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
Thanks AY. Do you have a link to the AP story?
Raff,
Did you see that the state of Michigan ushered through a new special court of appeals because Snyder did not like the way the court of claims was ruling against him….. All present cases against the state are stayed until the court of appeals sets up its system….. I kid you not…. Talking about gaming the system….. Btw it’s Koch funded….. You’ve heard of hand Jefferson project…. I alerted someone in the know in Michigan about it…. They hadn’t paid attention to it…. But now they looked into it…. And it’s a oh my moment…. I think AP here intitially posted the link…..
AY,
I do believe that the PBGF would get involved and that usually results in significantly reduced pension benefits. Secondly, the judge has now allowed a direct appeal to the Court of Appeals so that the parties can argue the state constitution protection issue.
Question… Do the present obligations get transferred to the PBGF…… Unfortunately….. I agree with the judge based upon his rational….. I think the state of Michigan…. Causing the problems by cutting corporate state tax rate etc…. And other forms of corporate welfare should be on the hook…. Plus the state constitution prohibits this type of action…..
Thanks Darren. I have a link in the article to the basics of Chapter 9 bankruptcy.
RW Nye, I’m lovin’ it…a revolution is long overdue in this country. I hope it happens in my lifetime because I’ll be right there on the front lines. What has happened to America and how do we EVER take back what’s been sorely lost !
People who make deals with the devil get what they deserve.
Thanks, Darren..
I just like the sound of Chapter 7 or 11.. and, most of “We The People” are not aware of Chapter 9.. yet.
But, the Federal Reserve would be a Chapter 7 or 11, since it is not really Federal.. and not a Reserve, either. Their balance sheet is looking a bit ominous lately.
Mike Spindell 1, December 15, 2013 at 4:28 pm
As someone who relies on my municipal pension in my old age this is distressing news. Having spent 32 years being underpaid in NYC, considering my education and the management level I worked on, my pension has actually been sort of a deferred compensation. This is theft pure and simple and the success that Detroit will have in doing this will is essence determine the economic fate of this country. If this stands and is replicated quite soon we all will be serfs.
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“Conspiracy theorists” have been pointing out for years that this is a concerted effort, even being commanded from the state level.
Remember the state government is involved in the plunder:
(). Like OS mentions in his post about juries convicting because they don’t think confessions are coerced, the public, liberals, and progressives tend to think that same way.
The plan is well developed, but not yet implemented:
(States of War Budgets, 1/21/11, quoting NY Times). Like the military NSA spying that is common knowledge now, there were years of warnings about it, all brushed off as “a conspiracy theory.”
Jack:
Actually that would be Chapter 9 Bankruptcy.
The state should guarantee the pensioners their benefit in full. Yet I have some concern this might create an incentive for bad management if their is the belief the state will automatically step in.
I believe individual cities and counties having their own pension plans is a recipe for disaster. Ordinarily I don’t like single point of failure situations where one entity goes under and takes down everything but in this case I make an exception. The state should in my view be charged with public pensions not cities and counties.
States are better equipped to handle shocks to pension funds than cities and counties are for two reasons. One they have larger revenue streams that can be tapped from including moving money from other budgeted items and the other being the state legislatures have greater authority to levy additional taxes to cover shortfalls. (hopefully only as long as necessary)
I also believe these states having individual munipality pension plans should spend a few years forming the best pension structure they are able and then mandate the transfer of the pension funds and payout liabilities to the state. I would guess the majority of municipalities do not have such problems as these individual, albeit large cities, hence collectively it might be able to absorb some of these shortfalls.
Great article Larry, thank you for writing this.
Elaine,
It is obvious that the pension attacks are all about privatization and an attempt to kill union strength.
Slash and Burn: The War Against California Pensions
By Gary Cohn
9/3/13
http://my.firedoglake.com/garycohn/2013/09/03/slash-and-burn-the-war-against-california-pensions/
Elaine,
The truth never gets in the way of the pension haters.
Stare Decisis.. may come back and bite some day.. when USA INC goes Chapter 7 or 11… then we can deep six all those congress critters pensions,
right.. ? And state legislatures, too.. They can all go back to selling used cars and overpriced timeshares.. or move to the Cayman Islands to be near their former campaign contributors.
In 2011, Dean Baker, a macro-economist and co-director of the Center for Economic and Policy Research, wrote an article for Huffington Post titled Public Pensions 101. In it, he provided insight into the attack on public pensions. Baker wrote:
With the recent spate of attacks on climate science and evolution it should not be a surprise that traditional defined benefit pensions in the public sector are now also under attack. There are powerful political actors in this country who are anxious to build a bridge back to the 19th century; taking us to a time where working people enjoyed few protections and could not count on sharing in the gains of economic growth.
The effort to weaken or destroy public sector unions and take away their pensions is the latest battle in this larger war. As usual, the right has been busy making things up to push its agenda, confident that the media will not expose untrue claims.
At the center of the right’s story is the view that governments are somehow being reckless or irresponsible when they provide guaranteed pensions for their workers. They tell us that these guaranteed benefits will bankrupt state and local governments, imposing impossible burdens on future taxpayers.
This story can be easily shown to be untrue. While the right has been scaring the public with talk of a trillion dollars in unfunded liability in state pensions, this sum can also be expressed as about 0.2 percent of state income over the time-frame in which the liabilities will have to be paid.
http://jonathanturley.org/2013/10/06/looking-at-the-causes-of-the-public-pension-problem-in-america/
David Cay Johnston on Gov. Scott Walker’s False Claims of Taxpayer Subsidies for Workers’ Pensions
Well said Mike S. In most cases these pensions
are bargained for benefits and the teachers and municipal and state workers accept lower wages for the contractual
promise of a solid pension.
Matt Taibbi is 100% right. Wall Street consultants were hired to advise cities on the soundness of floating bonds and to assure the city managers and elected officials that the deals they entered into were both prudent and reasonable. Unfortunately, for the cities, the Wall Street consultants were conflicted, to put it mildly. They took their fees but served their own interests and left the cities holding the bag. This situation was made even worse when Wall Street took the whole country’s, the whole world’s, economy south while hanging on to its bonuses and pensions and platinum parachutes.
The other sad component of this story is that wonderful corporatist parties in this country have decided that humans, those people who live in the working and middle class, don’t deserve the compensation for which they worked and that any one with a pension who isn’t a billionaire should be looked on as a leech! It is a sad commentary on our country that other blue collar workers are saying well IMF I can’t have a pension neither should they instead of saying. Wait a minute why does Jamie Dimon still get his bonus while Grandma has to starve. Sad very sad.
The judicial system that decided to crush the pensions of workers in Detroit is the same system that enforces the contracts of Corproations against workers and consumers when the terms of those contracts change daily and contain clauses that are as unconscionable as they are one sided. Justice in this country is not blind at all. It can see the size of your check book rather well. sad, very sad.
As someone who relies on my municipal pension in my old age this is distressing news. Having spent 32 years being underpaid in NYC, considering my education and the management level I worked on, my pension has actually been sort of a deferred compensation. This is theft pure and simple and the success that Detroit will have in doing this will is essence determine the economic fate of this country. If this stands and is replicated quite soon we all will be serfs.