in this country is not governed by reason.
OT - Federal bankruptcy law vs. pensions backed by state constitution
Take to the sea!
I'm not a lawyer either. My understanding is that states can write whatever they can get passed into their constituion. But if they write something that cannot be upheld on the federal level, then it will obviously fail when it is challenged accordingly. Take, for example, the recent marijuana laws in some states.
Can Michigan bail out Detroit? Of course it can, if it is willing to divert it's tax revenues. Do the majority of the voters in Michigan wish to do so? Is it political suicide to propose to do so?
I'm betting on the 10 cents on the dollar scenario. And they may be lucky to get that much. Detroit is only the first of many, public and private. Sometimes, it's good to be first. Especially when the line will grow long.
The PBGC does not have nearly enough money to pay 10 cents on the dollar for everything that is currrently underfunded in the private sector. And the public sector? IL? CA? And that's with the market at an all time high. What happens if it crashes:
The governments next move will be to roll everyone's 401 into the new "Social Security" program.
It's the only trough left big enough to feed the hogs.
no politician will get elected on the premise of paying 100% of Detroit pensioners. It won't happen. Michigan will not pay, unless the Federal Government makes them (which would be a relief to the politicians).
I don't think the Federal Government wants to touch this with a 10' pole. They can pay, but what happens to the other (mid to larger) cities that are on the brink of defaulting? If the government pays now, that's sending a bad message to all of them.
Unfortunately, the pensioners get screwed and the gov't maybe can create a special social security payment to make up for this.
We never should have constitutionally guaranteed anyone's pension.
when they hit retirement age? Without a pension they would be on public assistance so either way we are paying for them.
They won't get rid of them entirely. Just reduce the payout and increase the amount the retirees have to pay for medical. Not sure if court will determine exactly what future payouts would be but what I've heard kicked around is that those with the more expensive pensions will be cut harder than those receiving less and early retirees who either can or did get other jobs after they retired will be hit hard.
Believe me, this sucks. I wish none of these guys had to take a hit but the pension funds are like $3 billion underfunded due to mismanagement of the fund and the fact that there isn't enough income coming in to the City to support all the retirees. There really is no choice.
Orr was offering 10 cents on the dollar. That's reprehensible, IMO.
On what basis? Is the extra money needed to pay more just supposed to magically appear from somewhere?
I'm not sure I understand your question. I think you're asking "on what basis is it reprehensible."
I would argue that it's reprehensible on both moral and ethical bases. I don't think people are really stopping to consider the magnitude of human suffering that is about to occur. As a poster below pointed out, most public sector retirees are not eligible Medicare. They are also sometimes ineligible for social security, or have their benefits reduced. Additionally, consider that workers took lower annual salaries in exchange for higher deferred compensation in the form of pensions and health care benefits.
And yes, some of these people will be eligible for Medicaid, but consider the implication of their eligibility. It means that they will literally have been impoverished by this bankruptcy. In order to be eligible for Medicaid must be at 133% or less of the federal poverty line.
You've made a separate point that there simply isn't enough money to go around. Fair enough, and I think it's clear that nobody is going to get 100% of what they're owed. But offering 10% to people who need these benefits to maintain a decent standard of living is laughable. No amount of cynical posturing about hard realities will change that.
Orr has to make tough decisions based on the hand dealt. It is ridiculous for you to suggest he is immoral and unethical to offer only 10 cents on the dollar. The city is in a tough spot and is insolvent -- meaning it does not have enough money to pay what it owes to lots and lots of companies and people and those companies and people are absolutely going to get screwed and paid out at pennies on the dollar. The real immoral and unethical activies here are the decades of mismanagement and corruption that has destroyed the once-great city of Detroit.
The real immoral and unethical result is the wealth transfer to the stakeholders at Miller Canfield and Jones Day.
Yeah, they should totally work for free. /s
$11bn filing. Their fees are a (big) rounding error. It generally is money well spent to hire capable professionals to do it right.
once said, Tis better to let the private sector handle most of these things. The governement is not financially efficient. This is the result of decades of mis-management from Coleman Young to Kwame.
