On December 10, 2014 the city of Detroit exited bankruptcy.
It was the largest municipal bankruptcy in US history.
The bondholders were totally screwed in favor of the pensioners (not that I generally like bondholders).
Regardless, everything was supposed to be fixed. It wasn’t.
Please consider Detroit Picks Firm to Help Fix $195M Pension Shortfall.
Detroit is closer to figuring out how to address a hole in pension funding that is far larger than it had anticipated when it exited from bankruptcy.
The city in March put out requests for proposals seeking national firms with expertise in public pension plans to advise the city on how best to address a $195-million payment to the city’s two pension plans that comes due in 2024, under terms of the city’s exit from the nation’s largest Chapter 9 municipal bankruptcy.
Detroit’s bankruptcy exit plan, approved in December 2014, gave the city breathing room before it had to make payments to its two pension plans — the General Retirement System and the Police and Fire Retirement System — on the assumption that the city would be better able to pay once its tax base recovered post-bankruptcy. The bankruptcy blueprint called for Detroit to begin making pension payments with a $112.6-million installment in 2024.
The city now says that actuarial assumptions used in the bankruptcy were inaccurate and outdated. City officials said that new actuarial reports last year by the Gabriel, Roeder, Smith & Co. firm project Detroit may have to pay $491 million over a 30-year period beginning in 2024, including the $195-million payment the first year.
It’s a serious hit to Detroit’s budget, an increase of $83.4 million that represents about 8% of the city’s annual $1-billion general fund budget. Naglick and Hill say it could mean diverting money that was supposed to be spent on reinvesting in critical city services.
The shortfall, first reported by the Free Press, came from the firm Gabriel, Roeder, Smith & Co., which discovered that bankruptcy advisers used outdated life-expectancy tables — estimates on how long retirees will live to collect their pensions — in projecting the city’s total pension obligation.
The revised estimate still counts on the pension funds’ assets earning 6.75% a year on its investments agreed to by the city’s emergency manager and pension officials in bankruptcy mediation talks.
Flawed Assumptions
It’s hard to know where to begin with this nonsense.
Not only were the actuarial assumptions off to the tune of 8% of the entire city budget, the reported shortfall “still counts on the pension funds’ assets earning 6.75% a year on its investments“.
That’s a position I find highly unlikely at best.
Here’s the kicker.
“The Police and Fire Board of Trustees and Investment Committee have adopted a new investment policy and are working diligently to ensure the best returns possible under the circumstances of today’s economy,” said Police and Fire Retirement System, spokesman Bruce Babiarz.
It sure sounds like the committee plans on over-weighting equities over bonds at precisely the worst possible time.
Related Posts
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- Rejected: Central States Fund Proposes 60% Pension Cuts, Treasury Dept Says “Not Enough”; 407,000 Affected
- One of Nation’s Largest Pension Funds (Truckers) Will Reduce Benefits or Go Broke by 2025
One Big Worldwide Bubble
After all is said and done, Detroit will not be close to the top of the list of the largest municipal bankruptcies in US history.
Absurd pension promises are the reason.
I side with Milton Berg, founder and CEO of MB advisors says “One Big Worldwide Bubble”: Cusp of 30-Year Bear Market in Stocks and Bonds.
Mike “Mish” Shedlock
We know who will get screwed in Chicago. What about Detroit?
Mucho wrong here.
1. How does a city (or person or business) emerge from bankruptcy essentially still bankrupt?
2. How does a bankruptcy court put those who are contractually first in line (bondholders) to the end of the line against a 100 years of contract law?
3. How does a city not make a payment in 10 years to these pension funds? How are they being funded in those 10 years?
4. Why would anyone buy a Detroit bond today? The contact for these bond has been proven worthless. Unless they expect a bailout.
5. Bankruptcy is supposed to wipe the slate clean. Why do public unions (who caused this mess) get an exception?
6. Before the obama ZIRP era – AAA bonds were easily paying 5%. 6.75% would not be that far a stretch. Wonder if these democrat public union members understand how obama has destroyed their pensions?
“”” 1. How does a city (or person or business) emerge from bankruptcy essentially still bankrupt? “””””
Should Read How does a city emerge from bankruptcy essentially still bankrupt? “””””
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That is the Plan. The City has No Intent to emerge from bankruptcy
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The Plan is perpetual Bankruptcy, enter every 5 or so years
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and kick the can down the road.
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To Emerge from Bankrtupcty in a ” solvent ” manner would mean
cutting pensions very deeply
and No One will stand for that.
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. Perpetual Bankruptcy a little at a time is the rule.
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all good questions. mow youre beginning to,learn how the politics of the us really works. its called LIES–at ALL levels. nothing will change (at least for the better) until integrity is introduced back into congreess, i.e., NEVER.
Wow. Detroit hasn’t gone back to back since the Bad Boys era.
I fail to understand your comments concerning bondholders. More often than not, these are the same people that invest via their 401-Ks or !RAs in what appear to be safe choices, in the expectation that the fund managers know what they’re doing and have assessed risk appropriately.
