Looking at the pension deal

[BankruptcyGuy]

From what I've been able to piece together from various news sources, I have some questions about what the city is presenting:

Are they really re-allocating $100 million in grant money from the US government for blight removal to fund pensions? How exactly does that not run afoul of the law?

Did the City's required contributions to the fund change, or, in great political fashion, did the City simply allow the funds to increase their expected rate of return, in order to reduce cuts today [[meaning that if the return targets are not met, cuts will be reduced further in later years)?

Did the City's contribution to health care go up or down? When GM and Chrysler set up VEBAs, they funded them with large [[billions) stock contributions? With what are these healthcare VEBAs being funded?

If anyone can point me to the actual term sheet or press release on the deal to enlighten me, I'd appreciate it.

[Richard]

NSP funds may be used for activities which include, but are not limited to:

• Establish financing mechanisms for purchase and redevelopment of foreclosed homes and residential properties;
• Purchase and rehabilitate homes and residential properties abandoned or foreclosed;
• Establish land banks for foreclosed homes;
• Demolish blighted structures;
• Redevelop demolished or vacant properties

"but are not limited to" Loophole?

http://portal.hud.gov/hudportal/HUD?...eighborhoodspg

Obama, Michigan in talks to free up $100M to aid Detroit pension deal


http://www.battlecreekenquirer.com/a...nclick_check=1

Which translates into how does one exploit the loophole or how does one provide a ailout without actually calling it by name.Keeping in mind the list of cities next in line to experience this.

Politics in motion.

One interesting thing was Hantz group had applied for a chunk of the funds solo but then turned operations over to the city.

I think this all is going to be smoke and mirrors until it is done,or it is in everybody's best interest not to know the details kinda like,do not worry we have this,trust us.

[DetroitPlanner]

There are no VEBAs for Detroit Employees as I understand it. My parents are retired employees and there medical plan has not changed much in terms of out of pocket cost per month, but the co-pays are going up as is the overall deductible.

[corktownyuppie]

It's clear that over the last 6 days, the leverage has shifted toward the city against all of its creditors. Once the swaps settlement was approved, the threat of a cram-down became imminent. In that regard, I can't imagine that the city gave that many [[if any) concessions in mediation over the last 4 days.

Which makes me wonder...what deal was being floated back and forth up in mediation up until last week? I can't imagine it was the 25% cut...Is this is a situation where the 25% cut is a threat in a cram-down, but while we're in mediation, we will offer a 5% cut with no COLAs?

Because man, if that was the city's offer behind-the-scenes-this whole time, that was a pretty sweet deal, not sure I understand why it took so long to accept. Perhaps the precedent it set?

[jt1]

Because man, if that was the city's offer behind-the-scenes-this whole time, that was a pretty sweet deal, not sure I understand why it took so long to accept. Perhaps the precedent it set?

Which makes me wonder - how much debt and liabilities is the city really shedding?

I'm not seeing where all the savings are adding up to make a large dent in the 12Billion in debt and liabilities [[taking out the 6B that is tied to DWSD).

Are we paying hundreds of millions in attorney fees to save....hundreds of millions?

[Smirnoff]

From what I've been able to piece together from various news sources, I have some questions about what the city is presenting:

Are they really re-allocating $100 million in grant money from the US government for blight removal to fund pensions? How exactly does that not run afoul of the law?

Did the City's required contributions to the fund change, or, in great political fashion, did the City simply allow the funds to increase their expected rate of return, in order to reduce cuts today [[meaning that if the return targets are not met, cuts will be reduced further in later years)?

Did the City's contribution to health care go up or down? When GM and Chrysler set up VEBAs, they funded them with large [[billions) stock contributions? With what are these healthcare VEBAs being funded?

If anyone can point me to the actual term sheet or press release on the deal to enlighten me, I'd appreciate it.

