Detroit’s Pensions. Mayhap one of the most difficult challenges Detroit faces in this next stage of attempting to put together a so-called Plan of Adjustment in order to exit municipal bankruptcy will be to address the city’s two public pensions—and its retirees. The funds, according to Emergency Manager Kevyn Orr, are $3.5 billion short of what they need to meet their obligations. Not only that, but Mr. Orr reports that because far less is coming in annually than going out, the problem is getting worse. It is the largest debt facing Detroit in seeking to exit from bankruptcy. The twin pension (the one serving police and firefighters is in better shape than the general retirement system. The police and fire fund has already eliminated its former managers, brought on competent advisers, and now appears to be following sound financial practices funds appear to be victims of poor investments and outright corruption.) funds, moreover, lie at the heart of ongoing, expensive litigation that could go to the Supreme Court—diverting time and resources critical to restoring not only balance, but also to minimizing reductions in payments to the city’s retirees. As U.S. Bankruptcy Judge Steven Rhodes, in his decision last week warned, a one-time infusion of cash―even could funds be found or raised―would not address the underlying problem: it would instead serve both retirees and taxpayers poorly. As Nolan Finley of the Detroit News pointed out, the twin funds could benefit from “stricter rules governing investment risk and guiding how rates of returns are projected. For example, in 2009, as the funds were losing 16 percent of their investments, the boards voted to declare a nearly 8 percent rate of return. That helps explain why the funds themselves were painting a financial picture that appeared rosy until Orr started digging for the truth.” It appears that Emergency Manager Orr is contemplating either taking over the funds or asking that they be incorporated into the Michigan state retirement system.
Will Detroit Help San Bernardino? Judge Rhodes’ decision last Thursday afternoon that Detroit’s pensions may be impaired, because the federal chapter 9 bankruptcy law prevails over the Michigan state constitution, has created some anticipation in San Bernardino that the decision will support San Bernardino’s position—a position largely supported to date by U.S. Bankruptcy Judge Meredith Jury. But shortly after Judge Rhodes gave down his ruling, the California Public Employees Retirement System (CalPERS) issued the following statement:
“The Detroit court failed to recognize the difference between a two party contract and the unique nature of a state public employee retirement system, which creates a three-way relationship among a public agency, its employees and the retirement system. In California, our members’ vested rights to their pensions are protected by the California constitution, statutes and case law.
“Unlike Detroit, CalPERS is not a city pension plan. CalPERS is an arm of the state and was formed to carry out the state’s policy regarding public employees. The Bankruptcy Code is clear that a federal bankruptcy court may not interfere in the relationship between a state and its municipalities. The ruling in Detroit is not applicable to state public employee pension systems like CalPERS.”
CalPERS’s position has not, of course, prevailed in the U.S. Bankruptcy Court—nor has CalPERS’ efforts to appeal to the 9th U.S. Circuit Court of Appeals succeeded. Yet the agency is distinct in the way it is created—part of a statewide system. And now all the parties are seeking to jockey for judicial position in ways that will have significant implications for retirees, employees, taxpayers, and cities.