Court Pension Ruling Gives Detroit New Hope

We shouldn’t have to wait for a city to crumble before it can get control of its debts.

During a trip to Detroit in the 1980s, a cab driver gave me an ad hoc tour of some of the city’s deteriorating neighborhoods. It was shocking even to someone who grew up in the Rust Belt. Things have gotten even worse in the ensuing decades.

There’s a mini-revival downtown (by well-armed hipsters), but once-great Detroit is going to seed. Locals joke about “rural sprawl,” as neighborhoods turn into vacant land. It can take an hour for police to show up to an emergency call. The infrastructure is collapsing. After Detroit declared bankruptcy, commentators wondered what went wrong. Many of us wondered what took so long.

“The evidence before the court establishes that for decades … the city of Detroit has experienced dwindling population, employment and revenues,” explained Judge Steven Rhodes, in a Tuesday ruling giving bankruptcy the nod. “The city no longer has the resources to provide its residents with the basic police, fire and emergency medical services.”

This was a landmark decision not because of any surprise about the fate of Detroit, with its $18 billion in debt. The big news is the judge ruled that pension rights, which have protections in the Michigan constitution, can be “impaired” under federal bankruptcy law. This could have nationwide impact if it becomes precedent.

“If it stands, this is huge,” said Carl DeMaio, the former San Diego councilman and architect of the city’s pension-reform initiative. DeMaio, now a congressional candidate, said his 2012 initiative (Proposition B) was designed to work around the existing court standard assuming that pensions couldn’t be touched, even in bankruptcy. This ruling, he added, could lead to “municipalities lining up outside of bankruptcy court.”

Broke California cities have been assuming that they cannot address what can be their biggest liability, pension debt. That’s making it difficult to fix their long-term fiscal problems. Vallejo went bankrupt in 2008 but didn’t touch pensions. Now, the city is in trouble again. A budget document from Stockton suggests that even after short-changing creditors and raising taxes, the city might struggle in a few years. The judge in that case hinted at what Rhodes said, that vested pension benefits are not protected in bankruptcy.

But Stockton, like Vallejo, chose not to take on the politically powerful California Public Employees' Retirement System, which says pensions are sacrosanct in all situations. They saw how CalPERS battled San Bernardino as it has tried to address pension debt in its bankruptcy. So pensions have remained the elephant-sized jar of red ink in every city’s living room — until now.

“In California, our members’ vested rights to their pensions are protected by the California constitution, statutes and case law,” according to a CalPERS statement after Rhodes’ decision. But the judge found the opposite – that federal bankruptcy law trumps state constitutions.

CalPERS called the decision “short-sighted,” but some pension reformers see broad impact. “San Diego City workers will endure the same fate as Detroit’s employees unless we take strong corrective action,” wrote former city attorney and mayoral candidate Michael Aguirre in a letter to City Council. He told me the ruling could allow a reorganization that off-loads the more recent, unaffordable pension giveaways.

City attorney Jan Goldsmith scoffed at Aguirre’s suggestion and said the city “isn’t anywhere near that situation.”

“Be careful what you wish for,” he added, warning about unintended consequences of turning city budgets over to judges. He prefers focusing on local and state reform measures.

But former Orange County Treasurer Chriss Street thinks the Detroit decision could change everything. The unions have had little incentive to ever reform pension plans, he argued. If pension obligations are unsecured in bankruptcy, “union members can face a personal loss.”

That changes the incentive, which is exactly what the pension-reform movement needs. We shouldn’t have to wait for a city to crumble before it can get control of its debts.

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  • UnCivilServant||

    So all King Cuomo and the assembly of thieves need do to take my pittance is stay the course and remain fiscally irresponsible? *sigh* there's another funding source I can't count on for retirement.

  • some guy||

    We've known for decades that pensions are unsafe. Anyone under the age of 40 who is depending on a pension when they retire hasn't been paying attention.