April 28th is when the "fine print" will be mailed to all affected to vote upon. City is getting out from "administering" benefits for retirees, they will be contributing cash [[significant reduction) to the VEBA.....it will be nothing like the UAW totally funded VEBA's.

[Eber Brock Ward]

April 28th is when the "fine print" will be mailed to all affected to vote upon. City is getting out from "administering" benefits for retirees, they will be contributing cash [[significant reduction) to the VEBA.....it will be nothing like the UAW totally funded VEBA's.

Yeah, but the city can't fund with stock.

So how will it be funded and how much will the city have to kick in. It's not a good outcome for the city if it goes from "administering but having to pay" to just "having to pay."

[Wesley Mouch]

Which makes me wonder - how much debt and liabilities is the city really shedding?

I'm not seeing where all the savings are adding up to make a large dent in the 12Billion in debt and liabilities [[taking out the 6B that is tied to DWSD).

Are we paying hundreds of millions in attorney fees to save....hundreds of millions?

Well -- yes. We had the chance to avoid lawyers fees. We choose fight and resist and business as usual. Council, Unions, Administration, Retirees, Residents. Every one of them.

So now we're stuck with lawyers fees.

And if we don't stop fighting we'll pay the fees, but not get the cash. That's the only worse alternative.

[Smirnoff]

Yeah, but the city can't fund with stock.

So how will it be funded and how much will the city have to kick in. It's not a good outcome for the city if it goes from "administering but having to pay" to just "having to pay."

City has numerous ways; water, taxes, art, parking, tunnel, zoo, airport, tickets, fines, bonds, property, etc.

[SDCC]

City has numerous ways; water, taxes, art, parking, tunnel, zoo, airport, tickets, fines, bonds, property, etc.

I believe this article supports your statement...
http://money.cnn.com/2014/04/16/news...ons/index.html

[Gistok]

Sorry but I don't see anything in that news article to support Smirnoff's "let's sell the assets" statement.

The DIA and Zoo will not be sold off.. nor should they be...

As for other city "assets"... the tunnel and airport don't appear to be on the auction block either... As for the tunnel it is a revenue generator... and should remain as such. And all of the other taxes fines and revenue streams... they have to take care of much more than just pension obligations...

[BankruptcyGuy]

City has numerous ways; water, taxes, art, parking, tunnel, zoo, airport, tickets, fines, bonds, property, etc.

I have heard nothing in the plans that indicate that asset sales are pending.

I doubt, but could be wrong, that these assets could simply be transferred to the funds [[to be sold later) as part of the plan.

What would really interest me is knowing what the City's overall contributions to the funds were in the first plan and the revised plan. If they are the same number, then the pensioners are either being misled now about the health of their funds or were misled in the first draft. If the City is contributing a much larger number, where are those funds coming from?

[corktownyuppie]

What would really interest me is knowing what the City's overall contributions to the funds were in the first plan and the revised plan. If they are the same number, then the pensioners are either being misled now about the health of their funds or were misled in the first draft. If the City is contributing a much larger number, where are those funds coming from?

This is one of the fundamental problems in the system, IMHO. The purpose of bankruptcy is to reduce/minimize the city's liabilities.

But when we talk about the pensions, they are framed from the perspective of "what will the pensioners get" instead of "what will the city be able to give".

I digress.

I believe that the pension fund has been the beneficiary of a raging bull market within the equity and private equity markets. Consequently, they are working with a starting balance that is 15-20% higher right now than at the time of bankruptcy filing. Quite clearly, that could be enough to fill a gigantic gap.

Another concession is that Orr agreed to use a 6.75% assumed rate of return rather than 6.5% that he proposed; and that helped bridge the gap even more.

So it's plausible that all of the above could take place without affecting the city contribution to pensioners.

The elimination of the COLA is a major concession from the unions. It doesn't get the headlines, because reducing someone's COLA has a graduated impact over time in comparison to "This pensioner is only receiving half his pension check starting in July". Despite the fact the impact is essentially the same.

