http://business.financialpost.com/2013/09/26/detroit-eyes-freezing-pensions-amid-probe-as-evidence-of-possible-fraud-come-to-light/
http://www.bloomberg.com/news/2013-09-26/detroit-s-pension-madness.html
and...
http://www.zerohedge.com/news/2013-09-26/detroit%E2%80%99s-bankruptcy-postmortem-worms-keep-slithering-out
Submitted by Tyler Durden on 09/26/2013 16:46 -0400
Detroit eyes freezing pensions amid probe as evidence of possible fraud come to light
Bill Pugliano/Getty ImagesA group opposed to the appointment of an Emergency Manager for Detroit, as well as to his plans for the city, protest a public meeting held by Kevyn Orr, Detroit's Emergency Manager, in June. Detroit’s two retirement funds are underfunded by US$3.5-billion.
DETROIT — Detroit’s emergency manager proposed freezing pension benefits for some current city workers starting in 2014 and will launch a two-month probe into the city’s dysfunctional and error-prone handling of employee benefits.
A copy of Kevyn Orr’s proposal was released by one of Detroit’s two pension boards on Thursday, the same day the city’s auditors posted a report that shed light on how Detroit overpaid benefits, including unemployment compensation for almost two years to 58 people who never worked for the city.
The report also raised the question of whether there was fraud in doling out some unemployment claims. The auditors’ review of nearly two years of unemployment compensation claims found that 13% were likely fraudulent and another 36% were highly questionable and required investigation.
In his pension proposal, Orr, who was tapped by the state of Michigan in March to run its biggest city, would close the general retirement fund, which represents non-uniform city workers, to all future city workers and freeze it for current workers as of Dec. 31. The city would replace the pensions with 401(a) and 457(b) retirement plans.
Tackling the city’s pension overhang is a critical task for Orr, who is trying to restructure Detroit’s US$18.5-billion in debt and long-term liabilities after the city filed for the largest municipal bankruptcy in U.S. history on July 18.
The city’s financial problems have eroded residents’ quality of life. In a court order Thursday, U.S. Bankruptcy Judge Steven Rhodes wrote that he has heard “truly disturbing accounts of the consequences of the City’s inability to provide basic services.”
http://www.bloomberg.com/news/2013-09-26/detroit-s-pension-madness.html
Detroit's Pension Madness
I’m rarely speechless, but I’m having trouble putting my emotions into words after reading the latest report on the Detroit pension situation. Now, I admit it: I’m kind of naïve. Usually when I see an underfunded pension, I think to myself “poor pensioners -- undone by a combination of stupid tax rules, volatile stock markets and mismanagement by trustees who tried to restore depleted fund assets with an investment approach you might call ‘desperate optimism’." Thus, I was not entirely prepared for the new revelations about the Detroit trustees’ custom of handing out annual holiday “bonuses” to workers, retirees and the City of Detroit. Between 1985 and 2008, they handed out roughly $1 billion this way. Had they been invested, one estimate says those funds would be worth almost $2 billion today -- or more than half the current shortfall in the funds.
These “bonuses” were used to lower the contribution the city was required to make, to give retirees a little something extra around Christmas time, and to fund individual savings accounts that workers are offered along with their pensions. In 2009, when the financial markets were completely frozen and the automakers were shotgunning through the bankruptcy courts, the pension trust paid 7.5 percent interest into those accounts -- which is about 7.5 percent more than they would have gotten at a bank. This while the pension funds were busy losing about a quarter of their value.
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I literally slapped my forehead while reading some of the explanations that the trustees offered for their behavior. The spokesman for the trustees has the nerve to complain about the actuary’s report that outlines these wild deviations from sanity. Here is how she justified draining the pension fund assets:
She said that the trustees were administering benefits that had been negotiated by the city and its various unions and that they had established an internal account to set aside “excess earnings” that would cover the cost. She said it was appropriate for retirees to benefit from market upturns because they had paid into the pension fund, so their own contributions had generated part of the investment gains.
“People were having a hard time, living hand-to-mouth, and we thought we would give them some extra,” Ms. Bassett said.
It does not seem to have occurred to Ms. Bassett, or the other trustees, that people would have a very hard time when the pension that they were depending on went up in smoke.