  • UnCivilServant||

    They're only unsafe when politicians and/or executives get to raid the fund as their private piggy bank. I keep a very close eye on the health of the ERS fund. So far it's still above 100% funded because the legislature can't raid it.

    What irks me is that thought that if they manage to run the state into the ground (which merely requires business as usual) they can get a bankruptsy court to open up the fund as an asset of the state.

  • ||

    Relying on money that is kept by the parasites and thieves of the state is folly. Even 401k's are dangerous. If it weren't for the fact that it would spark open rebellion I'm surprised the parasites haven't gone after 401k's and IRAs yet.

    I even ditched all my municipal bonds because who the fuck knows who is going to go into bankruptcy yet? It's all so fucking volatile, which is of course anathema to good investment and business.

  • Pro Libertate||

    Isn't this a great time for investment?

  • Hugh Akston||

    The stock market keeps going up and up!

  • SweatingGin||

    Record highs! Buy before it's too late!

  • EDG reppin' LBC||

    Don't forget, there is plenty of money to be made when the market is crashing, also.

  • Pro Libertate||

    It's really difficult to know what to invest in. And I'm heavy into stocks like most people. Very nerve-racking.

  • ||

    The Obama administration: making financial markets unstable since 2009.

  • Pro Libertate||

    It's funny that people just focus entirely on the stock market and ignore everything else. Look, ma, it's going up!

  • playa manhattan||

    I believe it's called the Shriek Index.

  • Drake||

    Stock market corrected for QE:

    http://www.zerohedge.com/news/.....t-it-seems

  • concerned cynic||

    P/E for the S&P500; is 18. This is high but tolerable.
    For the rest of the stock market, P/E is 28. Intolerable.
    For REITs, P/E is 52. Madness.

  • some guy||

    I don't trust any dollar that isn't in an account with my name on it, right now. (And even those dollars have to be watched closely).

    I'm surprised the parasites haven't gone after 401k's and IRAs yet.

    Do you mean confiscating these accounts, or just taxing withdrawals after promising not to?

  • ||

    I mean raiding them. "Borrowing" the money with a promise to pay it back, but that the money is needed now for the "public good". Some TEAM BLUE pundits and bloggers floated the idea briefly, but like fucking with people's insurance plans, fucking with their retirement money really riles them up.

  • some guy||

    I'd love to see them try. Any serious talk of doing so would ruin the IRA/401k system. Everyone would stop contributing and start pulling money out. Screw the penalties. Better to take a hit now and get something than to lose it all.

  • ||

    Oh yeah, it would be madness if they tried to do it, which is why they haven't, but you can see them eyeing that pile of cash while licking their lips, trying to figure out how to get their grubby parasitical little hands on it.

    Their appetite for other people's money is bottomless.

  • ||

    Most of what they do is madness. It's really only a matter of time before they've destroyed the economy to the point that they start thinking this is a good idea.

  • ||

    They already think it's a great idea, they just aren't sure how to do it without sparking riots. If they can figure that out, they'll move forward immediately.

  • EDG reppin' LBC||

    The fucking thieves are probing around the edges, trying to figure out how to "nationalize" confiscate 401k's.

  • SweatingGin||

    Didn't Poland just do that?

  • NL_||

    I don't trust any dollar that isn't in an account with my name on it, right now.

    Reasonably cautious advice, as long as you aren't in Cyprus.

  • concerned cynic||

    401k and IRA withdrawals are already fully taxable as ordinary income, even though much of the accumulation in those accounts consists of capital gains that, if held in taxable form, would be taxed at much lower rates.
    Withdrawals from Roth accounts are presently free of tax. This could change.

    A more plausible "threat" is a ceiling of about $3M on a household's total tax deferred accounts.

    There is a new Medicare "surtax" in investment income of returns with taxable income $400K/year for a married couple. This surtax idea could be applied to IRA, 401k and Roth income in excess of some annual amount.