It's almost like you didn't read my previous comment.
That's to normal unsecured creditors. Pensions won't get stuck with that.
No, I think pension payments to retirees would have to be cut by about 1/3:
There are two funds, GRS and PFRS (General and Police/Fire, respectively)
As of FY11 (6/30/11, the latest data available), they have a combined balance of about $5.8B in net fund assets available to pay retirees.
The pension funds claim they are unfunded by ~$1B, but the EFM estimates they are actually underfunded by ~$3.4B.
So, if they were fully funded using reasonable assumptions, they'd have $9.2B of net fund assets. Well, the current assets are untouched by bankruptcy. And if the unsecured creditors end up with 10c on the dollar, they'd recover another 340M from the bankruptcy, leaving the system with assets of $6.1B vs liabilities of $9.2B. So the system would by ~2/3 (6.1/9.2) funded, implying cuts of ~1/3.
Not clear how those cuts would be parceled out... do you cut everyone by 33%, do you cut higher pension amounts by a larger percentage (ie, make it regressive), etc.
In addition, retirees currently have health care costs covered by the city. There are no assets held against this liability, so the entire thing is unsecured. EFM estimates that to be a $5.7B liability. That gets cut to $570M. So healthcare coverage is basically out the window. I have absolutely no idea how they backfill this. You (or a spouse) have to have worked for 10 years in a Medicare-eligible job to be eligible for Medicare. City jobs do not meet that requirement, although many retirees may be eligible through another job they held or a spouse. Many, particularly if their pension is cut, could find themselves eligible for Medicaid, and many more should be able to get health care through the new exchanges. But no matter how you slice it, it is going to be quite bad for healthcare for retirees. If you are a medical professional in metro Detroit, and especially in the city proper, prepare for a dramatic reduction in revenue.
Current net fund values:
"If you are a medical professional in metro Detroit, and especially in the city proper, prepare for a dramatic reduction in revenue."
I'd say that Vanguard Health agrees with your assessment http://www.crainsdetroit.com/article/20130624/NEWS/130629955/dmc-owner-vanguard-to-be-acquired-by-dallas-based-tenet-healthcare
My understanding is that there is about 11B in unsecured debt. 6B of that is Health/Other benefits and 3.5B is Pensions. This WSJ Article states that retirees were offered "less than 10% of what they are owed." It also said that all unsecured creditors were offered 2B of the total 11 That's consistent with pretty much every article I've read.
You're obviously more knowledgeable about bankruptcy proceedings in general. Do you have some specific information that contradicts this reporting? I would seriously be glad to hear it.
The reorganization plan will be very, very complicated. There will be several classes of creditors (senior secured, mezzanine, priority employee, other priority, bondholders, general unsecured, etc.) and each will receive a different distribution. I suspect that the 10% was mentioned in reference to general unsecured creditors like trade vendors, consultants, landlords, even lawyers that the City hired.
As for returns on the pension, based on what you all have said about the MI state constitution, is the state going to be responsible for the shortfall coming out of the bankruptcy case (like the PGBC would for private pensions)??
I'm talking about what Orr offered prior to the bankruptcy filing. The article specifically mentioned the 10% figure specifically in relation to retiree benefits, including pensions. Maybe the WSJ reporters (and several others) had it wrong, but it's right there in black and white.
tl;dr summary: people are confusing what entity is owed what. Detroit owes its pension $3.5B. The pensions owe retirees about $9b. The difference is the current amount of assets in the pension fund that will be unaffected by the bankruptcy.
Longer: OK, quick lesson on different legal entities and pension underfunding.
Basics on underfunded pensions
[Note: I'm making up all of the numbers here to illustrate the impact. There are many actuarial assumptions that go into calculating these numbers that are way beyond the scope of MGoBlog, or even most intro finance courses at business schools!]
