Tuesday, January 7, 2014

Detroit's Deep Pension Freeze?

Reuters reports, Detroit manager freezes pension fund, creates 401k-type plan:
Detroit Emergency Manager Kevyn Orr has frozen the pension fund for some of the city's workers, replacing it with a 401k-type plan, according to an executive order obtained by Reuters on Monday.

The pension freeze, which took effect on Dec. 31, only affects Detroit's General Retirement System, which covers non-public safety workers. The action closes the pension fund to any new or rehired employees and freezes benefit accruals for current workers. It also stops worker contributions to the pension and annuity savings funds and ends cost-of-living adjustments for pension payments made to retirees.

As of Jan. 1, the order created a defined contribution plan for affected workers.

Orr issued the order on Dec. 30, but it was not posted on a web page listing his other orders since taking over Michigan's biggest city in March.

Detroit's pension systems, made up of the general retirement and police and fire funds, are a major factor in the more than $18 billion in debt and other obligations that led to the city's historic municipal bankruptcy filing on July 18.

Tina Bassett, a spokeswoman for the General Retirement System, questioned Orr's action in light of ongoing U.S. Bankruptcy Court-ordered mediation between the city and its pension funds and other creditors.

"This is an outrageous and over-zealous action from the EM's office," Bassett said in a statement. "Again the EM's office demonstrates a lack of integrity and willingness to make a good faith effort when negotiating with our pension system."

Orr's spokesman was not immediately available for comment. Detroit's new mayor, Mike Duggan, had no initial comment, according to his spokesman.

The Detroit retirement systems have filed an appeal with the U.S. Court of Appeals for the Sixth Circuit, hoping to overturn Judge Steven Rhodes' Dec. 3 ruling that the city was eligible for Chapter 9 municipal bankruptcy.
Reuters followed up soon after to report Detroit's emergency manager opts to delay pension freeze:
Detroit Emergency Manager Kevyn Orr on Monday delayed a move to freeze the pension fund for some of the city's workers just hours after the order became public, saying a delay would allow for mediation with the city's retirement funds to play out.

Orr had issued the order on Dec. 30, with an effective date the following day, but it did not come to light until Monday when pension officials criticized the move. The document was not posted on a web page where Orr's other executive orders have been since taking over Michigan's biggest city in March.

Despite the delay, Orr said he reserves the right to retroactively freeze the General Retirement Fund, which covers non-public safety workers, retroactive to Jan. 1 if mediation fails to produce an agreement on a $3.5 billion unfunded pension liability the city "cannot afford to pay."

"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 in a statement.

He added that "an additional delay without the prospect of a mediated solution threatens to further erode essential services and public safety."
Bill Vlasic of the New York Times also reports, Detroit Pensions Are Frozen, Then Thawed:
The city’s emergency manager, Kevyn D. Orr, in an unpublicized move last week, ordered that pension benefits for thousands of public employees be frozen, but said on Monday that he would delay the move to allow for a possible compromise in federally mediated talks.

Mr. Orr’s abrupt decision to stay his executive order of Dec. 30 came after protests from representatives of the general retirement system, which covers 5,600 active workers and 12,000 retirees.

His executive order froze benefits for those employees and retirees, eliminated cost-of-living increases, and created a 401(k)-style retirement plan for all new city workers. The moves were intended to save Detroit money as it reorganizes its debts and liabilities in United States Bankruptcy Court.

In backing off the order on Monday, Mr. Orr said that he reserved the right to reinstate the freeze retroactively to Jan. 1 if mediated talks could not produce a compromise on Detroit’s pension obligations. He did not say why he stayed the order, but his action came shortly after news reports disclosed it.

“Time is running short, and the city’s financial status remains dire,” Mr. Orr said in a statement. “An additional delay without the prospect of a mediated solution threatens to further erode essential services and public safety.”

Mr. Orr has estimated that the city has about $3.5 billion in unfunded pension liabilities that it cannot afford. Representatives of the pension funds have argued that the liabilities are considerably less.

The pensions are among the most challenging issues Detroit has to address in its “plan of adjustment” in the Chapter 9 bankruptcy case.

While Mr. Orr has targeted the pension plans as too burdensome to manage, employee unions and retirement system officials have protested that workers deserve to be treated differently in bankruptcy from Detroit’s thousands of other creditors.

Mr. Orr’s executive order affected nonuniformed employees and retirees. While current retirees would continue to receive pension checks, active workers would not accrue additional benefits based on time worked. It did not affect the police and fire retirement system, which is considered to be better funded better than the general retirement accounts.

The order was not released to the news media or posted on the city’s website, although it was signed on Dec. 30.

Under Michigan’s emergency-manager law, Mr. Orr has wide power to make changes to Detroit’s finances and contracts.

A spokeswoman for the general retirement system, Tina Bassett, said Monday that Mr. Orr’s order was “outrageous” and showed a “lack of integrity” because it could undermine the continuing, federally mediated talks.

“Currently we are in the midst of mediations that we thought were going rather well,” she said in a statement. “We can only wonder why take this action now and for what purpose?”

But Ms. Bassett said the stay was welcomed by retirees and city workers, who “are not responsible” for Detroit’s financial distress.

“We welcome this opportunity to continue to negotiate in good faith as part of the continuing federal mediation process,” she said.
I don't know what is going on in the U.S. but I think the record cold snap is affecting the judgment of  politicians and "emergency managers" overseeing pensions.

I'm going to repeat this over and over again, shifting public or private sector workers into a defined-contribution plan is effectively condemning them to pension poverty. Politicians recommending such reforms are absolutely clueless on the benefits of defined-benefit plans. They're basically appealing to the masses who are equally clueless on what consists of good pension and economic policy.

Unions are right to fight these proposed changes but as I stated a while ago, Detroit's cries of betrayal will be heard all over the United States. Having said this, Detroit's pensions were completely mismanaged and fraught with corruption and conflicts of interest.

It's a story I've seen too many times. States and cities pay their public pension fund managers peanuts, they attract incompetent and corrupt fools to manage these pensions and surprise, their pensions are suffering irreversible deficits, leaving these plans vulnerable to ambitiously clueless politicians looking to boost their poll numbers.

Illinois is a perfect example of this. Politicians there are patting each other on the back for slaying their pension dragon but they too just passed meaningless reforms. Importantly, unless states and cities implement independent and qualified investment boards and start paying their pension fund managers properly, U.S. pension reform is a hopeless cause.

Below, Detroit's former city employees feel 'betrayed' by pension cuts. "I haven't seen any cuts at the top, but they're trying to cut our pensions - the guys that are out here working," former Detroit firefighter David Allen told the Guardian's Dominic Rushe.

Welcome to the new normal where hedge funds and private equity funds profit from municipal bankruptcies all while graciously accepting handouts from public pension funds praying for an alternatives miracle.

It's beyond fucked up and unless the masses wake up and revoke Wall Street's license to steal, Detroit's deep pension freeze will hit every city and state struggling with crippling public finances.