Lastly, some of this might be part of the "dark arts of bankruptcy", in that Orr and his team can make arguments to offer the lowest plausible settlement in the plan of adjustment in order to create leverage for creditors to settle and get on board with the plan, right? As I mentioned above, I have no idea what offer was being floated back and forth in mediation, but when threatened with a cramdown and a 25% pension cut, that certainly makes a 5% cut and COLA elimination seem like a gift.

Compare that to a pre-bankruptcy scenario from 12 months ago....if Mayor Bing went to the unions and asked them to voluntarily drop health care coverage, eliminate the COLA, and drop the benefit by 5%, I'm sure we can all imagine how that conversation will go.

The key for the city going forward is whether or not the impact to our cashflow is positive enough to execute a turnaround. And even though that's supposed to be Orr's prime concern, it probably falls secondary to exiting bankruptcy on time.

But you know who has the most to lose if we don't do this right the first time? I'd say Judge Rhodes. He's made it crystal clear that he will not approve a settlement that will result in us coming back to do Chapter 9 a second time.

My questions are these:

[[1) Will the bankruptcy improve our balance sheet and cashflow enough to make some real structural changes needed?

[[2) Will the state legislature screw this up and block the Grand Bargain?

[[3) Will Rhodes rule that the settlements are both equitable while making sure that the experts he chooses believe that we are properly poised to recover?

[[4) And will the political protections be in place to make sure that the financial controls are in place to set us up for sound financial practices?

We will see.....

[rb336]

Were the original unfunded pension numbers a sham?

http://www.demos.org/publication/detroit-bankruptcy

http://www.demos.org/blog/4/16/14/fi...oit-bankruptcy

[mwilbert]

I believe that the pension fund has been the beneficiary of a raging bull market within the equity and private equity markets. Consequently, they are working with a starting balance that is 15-20% higher right now than at the time of bankruptcy filing. Quite clearly, that could be enough to fill a gigantic gap.

This is almost certainly correct.

I'm pretty sure Orr was overstating the required cuts in the first place, because they knew they would have to negotiate up. When he first came out with the numbers, based upon the previously available data about the pensions I thought the proposed cuts were on the high side, and then the markets went up a lot. And a small change in the assumed rate of return makes a big difference in the excess liability. Getting rid of the COLAs is also significant over time.

It's possible he's going too far onto the optimistic side now. I hope not, but 6.75%, while not outside the range of what is common, is on the high side in this economic environment, and there still seem to be a lot of hard-to-value assets in the pension funds.

[Wesley Mouch]

... The purpose of bankruptcy is to reduce/minimize the city's liabilities.

Reducing liabilities is a strategy. The purpose is to establish a stable financial structure that can continue to manage the city's in the citizens best interest.

...
[[1) Will the bankruptcy improve our balance sheet and cashflow enough to make some real structural changes needed?

Its to Mr. Orr's credit and probably his Democratic party allegiance that he cares about this. Its easy to imagine a tea-party version of this bankruptcy where credits win and the resulting city finances are only stable eough for one week of operations. I think we're very lucky that Mr. Orr has been progressive in setting actual operational goals for not just basic financial stability but also for a viable, livable city with ability to deliver at least public safety.

[[2) Will the state legislature screw this up and block the Grand Bargain?

It will be a race between the state legislature and the city council -- outstate Detroit hating forces with grudges of the past versus local Detroit hating forces with grudges of the past. If voter believe that the future can be better than the past, perhaps our representatives will act responsibly.

[[3) Will Rhodes rule that the settlements are both equitable while making sure that the experts he chooses believe that we are properly poised to recover?

I know less about the role of his experts, and I'm suspicious of experts. [/quote.

[[4) And will the political protections be in place to make sure that the financial controls are in place to set us up for sound financial practices?

The big one. I personally don't believe most city administration, trustees, or politicians believe the crisis is/was real. It was just because Wall Street stole the money. So I'm not optimistic that the new Detroit post-bankruptcy will be any different. Election of Duggan was a sign of hope for competence over rhetoric. Let's hope the trend of electing people who can get things done rather than promise the moon doesn't end when the adult supervision ends.

