Apr 102013

Orr can expect tough fight to trim legacy costs; state constitutional provisions complicate job

By Mike Wilkinson, Detroit News, April 5, 2013

Detroit — Pensions and retiree health care could be on the table during Detroit’s restructuring, prompting worry among the city’s 30,000 current and former city workers that Emergency Manager Kevyn Orr may try to cut their benefits.

It’s a fear rooted in reality because Orr has the power to make drastic changes, and retiree benefits are among the biggest bills for a city that is nearly $15 billion in debt, has a $327 million accumulated general-fund deficit and will be unable to pay nearly $2 billion in debt payments over the next five years.

“It’s a concern,” said Reggie Amos, who retired from the Detroit Fire Department in 2009. “That’s why I keep my thumb on the pulse of Detroit.”

Orr has until mid-May to submit a preliminary restructuring plan to state officials. Among his options are changing labor pacts and restructuring the city’s debt, including pension and retiree health care obligations.

Orr can reduce health care benefits, but changing pensions would be a tougher fight.

Michigan law allows him to replace board members of Detroit’s two systems if auditors determine they are underfunded — and there’s vast disagreement about their financial soundness.

Changing pension benefits would require a ruling from a bankruptcy judge — and there’s no consensus on whether a court order could trump the Michigan Constitution that protects pension benefits.

Either way, officials with the pension systems expect a fight.

“We know (change) is coming,” said Matt Gnatek, president of the Police and Fire Retirement System.

The outcome could be huge to both the retirees and the city’s financial health. More than 8,000 former police officers and firefighters draw pensions, which averaged nearly $30,000 last year. Another 11,970 former city workers or their spouses draw pensions that average $19,600 a year, according to recent audit figures.

All of them are also entitled to city-paid health care, which cost the city more than $177 million last year.

Last year, pensions cost the city 30 cents for every dollar it spent on payroll. The systems oversee roughly $7 billion in investments, but some haven’t performed well of late.

Pension investments are expected to grow about 8 percent per year. The police and fire system’s investments lost 4.3 percent for the fiscal year that ended June 30, 2012, and without a “remarkable” recovery, the city may have to spend more to fund the system, according to a March report by actuarial firm Gabriel Roeder Smith & Co.

Orr has said he intends to sit down with all stakeholders and wants to avoid a costly bankruptcy filing, but observers expect he will look at the costs of the city’s work force and retirees.

“An emergency manager is going to have to find savings wherever he can find them,” said Douglas Bernstein, a Bloomfield Hills attorney and expert on municipal bankruptcy.

Officials with the general retirement system declined comment.

‘Setting up a showdown’

Orr may not be able to alter retiree pensions alone, but he could change retiree health care whose annual cost to the city is nearly as large as the gambling taxes paid to the city each year by its three casinos.

A recent report by Michigan State University economics professor Eric Scorsone estimated the city faces $4.9 billion in future retiree health care costs — equal to nearly 40 percent of the retiree health care liabilities facing all Michigan municipalities.

Former city officials have tried to reduce costs, with former Mayor Kwame Kilpatrick — now awaiting sentencing on multiple corruption charges — slashing benefits in 2006. But that move prompted a lawsuit and a settlement that maintained health care but forced retirees to pay more in premiums, co-pays and deductibles.

“Maybe the emergency manager has the power to negotiate a contract, but not to negotiate a court order,” said Ed Wertz, a former president of the Retired Detroit Police and Fire Association.

Should Orr decide the city’s woes can only be solved in U.S. Bankruptcy Court, he could try to put pensions on the table, along with health care and the city’s debt, much of it borrowed to plug previous deficits.

The Michigan constitution protects benefits, and it’s unclear whether a bankruptcy judge could be persuaded to rule otherwise. In California, two cities going through bankruptcy had different results — Stockton continues to make full payments to its pensions, while San Bernardino has stopped.

Because municipal bankruptcy is relatively new, the issue likely will have to be decided by higher courts, Bernstein said.

“In law, nothing is a sure thing,” he said. “We’re setting up a showdown over what takes precedence — a bankruptcy judge or a state’s constitution.”

Changing pension benefits may be difficult, but Orr also could try to scrap the governing boards of the retirement systems — giving him more influence in their investment strategies.

State law allows emergency managers to do so if an actuary decides they are less than 80 percent funded. This week, Pontiac’s emergency manager proposed trimming that city’s pension board from 11 members to five.

But there’s disagreement about the health of the Detroit funds. The Police and Fire Retirement System claims it is funded at 102 percent, while the General Retirement System says it is at 83 percent.

A recent report commissioned by the city from New Jersey actuarial firm Milliman found the funding of both systems was far lower: 50 percent for the police and fire system and 32 percent for the general system for the fiscal year that ended June 10, 2010.

The report labeled its conclusions as “very rough preliminary guesstimates,” but faulted the systems for counting $1.4 billion the city borrowed in 2005 to shore up its pension obligations as assets.

The report also suggested the pension boards are too pessimistic about how long retirees may live and too optimistic about intended rates of return.

A separate audit, required annually by the state, suggested the true market value of fully one-quarter of the police and fire pension fund’s assets can’t be determined. The pension funds’ own actuaries, though, have concluded both are in fine shape.

Separately, the funds have faced allegations they lost more than $84 million because of corruption by board members and staffers.

Former board members Jeffrey Beasley of the General Retirement System and Paul Stewart of police and fire were charged with using their positions to enrich themselves. Ron Zajac, formerly the attorney for both funds, was charged with participating in a bribery and kickback scheme. He has denied the allegations.

Gnatek, the fire and police fund president who said he ran for a spot on the board to clean up the mess, said the current board is doing its job.

“We’re a different board. We’ve hired a new staff,” Gnatek said. “We’ve cleaned house.”

Workers brace for pain

Gnatek said he expects Orr to thoroughly review the pensions. What might happen is far less clear. But he and Amos said they believe current city employees will bear the brunt of changes.

“They’re the ones who are really going to take the hit,” Amos said.

Already, changes in how pensions are calculated have lowered potential pensions. Employees are paying more into the system and expecting less. The pensions of newer city employees could be 10 percent smaller than their predecessors.

With Orr now ruling City Hall, it could mean even greater pain. But how much is unknown.

“That’s the frustrating part. It’s ‘wait and see,’ ” said Gnatek, a 38-year-old sergeant. Like many still working, he wonders what his future holds.

“I hope there’s something left when I retire.”


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