    Hungary passed a law 2-3 years ago, offering owners of private retirement savings accounts the following Hobson's Choice: either surrender the total balance in their accounts to the Hungarian government, or lose forever their right to a Hungarian Social Security. I believe that more than 95% of private investors caved in, fearing another 2008 crash.

  • JWatts||

    "Withdrawals from Roth accounts are presently free of tax. This could change."

    This is the primary reason I have never contributed to a Roth account. You are taxed before you contribute with the agreement that down the road you can withdraw all of the money without paying taxes on the gains. I figure at some point, the statists will look at these, discover that to their complete surprise most of the contributors are savers and have accumulated substantial assets. So therefore, it's only "fair" that we pass a new law to prevent these wealthy people from using a tax "loophole" to avoid paying their "fair" share.

    I've just taken the same funds and invested on my own. Sure the gains aren't "tax free", but I can also take the money out at any point and do what I like.

  • playa manhattan||

    Didn't John Kerry float the idea of "nationalizing" 401Ks and IRAs a few years ago?

  • EDG reppin' LBC||

    It's time to have an adult conversation about enacting sensible investment legislation.

  • ||

    It's time to have an adult national conversation about enacting sensible investment legislation.

    Suggested improvement.

  • ||

    Like I said above, there was a brief spate of bloggers/pundits/politicians feeling out the idea of somehow getting their hands on 401k's and IRAs, because of course any money just sitting anywhere is like shit to a fly with them. It was more masturbatory than anything else (you could feel how much they loved the idea of getting their hands on all this money that "selfish" people had socked away for themselves in their retirement), but the very fact that they felt compelled to engage in it was enough of a warning sign.

    These people will steal all you have saved if they get the flimsiest excuse. Count on it.

  • some guy||

    Like I said above, there was a brief spate of bloggers/pundits/politicians feeling out the idea of somehow getting their hands on 401k's and IRAs, because of course any money just sitting anywhere is like shit to a fly with them.

    It's particularly funny that they think the money is "just sitting there" because all of my 401k/IRA money is in stock index funds, not under the proverbial matress.

  • ||

    Do you actually expect these thieving mongoloids to understand that? You have "money", they want your money, and they have zero principles or integrity and will steal it from you given half a chance.

  • Brian||

    The ruling class would love to manage everyone's retirement accounts. That's a terrifying thought: government management of a huge portion of everyone's investments. They'd obviously feel the need to invest on behalf of "everyone's best, collective interest," i.e., whatever's best for their election chances. Hello, irrational command economy.

  • ||

    Yep. They'd sink every dollar into Solyndras and Fiskers. I'm convinced there's money to be made in shorting the stock of any company that gets massive loans from the government.

  • some guy||

    Do you actually expect these thieving mongoloids to understand that?

    Of course not. It's "funny" in the horror movie sense.

  • SweatingGin||

    The thing to check is: "Over 100% funded, at *what* expected rate of return?"

    Pensions always struck me as counting on the financial viability of an organization for far too long. Even a company like IBM can't be expected to be around forever, and I wouldn't count on a municipality, state, or nation-state, either.

  • some guy||

    Agreed. This is what I mean by "unsafe". UnCivilServant can "watch" the ERS fund all he wants, but he can't actually do anything about it if that money gets stolen.

  • SweatingGin||

    Detroit pension funds were in pretty decent shape, too, IIRC. It's that the city borrowed a bunch of money on variable rates to shore up the pensions that really kicked the finances down the stairs.

  • ||

    That's my point above. If they raid the funds, what are you going to do? Yes, people will become enraged, but even then, if the parasites decide they really need it, what are you going to do short of violence?

  • EDG reppin' LBC||

    ... if the parasites decide they really need it, what are you going to do short of violence?

    And that is exactly why the thieves are shitting themselves over the prospect of 3D printed guns. 3D printed guns will be the great equalizer.

  • UnCivilServant||

    No, I think violence is on the table at that point with the NYS Workforce. There's only one viable barricade point between the offices of thousands of state employees and where the legislators are. I wouldn't trust it to hold up against a mob long enough for the state troopers to mobilize.