Pensions in Detroit (as most places elsewhere in the U.S., other countries use different systems) are supposed to be pre-funded. So, every paycheck the city should set aside the money required to eventually pay the pension amount associated with that wage. Example: you get paid $50K in a year, and the city should put away $2.7K for your eventual retirement That $2.7K gets paid into a pension fund, which is a trust that takes that $2.7K and invests it, so that by the time you retire after 35 years of work it has grown, and, when collected over the course of your working career, the idea is that the accumulated contributions (plus related investment earnings) should be enough to pay out your pension until you die.
Let's say that a typical worker making $50K a year has been contributing $2.7K/year for 35 years and has been earning 8% (Detroit's assumption, incidentally). They'd have accumulated about $500,000 when they retire, and if they live for an average of 20 years after that, the pension would perfectly be able to pay out $50K/year (and actually have a tiny surplus left over). That is how the system is supposed to work. (One important note: it works because of averages: some people will live more than 20 years and would need more money; but some people will die younger, and hence need less. Pooled together, they cancel out. That is a key benefit of pensions -- they provide insurance against outliving your savings, what is known as "longevity risk.")
However, that system is INCREDIBLY sensitive to the interest rate assumption. Remember I said you had to contribute $2.7K every year to make the math work if you can earn 8% returns? If you only earn 7% returns, you would have to contribute $3,600 every year over 35 years to make it work. At 6%, you'd have to contribute $4,800 or so.
So, what Detroit did (partly due to elected officials and partly due to union leaders) was do a few things wrong plus become the victim of low rates. First, Detroit assumed a higher rate of return than they were likely to get. Second, they (quite famously) mismanaged the money. Third, not Detroit's fault, but interest rates have come WAY down, and investment returns are ultimately a function of the rates set by the Federal Reserve.
The upshot is this: Detroit should have been putting $5K into the account, and instead they were putting about 2/3 of what is required to be put into the account.
The current impact of that is that, if you use more reasonable assumptions for the rate of investment return Detroit will earn on its pension assets, it would need a little more than $9B in its pension funds to pay out to retirees. It currently only has about $5.8B. The difference is that 3.4B or so number that people are throwing around.
Pensions and bankruptcy
The pension fund (actually, its two separate funds: one for police and fire, and one general) is a completely separate legal entity than the City of Detroit. While Detroit declared bankruptcy, its pension funds did not. The assets in those pension funds are not part of the bankruptcy proceedings -- the $5.8B in those funds that belongs to retirees is entirely safe from the bankruptcy proceedings. They are, in the industry term, "bankruptcy remote."
However, the City of Detroit owes those funds $3.5B or so still. That $3.5B is the part that the bankruptcy could reduce substantially. If the previous 10c/dollar number thrown out stands, the pension funds obviously collect only $350M instead of $3.5B. So, they would then have $6.1B of assets in total.
The pension would be underfunded... either it needs to reduce payments to retirees, or eventually the fund will run out of money before all of the retirees have died (shortfall risk!). The amount is simply assets/liabilities (or [5.8 current assets + 350M bankruptcy recovery = $6.1B]/9.1B of total pension liabilties = 6.1/9.1 =~ 2/3)
Even in the (unlikely) case that retirees get absolutely zero from the City of Detroit, they would still have the assets currently in the pension funds, so their "worst case" scenario is not much different than what I've already outlined: the liability is unchanged, but they'd only have their existing assets of $5.8B, so 5.8B/9.1B= 64%, so they'd take a 36% reduction instead of a 33% reduction or so.
Who else might fill that gap?
It is NOT the Pension Benefit Guarantee Corp (PBGC). It only covers corporate pensions. Nor will it be the Federal government. It would require an act of Congress most likely. Our own beloved alumnus-President set precedent on that by famously telling New York City to "Drop Dead" when asking for a bailout: http://www.nydailynews.com/news/politics/ford-city-drop-dead-president-snub-inspired-discouraged-ex-gov-hugh-carey-article-1.947295
It could be the State of Michigan -- this will be contested both in the courts and in through the political process, almost for sure.