[[And btw, I don't mean to say Duggan isn't a master of rhetoric. He's completely capable of powerful B.S. But unlike, say, Cushingberry Duggan is also capable of actual results. We need results and can tolerate some grandstanding en route.)

[corktownyuppie]

Reducing liabilities is a strategy. The purpose is to establish a stable financial structure that can continue to manage the city's in the citizens best interest.

Well said.

I know less about the role of his experts, and I'm suspicious of experts.

Natural suspicion warranted, here for your perusal is the list of people under consideration.

http://www.freep.com/article/2014041...expert-witness


Regarding the politics, I think we are seeing a political emergence of a different battlefield. A black democrat that worked on Obama's campaign is cutting pensions. A white republican from the liberal bastion of Ann Arbor is talking about funneling state money toward Detroit.

I think we'll see more and more of these "hybrid" politicos as the demographic winds change and as more and more people see the bankruptcy [[no pun intended) of the ideological extremes on both sides.

[Packman41]

This is almost certainly correct.

I'm pretty sure Orr was overstating the required cuts in the first place, because they knew they would have to negotiate up. When he first came out with the numbers, based upon the previously available data about the pensions I thought the proposed cuts were on the high side, and then the markets went up a lot. And a small change in the assumed rate of return makes a big difference in the excess liability. Getting rid of the COLAs is also significant over time.

It's possible he's going too far onto the optimistic side now. I hope not, but 6.75%, while not outside the range of what is common, is on the high side in this economic environment, and there still seem to be a lot of hard-to-value assets in the pension funds.

IMHO I do not think Orr was overstating the unfunded liabilities. In fact the opposite may be true - only time will tell.

The 6.75% rate over time a not be sustainable. I just read a forecast that thought a 4.0% return is more likely from a portfolio of assets with a risk tolerance appropriate for a pension fund - not like the risky assets both funds have now. BTW, the Canadian Pension Plan actuary uses a 4.0% return to assure a 75 year sustainable plan.

Both funds issued auditor prepared reports for year end 2012 that:
1) Percentage of debt securities [[bonds) BELOW investment grade was: P&F 66.2% and GRS 81.3% This is an ASTONISHING risky portfolio
2) Percentage of total assets with INDETERMINATE VALUE was: P&F 25% and GRS 32% Again, astonishingly RISKY.

My fear is that Orr may be running fast to get ANY deal accepted and that he is just kicking the pension unfunded liability down the road and it will re-surface within a decade.

[mwilbert]

IMHO I do not think Orr was overstating the unfunded liabilities. In fact the opposite may be true - only time will tell.

The 6.75% rate over time a not be sustainable. I just read a forecast that thought a 4.0% return is more likely from a portfolio of assets with a risk tolerance appropriate for a pension fund - not like the risky assets both funds have now. BTW, the Canadian Pension Plan actuary uses a 4.0% return to assure a 75 year sustainable plan.

Both funds issued auditor prepared reports for year end 2012 that:
1) Percentage of debt securities [[bonds) BELOW investment grade was: P&F 66.2% and GRS 81.3% This is an ASTONISHING risky portfolio
2) Percentage of total assets with INDETERMINATE VALUE was: P&F 25% and GRS 32% Again, astonishingly RISKY.

I don't really agree with this.

1) 6.75% may be too high, but 4.0% would be too low, requiring large pension cuts for a pretty unlikely contingency.

2) Bonds below investment grade are still pretty safe. Holding a lot of them is not astonishingly risky; it is a bit riskier than holding a similar amount of investment grade bonds, but it isn't way out there on the risk spectrum.

3) I don't think the the assets with indeterminate value are necessarily risky in the normal sense of the word. The problem is that since it is hard to know what they are worth, it is hard to know how much money the pension funds actually have--there is a risk that you are overestimating [[or underestimating) their value, as opposed to the price of the asset being volatile. Of course those assets may be risky for other reasons, but we don't know that.