    So they'll probably announce it late on a friday evening in order to flee town first.

  • goneGalt||

    I wouldn't trust it to hold up against a mob long enough for the state troopers to mobilize.

    Especially if the troopers believe a precedent is being established which can be applied to their own pensions.

  • UnCivilServant||

    The expected rate of return is rather non-spectacular.

    @somge Guy - I watch it to determine how long I'll need to be working. Right now it's "Indefinitely"

  • some guy||

    @somge Guy - I watch it to determine how long I'll need to be working. Right now it's "Indefinitely"

    I hear you on that one. Up until reading this thread I thought 401k's and IRAs were as safe as any other investment account, but now I'm not so sure. Anyway, my retirement planning assumes my pension and SS benefits are both going to evaporate. I figure if my savings, 401k, etc. also evaporate then I'll have much bigger things to worry about than finances.

  • some guy||

    Of course, I do think there is a decent chance that I will get at least some of my pension and SS when I retire. That will all be gravy, though. I'll blow it all on travel and booze.

  • some guy||

    We shouldn’t have to wait for a city to crumble before it can get control of its debts.

    If you didn't have a policy of electing whichever politicians offers the most "freebies" your city would have never lost control of its debt in the first place.

  • NL_||

    There's no particularly good reason why pensions and benefits should be inviolable while social services, bondholders, taxpayers and current/future employees are all expected to share burdens. It's not like there aren't employees and retirees relying on money from those other sources. They should be reasonably high priority, but they're so inflated it's unreasonable to think they can remain unchanged.

  • Cdr Lytton||

    The unions have had little incentive to ever reform pension plans, he argued. If pension obligations are unsecured in bankruptcy, “union members can face a personal loss.”

    That changes the incentive, which is exactly what the pension-reform movement needs.

    It changes the incentives so that public sector unions will push (often successfully from their rigged bargaining) for more cash on the table upfront instead of promises down the road.

  • EDG reppin' LBC||

    Which might not be a bad trade off. How about governments/corporations don't offer pensions, 401k's, health coverage, etc? They probably would be able to offer better wages, and let workers decide how to use thier money. Sounds like a win/win to me.

  • Cdr Lytton||

    By more cash, I mean unions will want the value of future pension obligations plus a risk premium. No way are they going to take less money than they're getting now absent some outside event like the bankruptcy of their particular city.

    I do like the idea of letting employees choose how to spend their money and getting employers out of the uncertainty of pension obligations but as long as public unions control both sides of the table, they'll make sure they get more under either outcome.

  • Gilbert Martin||

    "The big news is the judge ruled that pension rights, which have protections in the Michigan constitution, can be “impaired” under federal bankruptcy law. This could have nationwide impact if it becomes precedent."

    I don't see why this should be any big surprise.

    As the liberals constantly tell anyone who wants to use a state law to resist something the feds are doing (gun control laws, for example), the supremecy clause means federal law is the top of the heap. And bankruptcy law is federal law.

    Of course when that goes against something that they want, they act like they never heard of it.

  • concerned cynic||

    The Fed, in its Financial Accounts of the US, estimated the 2013 unfunded liability of state & local governments at about 1.2 trillion. That is the lowest possible number to work with. I agree with Joshua Rauh's argument that the discount rate for future liabilities should be the 30 year T Bond rate of 3%, not the estimated long run rate of return on a portfolio that is 80% stocks and 20% bonds, or 8%. That stock-bond breakdown is typical of state & local pension plans. If the discount rate is 3%, then the unfunded liability is 4.5 trillion.

    There is no way the USA can dig itself out of this deep hole, without reducing pension amounts promised to future retirees.

    What I write here ignores an even bigger elephant in the room: the cost of retiree healthcare, which is only about 1% prefunded. This fact alone threatens to sink all of state & local government by 2030.

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