Detroit will fill part of the gap (that is the 10c/dollar offer; to be negotiated in bankruptcy for sure. Detroit would probably issue new, post-bankruptcy bonds and put the proceeds into the funds to do this. Or, an alternative I'd be interested in proposing, would be that the pension could agree to take X% of the city's total tax revenues for some period of time. That would give the unions incentives to help increase the cities tax revenues, most importantly by increasing employment, helping to raise property values, etc. It would sort of be like giving them equity in the new Detroit, which is what usually happens in corporate bankruptcies.)
But if I were a betting man, I'd say that the retirees are going to bear the brunt of this. I would be awfully surprised if they didn't take a haircut of at least 25% through this process...
This was an amazingly clear explanation. Every article I read made it sound like retirees would get 10% of their pension, which is clearly not their case. As you explain the pension fund would get 10% of the outstanding amount. Anyways, thanks again for laying out the facts. I also thought the equity proposal you put forth was a great idea.
I would say that's largely because the pension fund lawyers want to make it sound like retirees will get 10% of their pension.
The figures I've seen say the Police and Fire fund is about 96% funded and the general fund is about 77% funded. So actually even though UWS did a marvelous job breaking the position down, I think retirees will probably see even less than a 1/3 cut.
(Figures are here: http://www.detroitnews.com/article/20130614/METRO01/306140038)
The other problem is that broke is broke. Orr just can't offer more money than there is, and he can't offer negative money to "Wall Street" creditors in order to give the pension funds more. If we start arguing about what's morally reprehensible I think we'll be in no-no land, but the basic fact is, the law just doesn't allow Orr to hand over everything he's got to one or two creditors and tell the others to pound sand. Orr is very limited by both the law and the numbers on the balance sheet.
Great post, Nobody wants people to lose their pensions. But it is simple math. I would ask the people that say 10% is not moral, what is? please provide a moral number that is fair to secured creditors who keep most cities, counties and states functioning by by bonds?
My wife is a teacher in IL, her pension will get cut, It is not fair, but what can we do.
Finally the people collecting these pensions are not totally innocent, who voted for the city council, mayors and John Dingell the last 40 years?
Thanks for the break down. That is a great post.
It's a bargainning tactic. He'll offer low, they'll offer high and they'll move to somewhere from there.
This is what he offered prior to the bankruptcy and one of the reasons the retiree board sued. If he had been willing to budge from that number, it's possible they would have avoided bankruptcy. He didn't. Now they're in bankruptcy court and a judge will decide who gets what.
There's not much he can do. It's not like the cuts are being placed unnecessarily on retirees. I was reading that current residents of the city receive services that are about as poor as possible (few working street lights, long delays in police response, etc.). The city is in a massive hole, and while I feel bad that pensioners feel the pinch, I also doubt that many of them are overly surprised by this turn of events. But unless you know of some way for the city to recoup billions of dollars to pay down their bills, this is one of the options that has to be addressed.
I'm not a resident of Michigan so I don't pay anything into Detroit's pension system or fund it. I do fund Fereral assistance programs, though.
Pensions are a disaster and very few companies still have them. The issue is that there are defined benefits (specifically medical) that are comletely out of line with all assumptions of healthcare spending made in the 70s-90s. People are living much longer now and medical care costs so much more that the pensioneers are getting 10x the benefits that they put into the system.
Therefore, companies switched to 401Ks and other savings plans.
How about contributing to their own retirement as a contigency plan? I get they were promised something but I still think it's incredibly dumb to not plan ahead. These are the same people who kick and scream when asked to contribute for part of their own healthcare benefits. I'm not anti-union per se, but I'm very much against public sector unions.
Let's leave the union debate alone so that this thread can stay up.
I think you are sorely mistaken about the facts if you think that these people didn't contribute to their retirement funds. Additionally, these benefits are not gifts they were "promised." They are part of a compensation package that they negotiated in return for accepting lower annual salaries. Finally, they aren't eligible for the same federal benefits as private sector employees.
