Wednesday, July 24, 2013

Detroit's Cries of Betrayal?

Steven Yaccino and Michael Cooper of the NYT report, Cries of Betrayal as Detroit Plans to Cut Pensions:
Gloria Killebrew, 73, worked for the City of Detroit for 22 years and now spends her days caring for her husband, J. D., who has had three heart attacks and multiple kidney operations, the last of which left him needing dialysis three times a week at the Henry Ford Medical Center in Dearborn, Mich.

Now there is a new worry: Detroit wants to cut the pensions it pays retirees like Ms. Killebrew, who now receives about $1,900 a month.

“It’s been life on a roller coaster,” Ms. Killebrew said, explaining that even if she could find a new job at her age, there would be no one to take care of her husband. “You don’t sleep well. You think about whether you’re going to be able to make it. Right now, you don’t really know.”

Detroit’s pension shortfall accounts for about $3.5 billion of the $18 billion in debts that led the city to file for bankruptcy last week. How it handles this problem — of not enough money set aside to pay the pensions it has promised its workers — is being closely watched by other cities with fiscal troubles.

Kevyn D. Orr, the city’s emergency manager, has called for “significant cuts” to the pensions of current retirees. His plan is being fought vigorously by unions that point out that pensions are protected by Michigan’s Constitution, which calls them a contractual obligation that “shall not be diminished or impaired.”

Gov. Rick Snyder of Michigan, a Republican who appointed Mr. Orr, signed off on the bankruptcy strategy for the once-mighty city, which has seen its tax base and services erode sharply in recent years. But the governor said he worried about Detroit’s 21,000 municipal retirees.

“You’ve got to have great empathy for them,” Mr. Snyder said in an interview. “These are hard-working people that are in retirement now — they’re on fixed incomes, most of them — and you look at this and say, ‘This is a very difficult situation.’ ”

On Sunday, Mr. Snyder fended off the notion that the city needed a federal bailout. “It’s not about just putting more money in a situation,” the governor said on “Face the Nation” on CBS. “It’s about better services to citizens again. It’s about accountable government.”

Many retirees see the plan to cut their pensions as a betrayal, saying that they kept their end of a deal but that the city is now reneging. Retired city workers, police officers and 911 operators said in interviews that the promise of reliable retirement income had helped draw them to work for the City of Detroit in the first place, even if they sometimes had to accept smaller salaries or work nights or weekends.

“Does Detroit have a problem?” asked William Shine, 76, a retired police sergeant. “Absolutely. Did I create it? I don’t think so. They made me some promises, and I made them some promises. I kept my promises. They’re not going to keep theirs.”

Vera Proctor, 63, who retired in 2010 after 39 years as a 911 operator and supervisor, said she worried that at her age and with her poor health, it would be difficult to find a new job to make up for any reductions to her pension payments.

“Where’s the nearest street corner where I can sell bottles of water?” Ms. Proctor asked wryly. “That’s what it’s going to come down to. We’re not going to have anything.”

Officials overseeing Detroit’s finances have called for reducing — not eliminating — pension payments to retirees, but have not said how big those reductions might be. They emphasized that they were trying to spread the pain of bankruptcy evenly.

When the small city of Central Falls, R.I., declared bankruptcy in 2011, a state law gave bondholders preferential treatment — effectively protecting investors even as the city’s retirees saw their pension benefits slashed by up to 55 percent in some cases.

Detroit, by contrast, wants to spread the losses to investors as well as pensioners, and hopes to find cheaper ways to cover retirees through the subsidized health exchanges being created by President Obama’s health care law.

Bill Nowling, a spokesman for Mr. Orr, said the emergency manager’s restructuring plan would treat bondholders the same as retirees in bankruptcy.

“How can we tell pensioners or city workers that we’re going to have to adjust their payments on their pensions because of decisions that they didn’t make but that affect them, but that we’re going to pay more to people who made risky investments?” he said.

In recent years, public sector pensions have often emerged as a political point of contention, earning scorn from taxpayers who work in the private sector, where defined-benefit pensions providing a guaranteed stream of income in retirement have grown increasingly rare.

But the average pension benefit in Detroit is not especially high. The average annual payment is about $19,000, said Bruce Babiarz, a spokesman for the pension funds. And it is about $30,000 for retired police officers and firefighters, who do not get Social Security benefits, he said. Some retired workers get larger pensions, though: about 82 retirees who either worked many years or had high-salaried jobs are paid pensions of more than $90,000 a year, he said.

Among them is Isaiah McKinnon, who was the city’s police chief in the 1990s and whose pension is just over $92,000 a year. Dr. McKinnon said he and other officers earned their retirement money by serving in a dangerous profession. Dr. McKinnon was shot at eight times while on the job and was stabbed twice, and he has scars from the attacks on his neck and abdomen, he said.

