The man appointed to oversee Detroit’s finances would like to freeze future pension benefits for those still on the job for the city. Emergency manager Kevyn Orr’s plan to take control of the pension fund at the end of December, reported by the Detroit News on Thursday, would pave the way for switching future retirees from a defined benefit pension to an individually-managed 401(k) investment portfolio system.
Under Orr’s plan, current retirees would continue to receive the benefits promised to them in city contracts. Those contracts provide modest benefits compared to national averages for public employee pensions. Orr has pledged to cut pension benefits since at least July.
A spokeswoman for the pension fund said Thursday that the organization had not been consulted on the plan prior to receiving it from Orr’s office. “We believe it is unseemly and disingenuous to present a proposal involving a new benefit structure that will affect the pensions of our members, beneficiaries and city employees not yet vested, without seeking our input, suggestions, knowledge and expertise,” said Tina Bassett. Orr’s plan would be contingent upon his bankruptcy filing on behalf of the city winning the approval of a federal bankruptcy judge.
Judge Steven Rhodes has yet to decide if the city is even eligible for bankruptcy, a question which hinges in large part on the judge’s evaluation of Orr’s pre-bankruptcy negotiations with the city’s creditors. Unions and the pension funds allege Orr was never negotiating in good faith but rather intended to push the city into bankruptcy court from the start. Emails between Orr and representatives of Gov. Rick Snyder (R-MI) seem to confirm that allegation. The Michigan Constitution also protects retiree pensions from being altered in bankruptcy court. Rhodes is set to decide both of those questions next month. Should he allow the bankruptcy to proceed, retirees will find themselves fighting with hedge funds and other investors over the city’s money.
On top of the alleged rush to bankruptcy, Orr is accused of greatly overstating the pension funds’ problems. While previous audits had found a $650 million combined shortfall in the city’s two separate pension funds, the independent firm Orr hired to analyze the funds suddenly reported a $3.5 billion shortfall. Municipal bond expert Cate Long called that analysis “pension voodoo,” and the firm that conducted it referred to its own work as “very preliminary guesstimates.” Coincidentally, the new estimates put Detroit’s pensions at just below 80 percent funded — the level at which Michigan’s emergency manager law would empower Orr to forcefully remove the pension funds’ trustees.
Whatever the true scope of the pension funds’ problems, there is little question that they have been poorly managed. The city borrowed money to finance the funds in a deal that ultimately cost far more than it was supposed to cost. Trustees routinely issued retirees a “13th check” in excess of what they were contractually owed, resulting in overpayments totaling nearly $2 billion over two decades. But it now seems that Orr is positioning himself to use that mismanagement and his own “voodoo” math to forcibly convert the city’s current workforce into a 401(k) system to which they never agreed.