Putting all political issues/public sector unions aside, as you may know, pension planning requires certain assumptions, not the least of which is anticipated investment yield. There is no way the average pensioner would know to challenge that the yields built into the actuarial calculations which govern future pension growth were unrealistically high for Detroit, to say nothing of an awful lot of other state, county and municipal pension systems across the US which used poor assumptions in their models.
The pensioner also had no way of knowing when he/she started working for the city of Detroit 40 or 50 years ago that the city would face huge erosion from its tax base. From what others have said, it looks like most pensions will be cut by about a third. I might just tread a bit easier on some of these folks. They are going to get hurt, through no fault of their own and realistically, I highly doubt the citizens of Michigan are going to assume the tax burden to bail them out.
Why offer a pension if it isn't guaranteed? When Denny McLain used pension funds for other purposes, he went to jail. Why is it OK for goverments to dip into pension money that should be in a separate account, and why shouldn't those who were offered a pension in good faith as part of their pay be able to collect what is rightfully theirs?
who is held accountable? The union bosses? the politicians...how many of them? over what time frame? The issue isn't that someone is responsible but how many...they will never be able to punish them all or prove enough in a court.
If I remember correctly he said he was a bankruptcy attorney.
My limited knowledge on this is that bankruptcy law is federal law and would trump/preempt any state law including the constitution. It certainly would stay (stop) any further proceedings in the State courts and there is no question in my mind th bankruptcy filing happened when it did to stop hearings on motions the pension boards filed. No doubt the pension boards made the constitutional argument b/c they know any ruling from a state court will be trumped.
Big picture, the whole case rides on how much credence the court gives to the pension board motions. If they get a judge who blows off the pension boards this case will fly through the court. If they get a judge who wants to give the pensions play it will really drag out. Watch who gets appointed judge very carefully. The appointment could come from any bankruptcy judge in the 6th Circuit. Detroit has five bankruptcy judges, one of whom is crazy, one of whom is a Bush appointed creditor oriented conservative who is from Ohio who would be hard on Detroit. One is too inexperienced in this kind of matter and wouldn't likely get the call. The best two options are a near 90 year old judge who has seen and done it all and the Chief Justice who is a long time Chapter 11 attorney. Hopefully they don't pick either of the Grand Rapids judges as one is nuts and the other is known to be very hostile towards attorneys from the east side of the state and is one of those "GR should be the center of Michigan and not Detroit" types.
ED yes I'm an atty, yes been before all of these judges but its not what I usually do.
Even for the "seen it all"-type judges, this will be really new, because Chapter 9 is a strange beast that almost never gets used.
As I mentioned yesterday on Twitter, this is throwing the switch in Jurassic Park. No one knows exactly what is going to happen. But raptors may be involved.
True but I can tell you based on judicial temperament and past rulings, there are definitely some judges that will make the process easier or harder. Why do you think no large corporations file Ch 11 in Michigan? It's because they fear certain judges and the NY and Delaware judges are known to be very hands off, quick and friendly to the filing parties.
Cases file in NYC and DE because lawyers know what to expect from the process there and the judges have seen many more cases than in other states. Its basically the lawyers that decide and its actually refreshing that Jones Day had to file this in MI for several reasons, two of which are that its great for the MI bankruptcy bar to get some high-level work but also because it will be fun to watch Jones Day lawyers have to play nice (as apposed to playing NYC "nice"). Going from DE bankruptcy court to a smaller bankruptcy court practice was fun - a drastic change!
The previously largest chapter 9 in the Sixth Circuit was a water district. This is new territory
Which judge do you think would be best from the perspective of the retires about to lose their pensions? The conservative from Ohio?
I think he's more corporate minded. Probably one of the two from Grand Rapids or the one wild card from Detroit (Rhodes). It could be someone from Ohio, Kentucky or Tennessee too but I don't know their judges well
Thanks for the info.
But the State Contitution doesn't prevent the bankruptcy court from modifying pension obligations, nor does it require Michigan to fund any short fall in the event those obligations are modified. The Michigan Constitution basically says that Michigan and its political subdivisions have a contractual obligation to pay pensions, and that they can't diminish or impair those benefits. In this case, Detroit isn't diminishing benefits. A COURT is diminishing them, and eliminating/modifying the contractual obligations themselves. Whatever pension obligations SURVIVE will be protected by the Constitution, though.
