9.30.13

Motor City Pension Investments & Payment. Detroit Auditor General Mark Lockridge and Inspector General General James Heath have released an investigative report finding significant violations in pension fund investments and excessive awards to retirees―during times when the funds were losing value. The earnings losses, according to the staff of Emergency Manager Kevyn Orr’s office may have cost more than $1 billion―so that the Emergency Manager is considering removal of pension board trustees, as well as exploring options for transforming the city two pension systems from defined benefit to defined contribution plans effective next year.  Detroit has approximately 33,000 employees and retirees who have, according to human resource records, been promised “exceptional benefit packages” to promote loyalty and reduce turnover. The ongoing investigation has determined that each of the city’s two pension funds had exceeded the levels of permissible real estate investment allowed under Michigan law―and had lost $144.8 million on those investments as of 2010. The investigation is ongoing with regard to the way overtime and high yielding bonuses, as well as unemployment compensation―and how they have affected the two pension funds, as well as the post-retirement benefit funds. In response to Mr. Orr’s proposed pension freeze, the city’s two public employees’ unions have challenged any changes as being both unconstitutional in Michigan and in violation of the law. In a critical federalism test, the unions are challenging whether U.S. Bankruptcy Judge Stephen Rhodes even has authority to consider any of Mr. Orr’s proposed changes to either pension plan as part of the chapter 9 bankruptcy case in a federal court.

Federal Help. The White House late last week directed more than $100 million in grants to Detroit to help tear down vacant buildings, with White House Chief Economic Advisor Gene Sperling, U.S. Attorney General Eric Holder, U.S. Transportation Secretary Anthony Foxx, and HUD Secretary Shaun Donovan making the trip to the Motor City, where, at a closed door meeting with state and local leaders, they announced the grants, but made clear the administration has no plans to offer a massive bailout to the city similar to the one provided by Congress and the Administration to rescue Chrysler and General Motors. The plans include a “blight commission,”  drawn from the community to oversee demolition of the city’s 76,000 abandoned homes and commercial buildings, as well as creation of an organization to ensure federal and private-sector funds are administered for their intended purposes. The White House proposal, however, includes no provisions to help restructure Detroit’s $11.5 billion in unsecured liabilities, the single largest burden weighing on the city’s balance sheet; nor did the White House entourage offer any assistance with regard to the city’s pensioners, a dispute the White House says should be handled in bankruptcy court. Instead, as administration officials have signaled in meetings over the past month, the White House is pressing ahead with its effort to partner with Detroit-area business and foundation leaders to augment private-sector support for the city with federal money. Generally the support is being funneled from existing programs in the Justice, Transportation and Housing and Urban Development departments to corresponding places in a cash-strapped Detroit.

Taking Stock in Stockton. In contrast to both Detroit and San Bernardino, Stockton, as it is seeking to exit chapter 9 municipal bankruptcy, has vowed to continue making all its required pension payments to CalPERS even as it forces its Wall Street creditors to accept less than full payment on their debts, releasing a statement late last Friday, the city said it will “honor its obligations to fund employee retirement benefits under the CalPERS pension plan.” The Stockton bankruptcy – along with San Bernardino’s case – has shaped up as a major test of the sanctity of public pensions, generating a showdown between Wall Street versus the California public pension fund. Stockton has indicated, since filing for bankruptcy last year, that it would keep paying CalPERS every dime it is owed, directly taking on the municipal bond insurance companies that guaranteed Stockton’s issuances. The insurers stand to lose millions of dollars; but it remains unclear how such losses might affect the costs of access to the capital markets for a post-bankruptcy Stockton. The bond companies tried to get the bankruptcy filing thrown out of court last spring, but lost. The 288 page bankruptcy exit plan document submitted to the Stockton City Council by staff members reinforces the concept that CalPERS would be held harmless, while other creditors would suffer losses. The city pays CalPERS about $29 million a year, according to officials with the California Public Employees’ Retirement System. While their pensions would be protected, officials note that city employees are suffering in other ways. The proposed plan “significantly impairs the interests of former employees and retirees with respect to health benefits,” according to the document, noting that the city in the last three years has slashed its workforce by 30 percent, including a 25 percent cut in police officers. The council could approve the plan as early as this week and then forward it to U.S. Bankruptcy Court in Sacramento. Ultimately, the plan would go to a vote of the various creditors and then the judge before it can take effect. A spokesman for one of the bond insurers, Bermuda-based Assured Guaranty, said the company would not comment immediately on the plan, simply noting his team is “reading through it,” referring to the 266-page document. In a statement, CalPERS said Stockton’s plan follows the law and recognizes “the importance of a secure retirement to its current employees and retirees, and the positive impact that pensions have on recruitment and retention of quality public servants.”

 

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