It’s very hard for me to attribute this to something benign, like total economic illiteracy or gross inattention to their responsibilities as pension trustees. I can’t imagine that anyone who can read and do basic arithmetic ever thought that draining off the “excess earnings” in the good years could result in anything other than exactly what it has wrought: a pension fund so disastrously underfunded that it may not be salvageable. No, wait, that’s too kind: they were also draining off … what should we call them? “excess non-earnings”? in years when the economy was melting down, the Dow Jones was trading for less than a Mickey Mantle rookie card and the region’s chief industry was teetering on the brink of extinction. What could they possibly have been thinking?
My best guess is that they were thinking the pensions would have to be paid, one way or another. After all, it’s in the Michigan State Constitution. So they could pay out bonuses, please various constituencies, and then force the city or the state to make them whole when it all came tumbling down. They didn’t reckon with the possibility that the city would simply run out of money, and the state would decline to step in, leaving them with no deep pockets to make up for their mismanagement.
It’s hard to overstate how bad this is. I can’t find any figures, but I’d guess that for many workers, the pension is at least half their annual retirement income. They may lose a giant chunk of that, because unlike a corporate pension, a municipal pension isn’t insured; if Detroit declares bankruptcy, they’ll get a fraction of whatever the city gives the unsecured creditors, and no more. The workers who were hoping to top that up with those “bonuses” in their personal accounts may also be unpleasantly surprised to find that a bankruptcy judge can claw that money back if it is deemed to have been improperly conveyed in the first place.
It will be even worse if the firefighter and policy funds turn out to have been similarly abused, because those people don’t even participate in social security. Their retirement could end up being lean indeed. But let’s hope that that does not turn out to be the case. The current situation is quite bad enough.
and...
http://www.zerohedge.com/news/2013-09-26/detroit%E2%80%99s-bankruptcy-postmortem-worms-keep-slithering-out
Detroit’s Bankruptcy Postmortem: The Worms Keep Slithering Out
Submitted by F.F. Wiley of Cyniconomics blog,
You may have seen recent revelations that Detroit routinely raided its pension funds to award extra cash – including bonuses dubbed “the 13th check” – to both retirees and active employees. These payments were far in excess of the city’s negotiated obligations and hidden from both the public and Detroit’s bond investors.
Here are a few justifications for the payments from an article in the Detroit Free Press:
“Things were always bad for employees,” [former pension board member Sandra Studzinki] said. “It was a way to make up for lots of the years that there were no pension increases.”...“Many retirees relied on that check to pay their increased utility bills during the winter,” [General Retirement System Vice Chairman John Riehl] wrote in a trustees report Dec. 4, 2011. “Also remember that the money would go directly into the local economy.”
And more from The New York Times:
[Pension board spokeswoman Tina Bassett] said it was appropriate for retirees to benefit from market upturns because they had paid into the pension fund, so their own contributions had generated part of the investment gains.“People were having a hard time, living hand-to-mouth, and we thought we would give them some extra,” Ms. Bassett said.
Also from the New York Times, estimates of the staggering amounts:
The outside actuary, Joseph Esuchanko, concluded that the various nonpension payments had cost Detroit nearly $2 billion from 1985 to 2008 because the city had to constantly replenish the money, with interest. It appears that Mr. Esuchanko could not get data for years before 1985.His calculations included only the extra payments by Detroit’s pension fund for general workers. Detroit has a second pension fund, for police officers and firefighters, which also made excess payments. Mr. Esuchanko could not get the data he needed to calculate those, either.
And how they pulled it off:
Most of the trustees on Detroit’s two pension boards represent organized labor, and for years they could outvote anyone who challenged the payments.
And here’s an opinion from the Detroit Free Press’s editorial board:
It’s a startling sum of money, and it’s directly connected to the fund’s instability, as well as the fiscal health of the city and the threat that bankruptcy might keep Detroit from being able to honor its pension obligations.
There may be no cleaner account of the repercussions of handing power to those who show their compassion with the public purse.However well meaning the union reps controlling Detroit’s pension board may have been, their politics clearly compromised the city’s long-term health.
Don’t get me wrong, I’m not posting this to support today’s mainstream Republican Party. Bush 43 helped ensure that long-term thinking is a thing of the past for those who control the federal government, whether red or blue.