*nvm - not sure if my original comment applied.
You're all over it. That ND education blew my Pitt education out of the water! Of course, you'll be paying for it. LOL
Like BiSB hints, federal law >>>>>>> state law (including the state constitution). But my new understanding of the constitutional amendment is that the state is responsible for pension benefits so if the benefits get altered in the bankruptcy case it will be the state taxpayers that make up any shortfall. Smart amendment? Not my place to say but it looks as though the voters are going to pay for their choice ...
The provision you are referring to is not an amendment. It is Article 9, Section 24 of the Michigan Constitution of 1963
Also, I do not think that the State has any role in terms of pensions. The relevant part of the provision states:
"The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby."
Prior to this, public pensions were considered a gratuity which could be changed at will. Thus, you could work for a city for 30 years. Then, after your retired, your political enemies could take over and vote to erase your pension and there was nothing you could do about it. Thus, the people of Michigan voted this section into their Constitution when it was redone in 1963.
The use of the word "and" refers to the entities that are covered - the state and any political subdivision (Detroit in this case). However, the obligation is not shared by the state and the city. Rather, Detroit (like other municipalities in the state) is a separate legal entity from the State of Michigan, with a separate pension system. There is no requirement that the State cover the City's pension system. If there was, Detroit would have handed it over years ago.
This, combined with the fact that the PBGC does not back these benefits, makes the pension issue really tough. Assuming the supremacy argument goes the way that everyone seems to think, the Judge could wipe out pensions for thousands of retirees [EDIT - Please see UWS- Blue's post above. "Wipe out" is an overstatement. I should ahve said "reduce."] who are, in many cases, too old to return to the work force and depend on those benefits. Also, many of them do not qualify for social security since they worked for a municipality.
A pension is part of a job's compensation plan that is promised to mostly public workers when they retire. The whole premise of a pension is not that great. It seems to me that individuals should have control of their own retirement funds like 401k's. The problem is, the pension is what was presented to many employees as their retirement option. I am not really sure how moral it is to just decide to take it away or modify it however the city would like. It is not the retirees fault that the concept of the pension is stupid. I am currently in a pension plan where I contribute over 10% of my gross salary to the fund. It is ridiculous to think that somebody could decide not to give me "my money" when it is time for me to collect. I would have preferred to control my own money from the get-go but it was not an option when I started working. I am sure it was not an option for these folks either.
So who do you propose pays for this?
Just saw that a state judge found that the bankrupcty filing was unconstitutional and has to be withdrawn. (This was a text from the Freep. I have declared the jihad over and downloaded the Freep app.)
Only in Detroit.
Lansing — Ruling that the governor and Detroit’s emergency manager violated the state constitution, an Ingham County Circuit judge ordered Friday that Detroit’s federal bankruptcy filing be withdrawn.
“It’s absolutely needed,” said Judge Rosemary Aquilina, observing she hopes Gov. Rick Snyder “reads certain sections of the (Michigan) constitution and reconsiders his actions.”
Aquilina’s ruling should quickly move state-level legal skirmishing over the Detroit’s Chapter 9 bankruptcy strategy into the Michigan Court of Appeals.
This is a really great display of the functionality of checks and balances in Michigan government (something which Snyder's overruling of the populace by getting a new emergency manager law passed put into doubt).
I have a question for the bankruptcy lawyers: why don't pension obligations just trump unsecured loans and other categories of debt entirely? Is there a possibility that the state constitution gets interpreted as requiring making 100% of those payments, even if it means 100% haircuts for various other stakeholders?
The problem is that if pensions were higher in priority than unsecured bonds, no one would ever be able to issue unsecured bonds again.
Here is why: many (probably most) US cities/states have massively underfunded pensions. If you had to issue debt that was junior (lower priority) to the pensions, there would be a much higher probability of losing all of your money in those bonds, and hence the rates would be much, much higher. In many cases, certainly including Detroit's over the past decade, the rates would have been so high as to inhibit issuance of bonds at all.