Dr. McKinnon, who holds a doctoral degree in education administration, is an associate professor at the University of Detroit Mercy. He expressed concern about retired rank-and-file officers whose pensions were based on salaries far lower than his.

“We’re in this predicament, and everyone has to suffer to an extent,” Dr. McKinnon said. “But the predicament and the percentage — that has to be talked about.”

Many retirees expressed a feeling of powerlessness, a sense that they stand to lose the benefits they worked a lifetime for because of things beyond their control. Motor City has lost more than a million residents over the last six decades. When it shrank its work force, it left fewer current workers to contribute to pension funds that still had to pay benefits that were earned by large numbers of older retirees who had served Detroit when it was a bigger city.

Detroit, like many other cities and states, anticipates that its pension funds will earn about 8 percent in interest each year — a target that proved overly optimistic during the recent downturn, when it fell far short.

Laws allowing workers to collect pensions even when they retired at young ages proved expensive, as did adjusting benefits for inflation. And some of the accounting measures the funds used made them look healthier than they actually were. Mr. Orr recently announced that the funds, which had reported a shortfall of around $644 million, were in fact underfinanced by more like $3.5 billion, a figure that some dispute.

But other problems are unique to Detroit. Several pension officials were accused this spring of taking bribes and kickbacks to influence investment decisions, and Mr. Orr recently called for an inquiry into possible fraud, waste or abuse in the pension system.

For some retirees, pension reductions would compound the other difficulties of living in Detroit.

Michael Wells, 65, retired in 2011 after working at the Detroit Public Library for 34 years. He said he still owed close to $100,000 on his house in Detroit, which was appraised recently at $25,000. “I’m totally underwater here,” said Mr. Wells, who is one of the plaintiffs in a union-backed lawsuit to stop the city from filing for bankruptcy and from reducing pension payments.

He said he viewed the pension as part of the overall pay he was promised. “It’s deferred income,” he said. “Had I not had a pension, perhaps I would have gotten several dollars an hour more and that would be O.K. I would have taken that money and invested it in some kind of mutual fund or stock.”

Paula Kaczmarek, 64, said that she had planned to retire from the Detroit Public Library in 2014, but that she decided to retire early because she was having health problems and she feared younger co-workers could be laid off if there were more rounds of staff cuts. (The city, which had 12,302 workers three years ago, now has only 9,560.)

“It’s not anxiety, it’s fear,” Ms. Kaczmarek said of the proposed cuts.

And many simply cannot believe that Detroit, which was once the nation’s fourth-largest city, could go bankrupt.

Dr. McKinnon recalled that when he was a young man in the police academy, he once asked a sergeant what would happen if the city went bankrupt. “ ‘The city won’t,’ ” he said the sergeant had replied. “ ‘And besides, there’s billions of dollars in the retirement fund.’ ”
Jeff Karoub of the Associated Press also reports, Detroit retirees worry about possible pension cuts:
K.D. Bullock had been retired from the Detroit Police Department for nearly 17 years and was working as a casino security supervisor when he encountered a problem last March —long accustomed to working on his feet, he suddenly couldn’t make it up a flight of stairs. After months of doctor’s appointments, he was diagnosed with rheumatoid arthritis, which makes it difficult for him to breathe. He not only left his job but had to begin paying others for the fix-up work he’d been doing on his historic six-bedroom house.

Now, he could be facing another hit, this time to his $2,400-a-month pension.

The pensions earned by more than 21,000 retired municipal employees have been placed on the table as Detroit enters bankruptcy proceedings with debts that could amount to $20 billion. Labor unions insist the $3.5 billion in pension benefits are protected by state law, but the city’s emergency manager has included them among the $11 billion in unsecured debt that can be whittled down through bankruptcy. A federal judge has scheduled the first hearing on the city’s case for Wednesday.

The prospect of sharply reduced pension checks has sent a jolt through retired workers who always counted on their pensions—who sometimes sought promotions just to sweeten the pot—and never imagined they could be in danger even as the city’s worsening finances finally led to its bankruptcy filing last week.

Bullock says he’s worried he’ll have to sell his home in Detroit’s historic Indian Village neighborhood, and others are wondering if they can afford a house at all.

“A number of things can happen. It just means our lifestyle is going to change — we have no way of knowing,” Bullock said of the choices facing him and his wife, Randye.

The average annual pension payment for Detroit municipal retirees is about $19,000. Retired police officers and firefighters receive an average of $30,500. Top executives and chiefs can receive $100,000. Police and firefighters don’t pay into the Social Security system so they don’t receive Social Security benefits upon retiring.

Bullock, 70, said the idea that his pension could be reduced is “a hard pill to swallow” after 27 years on the force working his way up. He said he was proud to be the first black commanding officer of the department’s communications system.