I also find it disturbing that you would suggest that bondholders deserve less consideration than pensioners. The former may well have provided the capital or loans for various projects that pensioners, via their government employment, derived their pension rights from.
Bottom line, and especially here in California, bondholders rights are enshrined in the State Constitution for a reason, and have first recourse to CA’s revenues, ahead of even Education. i, for one, have no issue with that priority.
I also find it disturbing that you would suggest that bondholders deserve less consideration than pensioners.
Where precisely did I ever say that?
I was talking in reference to the absurd notion that bondholders could never take a haircut. That seems to be the ECB’s position. In fact we found out in Greece that bondholders can indeed take a haircut.
In the case of Detroit, I specifically stated “bondholders were screwed”.
In spite of that you made amazingly wild assumptions.
Bondholders were also screwed in the GM bankruptcy – but they should have know it was idiotic to buy GM bonds.
Mish
The Federal Government itself chose not to honor bondholders in the GM bankruptcy. Much the same happened with Eddie Lampert with Sears Holdings. I don’t think anyone is saying the Federal Government let alone Eddie Lampert don’t have the ability to pay…yet both of their “rescues” (GM and Sears) are now struggling under a “reputational hazard” that in a crisis the open market itself will get “thrown under the bus” as they say. This is reflected in the equity price even though these are huge companies, massive employers, have done many of the right things since the Lehman collapse, etc.
The bondholder should never get zero, yes?
Hi Mish,
If both stocks and bonds are on the cusp of a long bear market, where do you think one should put their retirement finds (superannuation here in Australia). We have a ‘cash’ option where funds are put into the short term money market but this tends not to exceed inflation.
Cheers from an australian reader
Since 2008 bondholder have took it in the rear. Unions come first now and banks. I got out of most municipal bonds after the GM fiasco and I am glad the wife and I did. Many here forget 28 billion dollars was written off for GM.
GM is still in trouble the Silverado handles terribly while towing and at higher speeds. Cadillac sales are way off and now GM is building a plant for smaller cars in Mexico because they can no longer afford the union wages on small profit margin vehicles. Of course the union was a tad greedy and allowed GM in labor contracts to do this and now the UAW is balking and wanting again government intervention to stop GM from doing this.
Ford tried to build a new plant in the USA but wanted all venders that were involved in the building of the vehicles to be there in the office to solve parts problems and service issues found on the line. Again the UAW balked and did not want the arrangement. Guess what they built the plant in Brazil. State of the art as well. Unions seem to forget you can price yourself and the company out of business. Oh I forgot the US government will come in riding its shining white horse and bail them out once again.
Many comment about how capitalism is destroying our economy but it is fascism now destroying our economy. The government should not pick winners and losers and if a loan is made of the public’s money all of it should be paid back period or the company folded and sold off.
Why are public pensions so sacred? It’s all BS. Greedy bastards. I’m jealous.
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odious
odious
Example ” Greek Debt Committee: All Debt to the Troika is “Illegal, Illegitimate, and Odious”
All the evidence we present in this report shows that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious. “””””””””””””
A corrupt organization
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makes campaign contributions to a corrupt politician
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who in turn makes legislation to favor the corrupt organization.
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And we all should abide by it and follow it as it is sacred ?
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. It is a contract. One you cannot break ?????
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really funny how they discovered that just after “emerging” from bankruptcy. its called lying.
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Being a pensioner from Detroit I’d like to clear up a few misconceptions. The vast majority of retirees “were” getting close to $18000/yr according to reports. Hardly millionaires. Cuts have been around 30% when loss of medical and clawbacks on annuities are figured in. As the Mayor was crying “loss of tax base” he gave “Welfare Queens” Illiitch (owns Tigers, Wings, Casino and Pizza Empire) a $250Million Tax break. He gave Marathon Oil a $250Million Tax Break. The art at the DIA could’ve been sold to cover losses and as we all know it would’ve been lent back to the Museum and rotated not destroyed. The Banks that “illegally” orchestrated “Interest Rate swaps” with the formal criminal Mayor using casino revenue that was prohibited from being used as collateral were the same Banks indicted for LIBOR manipulation world wide. Lap Dog Judge Rhodes, protector of the 1%, chose not to sue these Banks. About a week ago I read where plenty of investment funds are in fact suing those banks for LIBOR manipulation..
The City paid employees a lot less than private sector, but offered decent vacation package as you accumulated more time, pension when retired with full medical. As a young man starting a family that sounded great but it never occurred to any of us that with the manipulation of the economy by the 1% elites that would bring down the world economy causing The Great Depression of 2007 that this pension is “no longer economically feasible.”
I understand this. It’s a cruel reality after you gave 30 plus yrs of your life that you just get kicked to the curb like trash.
Raising a family of four in the early years on $24000k (about $40k now) I had to find other means of income and made “some” good investment choices. Though I didn’t see the writing on the wall it’s cushioned the blow.
Mish,
I recently wrote, “You…, and I, have the distinction of living at a time when we are witnessing a remarkable transformation of America.” This is an amazing opportunity to see the details of how institutions fail and rise in living color, so to speak.