Some cities have underfunded pensions that they will eventually work their way out of, but need access to cash right now (or, better example, in say 2010 when tax receipts were unusually depressed due to the recession). If pensions had higher priority than unsecured claims, they wouldn't be able to get those deals done, and many more cities would go bankrupt due to lack of funds. Those bankruptcies are avoidable if the city simply has access to the credit markets -- so it is important that in trying to protect people, you do not accidentally cut off access to the credit markets.
When I was in grad school, I wrote a paper about how corporations have amazingly lax rules on this sort of thing. Specifically, corporations are able to pay dividends and buy back shares even with massively underfunded pensions. I think that is probably poor public policy. I would like to limit withdrawls by equity holders unless pensions were funded. However, I would not advocate for putting pensions ahead of unsecured credit, because that would simply cut off credit to many firms and force them into bankruptcy due to a solvable liquidity situation instead of a true lack of solvency...
In theory you only want cities taking on more debt when they can really work their way out of the hole. Even if loans were behind pensions in bankruptcy court, that shouldn't cut off credit for cities that are actually in position to dig out. So cities in position to dig out shouldn't see much higher rates. (If they would, that seems to me like solid evidence that the current system is rigged in socially undesirable ways.) And cities not in position to dig out shouldn't be allowed to put more creditors ahead of pension obligations anyway.
I have a question for the bankruptcy lawyers: why don't pension obligations just trump unsecured loans and other categories of debt entirely?
There are practical reasons (the ones outlined by the previous poster), but the legal reason is that they just don't. Bankruptcy is a very technical area of law, and Congress hasn't carved out pension obligations.
Is there a possibility that the state constitution gets interpreted as requiring making 100% of those payments, even if it means 100% haircuts for various other stakeholders?
I really, really doubt it. The constitutional language isn't worded that way, and even if it WAS worded that way, it would be completely trumped by the supremacy clause.
But are you an expert? =P
Serious question: I get that chapter 9 is federal thing. Does it specify the repayment order? I'd have thought Detroit could only issue bonds subject to state law. So it strikes me as weird that the Supremacy clause comes into play, unless chapter 9 is really specific (and, I'd have thought, more specific than necessary) about how repayment has to work.
And the AG has appealed.
I am surprised that the Judge's order didn't address the federal supremacy issue at all. It's possible that this issue wasn't argued to her, but it seems to be the central issue in this case.
What's the over/under on how long it takes the Court Appeals to issue a ruling? I say 11:00 a.m. on Tuesday. I might even take the under.
How about an over/under on the probability of it being overturned on appeal? 99.5%?
Maybe supremacy/premeption cases are just as easy as "fed wins." However, my gut tells me that this is one of those issues where the research will show it is much more complex.
Also, this is a HUGE issue. Pension liabilities are enormous. Art. 9, Section 24 is a big deal in protecting pensions/prohibiting change depending on whose point of view you adopt. If the precedent gets set that cities can avoid Art. 9, Section 24 through EFM/bankruptcy, I would expect to see more filings.
I hate to see this issue being decided in a rushed fashion. I hope the Court of Appeals takes its time, or lets the issue be decided by the bankruptcy judge in a thoughtful manner after it is fully briefed.
This WaPo article claims that Federal Bankruptcy law gives states the power to restrict municipal bankruptcy filings.
but Orr is serving under a State law that says a City can file under certain circumstances - including when an Emergency Financial Manager has been appointed and the Governor signs off. Those conditions have (I beleive) been met. The Constitutional provision says nothing about filing for bankruptcy. The article may have missed the point.
I think you should feel free to argue with the msm. I posted it more as a discussion point.
If the order basically barred the action of the emergency manager or effectively says the emergency manager does not have standing, then the supremancy issue does not apply. The Chap 9 was a voluntary action which requires standing to do. The Michigan court is basically removing standing from the governor and emergency manager wrt bankrupcy court.