He said that pensions — and people — should be a priority over other city assets, such as artwork at the Detroit Institute of Arts, some of which could be sold to help satisfy the city’s staggering debts. But art patrons have protested the idea of auctioning off Old Masters in the museum collection. And investment funds have spoken up for the average people who could get only cents on the dollar for their investments in supposedly safe city bonds.

The ripple effects of the pension issue are touching people far beyond Detroit.

Glenda Dehn, 66, and her husband planned to spend winters in Arizona after his retirement from the police force, but since their recent divorce after 48 years of marriage, the home in Peoria, Ariz., is her permanent residence. Now she worries that she’ll have to move in with family members in Michigan.

“It would be a major life change for me and many, many others,” said Dehn, who also has a son on the force.

Likewise, police retiree Warren Coleman, 76, wonders if his other investments will be enough to support him. In his 27 years on the job before he retired as an executive lieutenant and moved to Ocala, Fla., he said he “put a whole lot of effort into getting promoted” with the rising retirement benefit in mind.

“I intended ... to do the best I could while I was there and get me in as nice a position as I could,” he said.

Not knowing what’s going to happen to the pensions — especially after paying into them and planning retirement around them— is the biggest concern for retirees right now, said Rose Roots, a 30-year city employee who retired in 1997 as a job-training specialist. She’s also the president of a retiree chapter of the American Federation of State, County and Municipal Employees. People want advice, she said, but there is little she can say.

“I’ve had some older retirees call me on the phone in tears because of their medical needs,” said Roots, 76. “I’ve never received calls like the calls I get now.”

Roots said her pension payment is “well below” the $19,000 annual average for municipal employees. “At this point I can’t even guess at what may happen that may force me to make changes,” she said.

Retirees are putting their hopes in state lawsuits filed by the pension funds. They argue that pensions are protected by the Michigan Constitution and should not be part of the bankruptcy process. The bankruptcy judge will likely rule on whether federal bankruptcy law supersedes the state guarantee.

The impact of the decision could fall heavily on retirees who had low-paying jobs and got small benefits checks.

Michael Woodson began receiving a disability pension of less than $500 a month after he said he fell off a truck while working for the sanitation department. The 57-year-old, who uses a walker, lives in a rugged neighborhood “in the heart of Detroit.”

“My concern is just (living) every day,” he said. “When you come from where I come from, things like this happen all through your life. ... I’ve been a blue-collar worker or less all my life. You learn to struggle.”

Coleman, the Florida retiree, said he’s not only concerned about his future, but also the city he served. He remembered working during the 1967 riots, and worries about the anger if thousands of people lose most of their income in the bankruptcy process.

“I see some big problems as a possibility,” he said.
Sadly, what is happening in Detroit will happen in many more U.S. cities struggling with crippling public debt. The articles serve as a painful reminder that public pensions are not as sacred as people think. When the money runs out, pensioners face huge cuts to their pensions as cities try to assuage bondholders to keep lending them money.

And Detroit's pension woes aren't only due to the decline of a once prosperous city. Bloomberg reports on how bad real estate deals haunt Detroit's pensions:
The city’s $2 billion General Retirement System lost $16 million in fiscal 2011 when it wrote off a housing development near Sarasota, Florida, that collapsed after the real-estate bubble burst, according to pension fund records. The $3.1 billion Police and Fire Retirement System lost about $15 million on 1,100 vacant acres 30 miles east of Dallas that was to be sold to homebuilders.

A 2006 loan guarantee for a Westin hotel and condos in downtown Detroit cost the funds $14 million.

That was just in real estate. The funds lost more than $20 million investing in a telecommunications company started by a Detroit businessman, $30 million on a cargo airline and almost $70 million on collateralized debt obligations -- derivative securities backed by a pool of bonds, loans and other assets. 
You read about these deals and wonder why wasn't there any proper governance to avert such questionable investments? These questionable investments are happening all over the United States, typically at local and municipal pensions which lack proper oversight.

The Pew Charitable Trusts just released a report on how states can adopt several practices to help municipalities in financial distress avoid having to file for bankruptcy protection. I recommend states look into consolidating local and municipal pensions at a state level. State pension plans are typically much better governed than local and municipal pension plans.

As I stated above, I fear that Detroit's cries of betrayal will be heard all over the United States where many cities are being crushed by crippling public finances. The plight of Detroit's pensioners is now being played out in the courts where a legal challenge is questioning the constitutionality of cutting pension payments.

No matter what the courts decide, it's clear this bankruptcy and others like it will impact public pensions and the lives of workers and retirees. What is happening in Detroit will happen elsewhere and is no different than what happened in Greece. When the money runs out, pensions get hit and people's lives are disrupted.

Below, Bloomberg Economic Editor Michael McKee examines whether Detroit's bankruptcy will unleash a wave of municipal filings as cities shoulder massive debts and pension obligations. He speaks on Bloomberg Television's "In The Loop."