Pension Busting


Respectfully submitted by Lawrence E. Rafferty-(Guest Blogger)

The main stream media was full of stories in the last week concerning a judge’s decision in Michigan to allow the Bankruptcy of Detroit to go forward.  What the media seems to have omitted from the discussion, is just how pensions in Detroit and across the country have come under attack.

“Now that a federal judge, Steven Rhodes, has ruled that the bankruptcy can proceed, a central issue will be whether the city can jettison up to $3.5 billion in accrued pension benefits owed city workers (which Orr claims are unfunded). With accrued state and municipal pension benefits protected by the Michigan constitution, Judge Rhodes’ ruling sets a chilling precedent for future municipal bankruptcies.” Truth-out 

Michigan isn’t the only place where pensions for municipal and state workers and teachers are under serious attack.  Illinois just passed a so-called pension fix that of course damages and reduces the pension benefits earned and contracted for by Illinois police, fire, and teachers.  Chicago’s Mayor Emmanuel is also claiming that Chicago cannot afford to pay its pensions and workers and teachers must take significant cuts.

As in Illinois, the Detroit workers whose pensions are now at risk of being reduced or lost, did nothing to cause the shortfall in the pension programs.  The City of Detroit legislators and officials for years have underfunded the city’s portion of the pension plan, while workers were making their contributions according to their respective contracts.  The Detroit workers even made concessions in 2012 amounting to millions in savings to the city.

“With average annual pension benefits for non-uniformed city workers of just $19,000, the problem in Detroit isn’t the generosity of city pensions. The problem is the crisis in the city’s tax base and the city’s repeated failures to make required pension contributions.” Truth-out

It is interesting that the Emergency Manager appointed to oversee Detroit, Kevyn Orr has used some interesting techniques to make the pensions appear to be in even worse shape than they might actually be. “City pension funds—one for police and firefighters and another for non-uniformed city personnel—hotly contest Orr’s numbers. Fund documents show a combined shortfall of $977 million, $2.5 billion less than Orr claims. They also show the police and fire fund is 96% funded and the general fund is 77% funded, in contrast to Orr’s allegations of 78% and 59%, respectively.

The methodology for the Emergency Manager’s (EM) calculations takes a page from the playbook of conservatives who argue that public-sector defined-benefit pensions across the country are underfunded and should be eliminated, what one union official calls “the pension-busters’ playbook.” Like many public and private sector pensions funds, the funds assume rates of return on investments of approximately 8%. The EM lowers those assumptions by at least a full percentage point. Detroit pension funds use a common practice called smoothing to prevent sudden large losses—such as those suffered by funds across the country in 2008-9—from making funds appear more underfunded than they really are. The practice averages losses over a period of years and provides breathing space for markets to recover before recognizing, or locking in, losses. The EM rejects the fund’s use of smoothing in its calculations.

Once the size of a shortfall is determined, pension funds also routinely spread out, over a period of years, the contributions needed to eliminate any shortfall, a practice called amortization. Detroit pension funds use29- and 30-year amortization periods. The EM cuts these periods to 15 and 18 years. While this change doesn’t increase the estimates of underfunding, it does push up the size of the annual contributions that would be needed going forward, making the city’s overall budget situation appear worse as it moves into bankruptcy, thus boosting the case for cuts to pensions.” Truth-out

This attempt by the Emergency Manager to “fix” the numbers to make the pension shortfall look even bigger prior to the bankruptcy reminds me of the tactics used to force the U.S. Post Office into financial turmoil by forcing the Post Office to fund their pensions out 75 years in advance over a 10 year period of time.  Could these pension attacks also be an attack on the union’s themselves?

It was argued by the Emergency Manager that the only alternative to trashing the pension rights is Detroit defaulting on their loans and Bond obligations to Wall Street.  It was also claimed that defaulting on the loans and bonds would not only hurt Detroit, but would also negatively impact the municipal bond market nation wide.  In essence it was argued that allowing a default on its bonds is worse than thousands of workers losing their pensions or seeing them severely diminished.

