01.07.14

Freezing Pensions. Detroit Emergency Manager Kevyn Orr yesterday abruptly rescinded his unposted Order 21, a New Year’s Eve freeze on the pension benefits of Detroit’s General Retirement System sent to Mayor Mike Duggan, union officials, members of City Council, former Mayor Dave Bing, and the Michigan Treasury Department. In the order, Mr. Orr said the freezing of pension benefits “will enhance the city’s capacity to provide or cause to be provided necessary government services essential to the public health, safety and welfare in addition to rectifying the city’s financial emergency.” The order also closes the retirement system’s Annuity Savings Fund to new employees, and it would halt accepting contributions sometime this month. The order also ends future cost-of-living adjustments. 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.” The surprise attack on the benefits came in the midst of federal judicially mediated negotiations between the emergency manager’s legal team and attorneys for the pension funds, retirees, and labor unions. Included in the order was elimination of the pension “escalator,” so that there would be no future cost-of-living increases for all retired city employees in the General Retirement System, and Mr. Orr’s order also closed the pension system’s Annuity Savings Fund, an added benefit for some municipal workers. Under the order, years of service and final annual compensation used to calculate pensions would be frozen and the city would make no other contributions to the fund.

According to Mr. Orr, the freezing of pension benefits would have enhanced “the city’s capacity to provide or cause to be provided necessary government services essential to the public health, safety and welfare in addition to rectifying the city’s financial emergency,” stating his actions were authorized under the broad powers vested to him by Michigan’s emergency manager law, Public Act 436 of 2012. The emergency manager’s order did not propose to take over the General Retirement System’s board, which Mr. Orr has the authority to do, and it did not affect Detroit’s Police and Fire Retirement System, which is generally agreed to be better funded than the General Retirement System. According to the order, Detroit employees who were not already vested in the retirement system “shall not be entitled” to pension benefits. Tina Bassett, a spokeswoman for the General Retirement System, called Mr. Orr’s pension freeze “an outrageous and over-zealous action.” The freeze, which was neither made public, nor posted on the city’s web site, would have eliminated the accrual of new benefits for workers and closed defined benefit pensions for any new employee, shifting the employees into a 401(k)-style defined contribution retirement plan. The sharp reversal of his unpublic decision came in the wake of reports in the Detroit News early yesterday, after which, or mayhap in response to which, Mr. Orr stated he would postpone the pension freeze to give federal court-ordered mediation talks between the city and its two pension funds time to bear fruit: “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….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.” According to Mr. Orr’s office, the two Motor City pension funds together have a $3.5 billion unfunded liability, a figure the pension systems dispute: their figures estimate the unfunded liability at around $700 million. Tina Bassett, a spokeswoman for the General Retirement System, called Mr. 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. 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?…The GRS today is one of the best funded municipal pension funds in the nation. The Board is transparent, accountable and fiscally responsible. The problems of the past have been corrected with procedures and policies that ensure no malfeasance can occur…We are not responsible for Detroit’s financial woes. The GRS was adamantly against the City entering into the swaps deal and passed a resolution stating so. The City Council passed it anyway…We entered into the mediation process with an open mind and willingness to work toward solutions that are in the best interest of our members, retirees and Detroit…We thought mediation was supposed to help resolve these issues. Where is the credibility?”

One Step Closer. Jefferson County yesterday found one of two remaining obstacles to exiting municipal bankruptcy removed when the so-called Wilson ratepayers (a triad of customers on the county’s sewer system) filed a motion Sunday night to dismiss their appeal of the county’s plan of adjustment, which U.S. Bankruptcy Judge Thomas Bennett formally approved on November 22nd. Jefferson County closed on the sale of $1.78 billion of new sewer warrants Dec. 3rd and used the proceeds to write down $3.1 billion of old debt – a major step toward implementing the plan. The attorney for the Wilson ratepayers noted: “After careful consideration of Judge Bennett’s order confirming the plan of adjustment and the legal precedents of both the Eleventh Circuit Court of Appeals and other circuits, we simply feel that the likelihood of success at this stage is minimal and unlikely to produce any benefit or favorable result for the ratepayers.” The action leaves one remaining obstacle—an appeal on behalf of Jefferson County Tax Assessor Andrew Bennett and 12 others, who include current and former Birmingham City Council members, state lawmakers, and others on the county’s sewer system.

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