But at the local level, stories like this reinforce an opinion I shared in this post. I showed a strong correlation between political bias and unemployment rates for 218 American cities, and argued that there’s probably some causation in both directions.
Causation #1: High unemployment and related factors are likely to favor political candidates from the left.
Causation #2: Left wing politics encourage the unsustainable spending that eventually leads to what we see today in Detroit.
http://www.freep.com/apps/pbcs.dll/article?AID=2013309130017
One billion dollars.
That’s how much, over 23 years, one of Detroit’s pension funds paid in bonuses to retirees.
It’s a startling sum of money, and it’s directly connected to the fund’s instability, as well as the fiscal health of the city and the threat that bankruptcy might keep Detroit from being able to honor its pension obligations.
The Free Press editorial page still stands strong with the pensioners. They didn’t make this mess; their leadership did. Michigan’s constitutional protection of municipal pensions is a sacrosanct guarantee that benefits, once promised, won’t be reduced. That has to be honored.
But without question, the bonuses paint a clear picture of the reckless management that led the general pension fund (which covers employees other than cops and firefighters) to this precarious situation, and have increased the burden on city taxpayers, who must make up for the fund’s screw-ups.
Going forward, it’s impossible to imagine how the funds’ current management can be left intact. It will need to be reorganized, just like the rest of city government.
The health of the funds has been a point of contention between Detroit emergency manager Kevyn Orr and the city’s unions and retirees. Reports commissioned by Orr and other city officials indicate that both the general retirement system and the police and fire retirement system have a combined unfunded liability of $3.5 billion. As the funds’ financial returns have waned, the number of city employees has dropped while the number of retirees has increased. So the city’s required contributions to the fund have also grown — and in most years, the city doesn’t have enough to pay its share, pushing contributions back, year after year (deferred payments also carry interest).
It’s widely speculated that Orr will move to take over management of the funds, as allowed by state law. The bonuses help make the case.
Pension funds function much like other investment accounts: The fund’s principal is invested and generates income, which is used to pay benefits. When the funds don’t generate enough income, the city must make up the difference.
But when the funds brought in returns over the expected rate (called “excess earnings”), trustees paid the additional income to retirees as “13th checks,” or distributions into employees’ annuity accounts, reportersNathan Bomey and John Gallagher wrote in Sunday’s Free Press.
A more conservative strategy might have seen any so-called “excess” earnings reinvested against a lean year — former Detroit budget director Ed Rago, who served under former Mayors Coleman Young and Dennis Archer, estimates the funds could have generated another half-billion in income during that time period.
A half-billion dollars could have gone a long way toward cushioning the impact of the 2008-2009 stock market crash, which most pension officials blame for the funds’ current condition. Moreover, think of how the stock market has performed since the crash. The money spent on bonuses since 2009 would have almost doubled in value if it had been reinvested in blue-chip stocks.
Let’s be clear: Retirees who received these bonus checks aren’t rolling in dough. Police and fire retirees’ average annual pension is about $34,000; general pension fund retirees’ annual payments average less than $20,000. Pension fund trustees have said that the practice of paying bonuses was necessary because retirees’ pensions are modest. That’s true.
But it’s also true that you can’t pay money you don’t have, and that depleting your principal impacts future earnings. Investment strategy is everything when it comes to pensions. Most funds use overly conservative estimates and practices for a simple reason: This is Grandma and Grandpa’s money, in many cases the only income they’ll collect in retirement.
Instead, the Detroit City Council ended 13th check and excess earnings distributions in 2011, only after the pension funds were depleted by at least $1 billion.
It’s so reckless and infuriating that it ought to be criminal. Now, the whole city is on the hook to make good on the bad bets.
For retirees, it’s a tough pill to swallow. It’s a hard fact that the decades of trustees, city managers and union officials who either tacitly or explicitly approved risky pension fund practices will probably never be called to account.
So now the city is in bankruptcy, and retirees who have long counted on those checks are thrust into limbo: A federal judge could still agree to reduce current pension benefits, although we believe the state would still have a constitutional obligation to fully fund them.
Future employees, however, will certainly face reduced retirement options as a result of the past pension shenanigans.
They, and the residents of Detroit, deserved far better from those who were trusted with such a sacred obligation.
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