However, I agree that the percentage of hard-to-value assets in the pension plans is rather high, and higher than I think should be permitted in public pensions, exactly because it makes it very hard to know how well or poorly funded the pensions are, and because I think there is potential for abuse when purchasing assets that don't have a clear market value.

[DetroiterOnTheWestCoast]

The 6.75% rate over time a not be sustainable. I just read a forecast that thought a 4.0% return is more likely from a portfolio of assets with a risk tolerance appropriate for a pension fund - not like the risky assets both funds have now. BTW, the Canadian Pension Plan actuary uses a 4.0% return to assure a 75 year sustainable plan.

The Canadians also seem to have a sane and sound banking system that they don't let tank the economy and then bailout with no strings attached. Now why would we want to follow their lead?

[Wesley Mouch]

...Regarding the politics, I think we are seeing a political emergence of a different battlefield. A black democrat that worked on Obama's campaign is cutting pensions. A white republican from the liberal bastion of Ann Arbor is talking about funneling state money toward Detroit.

I think we'll see more and more of these "hybrid" politicos as the demographic winds change and as more and more people see the bankruptcy [[no pun intended) of the ideological extremes on both sides.

This political evolution is perhaps the most important thing that we as Detroit-lovers can address. The old paradigm of Detroit-base, labor-loving, teacher's union-owned Democrats at war with tea party, socially backwards, immigrant-hating Republicans is going to pass into history. What will evolve will be something entirely new. We as Detroiters aren't prepared to deal with outstate legislators who want to help Detroit.

[Wesley Mouch]

...The 6.75% rate over time a not be sustainable. I just read a forecast that thought a 4.0% return is more likely from a portfolio of assets with a risk tolerance appropriate for a pension fund - not like the risky assets both funds have now. BTW, the Canadian Pension Plan actuary uses a 4.0% return to assure a 75 year sustainable plan.
...

I should think if you planned for 4.0%, then you could increase benefits safely when you get 6.75%. Relying on a more aggressive figure only encourages less funding today. Why would we want to do that?

[Hermod]

I should think if you planned for 4.0%, then you could increase benefits safely when you get 6.75%. Relying on a more aggressive figure only encourages less funding today. Why would we want to do that?

NO, NO, NO!!!!

You don't increase benefits, you sock that money away against a year when you only have 2.5% or where you go negative.

How many localities in the USA saw the good times rolling in and spent up to the tax receipts coming in and planned on future growth on the same path?
Then when housing prices dropped and the property tax intake tanked, they had all of these fixed expenses that they were sunk into.

[Packman41]

I should think if you planned for 4.0%, then you could increase benefits safely when you get 6.75%. Relying on a more aggressive figure only encourages less funding today. Why would we want to do that?

Good question. At a 4.0% investment rate both funds would have a even larger unfunded liability than they do now and the taxpayers would owe MUCH more to the funds RIGHT NOW. A 6.75% investment rate sounds good to the pensioners and if they do not earn that rate, then no problem - they will command it from the taxpayers at a later date.

And save it for a "rainy day"? Forget about it - how do you think they funded those 13th checks? Yes, that "extra" money from the good years. So when the bad years rolled in, the trustees just commanded that the taxpayers refill the pot.

These investment rate ASSUMPTIONS are just that assumptions that complicate the negotiations and only time and the economy will show who made the "right" assumptions. This is also why I believe a higher rate is just setting us up for a repeat in the future.

[mwilbert]

I should think if you planned for 4.0%, then you could increase benefits safely when you get 6.75%. Relying on a more aggressive figure only encourages less funding today. Why would we want to do that?

Because we don't have more money for funding today. The adjustment would come from the pensions going down rather than the funding going up. If you assume 4% you have to cut the pensions a lot more, so it is a relatively unattractive option.