paid interest rates above what the general marketplace offered and the article said, “Many times, pension trustees gave employees a “far greater” rate than what the fund earned on investments.” They paid rates as high as 7.5% of interest.

When the interest paid out to the ACTIVE employees exceeded the interest earned on investments, then the trustees apparently dipped into the funds that were supposed to be held in a trust account for the RETIREES. So over 5 years about $532 million was shifted from the trust account for the RETIREES to the ACTIVE employee’s annuity account.

While the report says this is “effectively robbing” from the trust fund, IMHO there was nothing “effective” about it – this is downright stealing. In the real world people would go to prison over this.

If I were a current retiree, then I would be asking for the pension fund trustees to get that money back from the active employees or take it from the trustee’s pockets.

As an active employee getting all these special deals no wonder you believe your pension trustees “… have done an overall good though not excellent job of running the pension system...” Maybe the retirees and the taxpayers that have to fund the trustee’s mistakes would not agree with you.

Did you ever think the reason the annuity funds are frozen is that the bankruptcy process will ask for a “clawback”?

[corktownyuppie]

Thank you Packman41 for articulating the problem. I never thought that the annuity was a "get rich scheme". You are correct...people were reasonable to believe that a long-term return on equity investments would average out to 7% [[I tell clients to use 6% just to be conservative).

The problem comes down to this...what happens during those time periods...sometimes prolonged...where the market falls short? The answer is that the city is on the hook for the difference.

This is the problem. If they wanted you to get equity-like returns on the money, they should have just allowed you to invest the funds into equities yourself. But instead they promised equity-like returns while magically telling you that you had none of the equity-like risk.

Did you ever think the reason the annuity funds are frozen is that the bankruptcy process will ask for a “clawback”?

That's one way. The other more common way I see is this. An annuity company will promise you something outrageous, like 9%, in your first year of investing with them. But they freeze the money so that you can't get it without a penalty for 7 or 8 years. In those 6 or 7 remaining years while the annuity company gives you 1 or 2%.

Why are the returns so low in years 2-7? Well they have to make up for all the over-market returns they paid in year one. And since you're stuck with the annuity, you take it.

I had no idea that trustees were raiding the pension funds to cover the annuity, but it makes sense. It's not even a problem with Detroit...it's a problem with public pensions in general. The levels of funding considered "normal" only work if the municipalities are in good fiscal health.

If Oakland County's pension was only 60% funded, I would be a little less worried. Their AAA rating can allow them to borrow money anytime to float the difference. If Wayne County's pension was only 60% funded, you've got a real problem.

My solution is that either:

[[1) all pensions must remain 95-100% funded, or
[[2) pensions can maintain various levels of funding depending on their credit. The better their credit, the lower the levels of funding need to be. The worse it is, the more they have to put the funding in.

Unfortunately, this creates a horrible situation where the cities that are going through the most financial difficulty are the ones which now have an increasing burden of pension coverage.

But on the other hand, at the end of the day 100% of pensioners expect 100% of their pensions to be paid, 100% of the time. So either the pensions themselves need to be 100% funded, or they need to be backed by an entity that can make sure it is.

[Wesley Mouch]

packman41: The Detroit News an article on September 6, 2013, but the article is no longer available online for reference. It described an analyst’s report how the GRS, “ “effectively robbing’ the city’s pension funds and contributed to a ‘significant underfunding’ of the city’s pension funds…”

So in other words the pension trustees behaved the same as Wall Street.

[Dumpling]

Thank you, packman41 for the additional info on how the annuity was funded.
I was not aware myself that funds were being shifted from the retiree trust
to the annuity and that was how it was funded in addition to the paycheck
deductions. I received an annual statement for the annuity and this information was not in there. I now more strongly feel that retirees should have a seat at the table on pension matters.
That said, I believe that when the annuity was initially set up, it is likely that
there was a higher ratio of active employees to retirees; that there was more
revenue sharing from the state; the Great Recession hadn't occurred yet;
and the Slow, Sure Michigan Recession That Was Proof That The State Was The Most Poorly Managed may have only just started. Over the past ten years there has been a tendency for the City of Detroit to lay off rather
than to hire which makes for a low level of consumer confidence among the employees, who would therefore have a propensity to save whatever they could [[which tends to deepen and prolong a recession).
Then the amount of money saved in the annuity program may well have exceeded the pension administrators' wildest expectations, but then the promised seven percent still needed to be covered for that larger amount of savings, so then they reached into the trust cookie jar that they shouldn't have [[not to mention the bad swaps deal that shouldn't have been brokered). Obviously at that point it would have been better to inform every one that the seven percent could no longer be achieved at that time but some lower percent could.

[corktownyuppie]

Obviously at that point it would have been better to inform every one that the seven percent could no longer be achieved at that time but some lower percent could.

I think you hit it on the head. An unwillingness to change and adapt to outside conditions is like an ongoing theme with city operations. At University of Michigan, their annuity, brokered through TIAA-CREF had a floating rate that would adjust up or down with conditions, with a baseline floor of 3%.

Trust me, even at 3% TIAA was losing money for a short period of time, but since you could only take money out of it over a 10-year period, the risk that they would have to fund and shortage was significantly lower than the 7% that Detroit was offering.

Plus, TIAA had a lot more funding to cover any shortage compared to the city.

Sigh. It's unfortunate that the retirees are getting screwed in all of this. The system was such a mess for so long.

[BankruptcyGuy]

From what I can tell by reading the annual reports, it does not appear that the Annuity Fund is a separate entity; instead, it is a separate account within the pension fund. Distributions from exceed contributions to both sets of funds.

As I've mentioned before, I think it is an open question how the cuts are allocated, or, more properly stated, how the trustees allocate the insufficient funds given to them under the plan. Do they adjust all distributions equally? Do they reduce the annuity return portion [[which was arguably fake anyway) to a greater extent? Do they impact older retirees less severely than younger ones?

I don't know how that issue will be resolved. It looks like there will be a fight after the fight.

[Wesley Mouch]

I think you hit it on the head. An unwillingness to change and adapt to outside conditions is like an ongoing theme with city operations. At University of Michigan, their annuity, brokered through TIAA-CREF had a floating rate that would adjust up or down with conditions, with a baseline floor of 3%.
...
Sigh. It's unfortunate that the retirees are getting screwed in all of this. The system was such a mess for so long.

The unwillingness to change with conditions seems to me to be an important part of many problems facing society.

Look at the car companies. Do ya think they didn't change with the times in the 70s and 80s? The Japanese and Germans sure did.

How do we encourage city governments to become adaptable? Look at how Charters are shaking up schools. Is there a way we can create Charter Cities where residents can toss out the ideas of the past and experiment with new ways to help citizens live productive lives? Or do we think everything's just gonna be fine when the money returns to Detroit?

[Packman41]

Pension trustees caused this problem by distributing $532 million they had no right to do. The $829 million the trustees say they are underfunded was caused in large part [[532/829 =65%) by them and their mismanagement. Make them fix it.

For change they need to be HONEST and tell the whole story of how they screwed up. Then give pensioners a vote: 1) annuity participants return the $532 million to the fund. 2) Or current retirees get preferred allocations as BK Guy suggested above.

How to prevent? Get PROFESSIONAL management. TIAA-CREF was professional and changed with the times. GRS & P-F trustees are noobs, led by a [[now) indicted lawyer and by the political appointees such as Monica Conyers, DeDan Milton, Jeff Beasley, etc.

IMHO, I would have thought Kevyn Orr would have terminated both pension plans because of the gross mismanagement let alone turn it over to the state to run.