Detroit emergency manager Kevyn Orr quietly issued an executive order freezing the pensions of city workers as of Dec. 31. / Andre J. Jackson/Detroit Free Press
Detroit emergency manager Kevyn Orr said today that he’s stayed a pension freeze he ordered late last month, allowing negotiators with both city pension plans to continue mediation in federal bankruptcy court over how to resolve what he says is $3.5 billion in pension underfunding.
Orr, growing impatient with a lack of progress in mediated talks between the city and pension plan representatives, quietly issued a freeze on the pensions of city workers in the General Retirement System as of Dec. 31, meaning no new benefits would be accrued and the plan would be closed to new city employees.
But today, Orr said he was delaying the freeze indefinitely, while reserving the right to reinstate it if mediation efforts don’t reach an acceptable compromise.
The order he issued in late December dealt only with the city’s General Retirement System (GRS), which provides pensions for non-uniformed city workers. But in a statement issued today, Orr made it clear he also intended to include the city’s Police and Fire Retirement System.
“The city remains in a financial emergency, and to the extent that mediation can assist in finding a way to improve services for all of its 700,000 residents, then it is worth continuing,” Orr said. “But time is running short, and the city’s financial status remains dire. An additional delay without the prospect of a mediated solution threatens to further erode essential services and public safety.”
The move prompted anger from the GRS, whose spokeswoman, Tina Bassett, called the order “an outrageous and over-zealous action from the EM’s office.” After word came that the order was stayed, the GRS issued a statement saying, “We welcome this opportunity to continue to negotiate in good faith as part of the continuing federal mediation process.”
The order for the GRS also would close the retirement system’s Annuity Savings Fund to new employees and would stop accepting contributions sometime this month. The order also ends future cost-of-living adjustments.
Instead of pensions, Orr’s order said the city would create a 401k-style savings plan. Orr announced in mid-2013 that he would seek a pension freeze and issued a report critical of the pension systems’ management and investment practices.
Orr spokesman Bill Nowling said today that Orr agreed to hold off after a discussion over the weekend with Chief U.S. District Court Judge Gerald Rosen, who is overseeing mediation in Detroit’s historic Chapter 9 bankruptcy.
“Judge Rosen asked Kevyn — I think they had a long conversation over the weekend — and Rosen asked if he would consider staying it,” Nowling said. Orr agreed to do so, “but he wanted to make sure the city preserves its rights. We’ve been at this mediation for a long time, and it doesn’t seem that we’re making any progress on it.”
Bassett said the pension system believed mediation was going “rather well.”
“The GRS today is one of the best funded municipal pension funds in the nation. The board is transparent, accountable and fiscally responsible,” she said. “The problems of the past have been corrected with procedures and policies that ensure no malfeasance can occur. We thought mediation was supposed to help resolve these issues. Where is the credibility?”
Orr did not release the order to the media or post it on the city’s website. It was signed and dated Dec. 30, with copies sent to then-Mayor Dave Bing, new Mayor Mike Duggan, City Council members, the state Treasury and department heads in the city government. Nowling said Orr’s office was prepared to release a similar order for the police and fire pension but hadn’t done so as of today.
Detroit Water and Sewerage Department Director Sue McCormick notified water department employees last week, saying “the consequences of the EM’s executive order have yet to be determined and will largely depend on personal circumstances.”
Mayor Mike Duggan said he’s not involved in pension talks and has no authority on pension issues under the power-sharing agreement he and Orr brokered. He referred questions to Orr’s office.
Under earlier proposals by Orr, the city would no longer pay into pension plans but would contribute an amount equal to a percentage of workers’ base pay — 5% for non-uniformed workers and 10% for police and fire — into retirement accounts. Employees also could contribute their own money into the accounts.
The average yearly pension for retirees in the city’s General Retirement System is less than $20,000. It’s about $34,000 for Detroit police and firefighters, who do not pay into or receive Social Security.
Alicia Munnell, professor of management sciences and director of the Center for Retirement Research at Boston College, said Detroit is a painful example of what happens when pension plans run into desperate financial trouble, leaving city workers’ modest pensions at risk.
Munnell said top concerns, unanswered for now, are whether the cuts Detroit pensioners will be asked to take are equitable compared to what other creditors will face and whether the replacement retirement plan will offer guarantees of minimum levels of return on investments so pensioners don’t risk heavy losses if markets sour.
“Shutting down of plans only happens when you get into these desperate situations,” Munnell said. “But in terms of plan design (for the 401k-style retirement), we’re going to have to get plans in both the public and private sectors where there’s a sensible sharing of risk.”
Submitted by Tyler Durden on 01/06/2014 11:05 -0500
So far, city employees of bankrupt Detroit have stoically withstood all direct and indirect eliminations of their entitlements and retirement benefits, which was to be expected: after all as per a recent finding, they are merely an unsecured claim in an insolvent entity. However, following the latest shot across the bow from Detroit's emergency manager Kevyn Orr, which freezes pension plans for all non-uniform employees, said stoicism will likely be acutely tested.
Emergency Manager Kevyn Orr has frozen the city’s pension plans for all non-uniform employees, closing the General Retirement System effective Jan. 1.Orr’s Dec. 30 action freezes earned pension benefits for employees in the General Retirement System andcreates a new 401(k)-style defined contribution retirement plan for existing and future city workers, according to a copy of the emergency manager’s order obtained by The Detroit News.As part of the order, Orr also eliminated the pension “escalator,” effectively eliminating any future cost-of-living increases for all retired city employees in the General Retirement System.The emergency manager’s orderalso closes the pension system’s Annuity Savings Fund, an added benefit for some municipal workers....City employees who were not already vested in the retirement system “shall not be entitled” to pension benefits, according to the order....Tina Bassett, a spokeswoman for the General Retirement System, called Orr’s pension freeze “an outrageous and over-zealous action.”“Again the EM’s office demonstrates a lack of integrity and willingness to make a good faith effort when negotiating with our pension system,” Bassett said in a statement. “Currently we are in the midst of mediations that we thought were going rather well. We can only wonder, why take this action now and for what purpose?”