So in effect the court is nulifying the filing by making it as if I filed your bankrupcy without your approval and as you.
I can see your line of thought. it is kind of a chicken and egg thing - where you stop depends on where you start. In theory, the filing evoked a stay (at least I think) of the Circuit Court and this decision should have been made by the Bankrptcy Court.
If that was the Judge's thought process, I wish she would have said so. I am a practicing lawyer in Michigan (not bankruptcy) so I get that Circuit Court Judges do not typcially issue written opinions. However, this isn't a typical case. Hopefully the Court of Appeals (which does normally issues written opinions) throughly addresses all of these issues. I think that there a number of other municipalities in the state that could also file in the near future. It would be good to have these issues thoroughly briefed, argued and addressed.
The Judge's result would also have dire consequences. If retirees are 100% immune from cuts, then the bond holders will take most of the hit. If this is found to be law in MIchigan, then every public entity in the state will have a hell of a time borrowing money at reasonable rates. Don't get me wrong - the law is what it is. But this decision will have huge consequences - it deservers thorough consideration. Not a two pager with a hand written note that a copy will be sent to the President (God knows why.)
OK, I'm going to put a serious response below, but check out her picture... did Monica from friends just issue a ruling in a Michigan courtoom?
Dating myself here...
When the Free Press did a human interest story a few weeks ago, almost every single person used in the story retired either in their late 40ties or early 50ties. There is your basic problem. For decades the unions resisted any downsizing. Furthermore they on average worked ten years less then a typical private sector employee. If the average age of retirement was 62 the pension funds might not be in such dire straights. It is really hard to support a labor pool if people are retired for as long or longer then they worked.
So a combination of early retirement, bloated payrolls, reduced revenue, and increasing health care costs have made current payouts unsustainable. Not a easy solution as some of these people are screwed without social security. I guess the moral of the story make sure you have something else other then a pension.
Detroit used to have a 20 and out rule under which you could retire after 20 years. If you started at in your early 20s you could retire (with life time health care and pension) in your early forties. A lot of folks did and got jobs in other towns. If those towns had an age 60 and 10 years of service (or 55 and 15), a Detroit retiree could earn a second pension and still be young enough to work at a third place. But you can easily have a situation where Detroit is paying retirement benefits for twice as long as someone worked.
And that, for the most part, is absurd.
Age+years of service is likely where we're headed if pensions in general are to survive, but the number is going to have to be much higher than the number of 70 you've put in your post (the 55+15 and the 60+10). The bidding in general is going to have to start somewhere in the neighborhood of 85-90. At 90, if you hire in at 18, you can go at 54 (54+36 years). Now, obviously there is going to need to be a lower number for cops and firefighters, who are normally in harm's way, but the idea where you can work 20 years, retire at 45, live to 80, and draw a pension for 35 years where you worked for 25, is pretty foolish. Eventually the math turns against you quite harshly.
Quick story: after graduating from college, one of our clients (I'm a CPA) was an electrical contractor who used IBEW Local 8 union electricians. IIRC (and forgive me, as this has been 16 years ago), those boys made a nice living (just under $30/hr), plus benefits and retirement once they hit 200 hours worked for the year through IBEW. I believe they needed 75,000 hours worked before they could draw their pension. Now, even though those guys typically worked 10 hour days for our client, that's still 30 years at 2500 hours a pop, likely longer. There was no 20 or 25 and out there.
From all the excellent discussion about municipal pension liability and the legal/ethical position of the pensioners, I haven't seen (might well have missed) any discussion about social security. With some possible exceptions, city employees --- and this includes police and fire --- are not covered under OASDI, the official (Old Age Survivors, and Disability Insurance Act) name for social security. Part of the "contract" that UWS-Blue so articulately laid out is that the relatively more generous pension benefits a retired muncipal employee receives are in part a recognition of the benefits that employee does not receive from social security. This makes the employee's position with regard to unfunded pension liability all the more precarious, given that he or she usually has no other income stream to compensate for any pension benefit loss.