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THE DETROIT FALLOUT – PENSIONS AND BONDS (PENSIONS – PART I)

August 19, 2013

THE DETROIT FALLOUT – PENSIONS AND BONDS (PENSIONS – PART I)

Newspapers across the country parrot one another to point out that Detroit with its Chapter 9 filing in bankruptcy has unfunded liabilities of $3.5 billion, but neglect to tell the rest of the story. That sum is just ITS SHARE of the so-called “unfunded liability.” The employee portion of the pension fund is FULLY FUNDED. Thus the employees who gave their working lives to the city have fully funded their share of the pension fund from which they were led to believe that they would someday have available upon retirement. The employees have in good faith fully complied with their employer’s pension scheme; it is the employer which has not complied with its own solemn pension contract with its employees. The employees have totally performed their end of the agreement and cannot play the Benjamin Button game and get younger so they can try out another working life. Unlike the city’s bondholders and other creditors, they are soon to be no more, and if certain adverse interests have their way by wiping out or substantially reducing their promised pensions, they may well spend their few remaining years in impoverishment. Such a sour ending would be an incredibly wrong and unfair result.

Such wronged employees will REALLY be victimized if the court decides to totally erase their pension rights since such employees over the years have paid in thousands of dollars of THEIR OWN MONEY in keeping their end of the pension bargain. Such a court decision is unthinkable, but possible in our Wall Street-written bankruptcy code. At a very minimum, employees’ contributions (with reasonable interest in addition) should be a starting point in the court’s division of Detroit’s remaining spoils. (I am unsure whether there would be any relief available under the federal Pension Guaranty Fund program.)

The business newspapers and TV channels talk about how we are going to fix the pension funding problem and how to apportion the cost among workers, retirees and taxpayers as a whole. That is a reasonable approach. City officials need to currently fund their pension obligations and not use pension funds as a grab bag of goodies to raid to reduce taxes so they will look good at election time.

However, we should not be diverted by such discussions in newspapers and TV channels and what we should do in the future for the reality of what we should do in the present, a problem brought into sharp (and public) relief by Detroit’s Chapter 9 filing. In summary, what cities should have done is not what they in fact did. What they did was chronically and persistently underfund their share of pension funding. The employees fully funded their end; they are not the people who set the (apparently) unaffordable policies that helped lead Detroit (and perhaps soon others) to Chapter 9 relief. It was the under-funders who set such policies. Employees are totally without fault and should not be victimized by the blunders of others or have to take a preferential back seat to other creditors who are likely to be far more sophisticated than Detroit’s workforce. What Detroit’s future pension arrangements with their employees may look like is one thing, but enforcement of an existing contract is another. The pension rights of employees under the existing contract should be fully funded.

Other creditors of Detroit will not agree with my conclusion, of course, since they want a preference in the court’s ultimate distribution of “the spoils,” but these other creditors knew full well that Detroit was underfunding its pension obligations along with other questionable financial decisions when they extended credit to the city for goods and services, and therefore took the risk. They are sophisticated players and can “write it off” their taxes. Wronged employees cannot write off their situations; they are old, tired and probably unemployable. The equities are clear to me and I come down on the side of the employees, who have neither redress nor relief to reclaim a working life. For them, “it’s over.”

Detroit has plenty of company. A Bloomberg editorial points out that at last count Chicago had funded just 36 percent and Philadelphia had funded just 50 percent of their obligations. It’s not all about cities; thirty-four states failed to make their required contributions last year and nine have set aside less than 60 percent of what’s needed. All told, state and municipal pensions are underfunded by at least $1 trillion. State as well as city politicians have an aversion to asking voters for higher taxes; that loses elections. They apparently prefer to underfund the state’s pension requirements in the interests of reelection.

Further alternatives (now eagerly embraced by many states) include slashing the state’s workforce, increasing the remaining employees’ share of health care premiums, reducing the state’s share of funding of 401(k) defined contribution plans etc. Most states are therefore not only reducing their current costs for workers’ benefits; they are also increasing the employees’ costs while simultaneously underfunding employees’ pensions, a not so obvious but effective maneuver to cut wages as employees take a smaller paycheck home and await the possibility of their employer’s potential filing of a Chapter 9 petition which could give them a “Social Security only” retirement.

Now that Detroit (the largest entity ever to seek Chapter 9 protection) has broken the ice, perhaps other big cities with their crumbling infrastructures, laid-off teachers and underfunded pension plans will take the same route. Kansas and other tea party-oriented states pathologically averse to taxes could be candidates as well. Some feel it is better policy to break contracts under cover of bankruptcy than to be responsible and raise taxes or do smart bonding or otherwise do the things necessary to keep their word.

I am not one of that number and do not agree with that manifestly immoral and soulless conclusion.

Part II will treat Detroit and the implications of bonding fallout across the state of Michigan and elsewhere. Stay tuned. GERALD  E

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