Does anyone remember the government bailout of AIG and the millions in bonuses that were paid to AIG execs with government money on the claim that the execs had enforceable contracts that had to be honored?

“If the connection with AIG isn’t immediately apparent, then you have to look a bit deeper. Folks may recall that AIG paid out $170m in bonuses to its employees in March 2009 with its top executives receiving bonuses in the hundreds of thousands of dollars.

These were people who not only shared responsibility for driving the company into bankruptcy; they also had been at the center of the financial web that propelled the housing bubble into ever more dangerous territory. In other words, the bonus beneficiaries were among the leading villains in the economic disaster that is still inflicting pain across the country.

The prospect of executives of a bailed out company drawing huge bonuses at a time when the economy was shedding 600,000 jobs a month provoked outrage across the country. President Obama spoke on the issue and said that unfortunately no one in his administration was smart enough to find a way that could keep the bonuses from being paid. The problem according to Larry Summers, then the head of President Obama’s National Economic Council, was that the bonuses were contractual obligations and they had to be honored.”  Common Dreams

If I understand Larry Summers’ claim, the Wall Street employee contracts are enforceable and must be honored in full, but the employee contracts of municipal and state workers and teachers across the country must not be enforced because Wall Street will lose money.  Does anyone else have a problem with this logic?  Do you think that employee contracts with city and state workers and teachers should be enforced as written and in the case of Illinois and Michigan, actually guaranteed by those State’s respective Constitutions?

Why was it ok for Wall Street execs to demand that their contracts must be honored and rank and file workers in Michigan and Illinois must be reduced and in some cases eliminated in order to protect the bottom line of Wall Street banks?  What do you think?

Additional Resources:  Municipal Bankruptcy

42 thoughts on “Pension Busting”

  1. rafflaw,

    Here’s an article for you:

    Judge Challenges Bankrupt Detroit’s Secretive Deal With Banks
    The Huffington Post
    By Ashley Woods
    Posted: 12/19/2013

    The federal judge overseeing Detroit’s historic bankruptcy abruptly halted a trial Wednesday, ordering the city to renegotiate a proposed settlement with its creditors — major banks owed hundreds of millions of dollars who are among the first in line to be repaid. The settlement would put to rest a swaps deal, a financial bet gone wrong, that’s been blamed by some experts for helping drive the city into bankruptcy.

    Following Judge Steven Rhodes’ decision to officially declare Detroit bankrupt earlier this month, city attorneys and creditors met Wednesday in court, attempting to finalize an end to the swaps deal, along with a new $350 million loan from London’s Barclays Bank, the Detroit Free Press reports. The loan money would be used to pay two more banks, UBS AG and Merrill Lynch (now part of Bank of America), $230 million total that the city owes after the swaps deal, which was originated by former Mayor Kwame Kilpatrick in 2005. The remaining $120 million would be used to improve services to residents.

    But the judge questioned why Detroit agreed to pay 75 to 82 cents on the dollar to these banks — all the while reportedly offering 16 cents on the dollar to pensioners.

    The city, currently controlled by state-appointed Emergency Manager Kevyn Orr, has treated the banks as secured creditors. Challenging these debts could mean Detroit could save hundreds of millions of dollars — crucial savings for a city contemplating shortchanging the pensions of retirees.

    “Every transaction — including this one — that the city has entered into in connection with these swaps … has been with a gun to its head,” Rhodes said, according to the Detroit Free Press. “That has to stop. … And I think it’s part of a bankruptcy judge’s role to carefully scrutinize a debtor’s request to approve a settlement when that settlement was made with a gun to the debtor’s head.”

    Despite prodding from Rhodes, Orr asserted attorney-client privilege, the Free Press reports, and refused to disclose whether the legality of the swaps deals, used to fund Detroit’s pensions in 2005 and 2006, could be challenged in court. Paying the termination fee to UBS and Bank of America would save the city as much as $3 million monthly in interest payments, Ernst & Young consultant Gaurav Malhotra told the court, the Detroit News reports.

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