The Pension-Busters’ Playbook

http://www.commondreams.org/view/2013/12/05-0


In Detroit, workers have been crushed by the exit of a major industry and now they're again being asked to shoulder the burden for policies they had nothing to do with. (Credit: AFP/Getty))

In July 2013, Detroit Emergency Manager Kevyn Orr filed what could be, at $18 billion, the largest municipal bankruptcy in U.S. history. Now that a federal judge, Steven Rhodes, has ruled that the bankruptcy can proceed, a central issue will be whether the city can jettison up to $3.5 billion in accrued pension benefits owed city workers (which the city claims are unfunded). With accrued state and municipal pension benefits protected by the Michigan constitution, such a ruling would set a chilling precedent for future municipal bankruptcies.

City pension funds—one for police and firefighters and another for non-uniformed city personnel—hotly contest the city’s numbers. Fund documents show a combined shortfall of $977 million, $2.5 billion less than Orr claims. They also show the police and fire fund is 96% funded and the general fund is 77% funded, in contrast to Orr’s allegations of 78% and 59%, respectively.

The methodology for the Emergency Manager’s (EM) calculations takes a page from the playbook of conservatives who argue that public-sector defined-benefit pensions across the country are underfunded and should be eliminated, what one union official calls “the pension busters playbook.” Like many public and private sector pensions funds, the funds assume rates of return on investments of approximately 8%. The EM lowers those assumptions by at least a full percentage point. Detroit pension funds use a common practice called smoothing to prevent sudden large losses—such as those suffered by funds across the country in 2008-9—from making funds appear more underfunded than they really are. The practice averages losses over a period of years and provides breathing space for markets to recover before recognizing, or locking in, losses. The EM rejects the fund’s use of smoothing in its calculations.

Once the size of a shortfall is determined, pension funds also routinely spread out, over a period of years, the contributions needed to eliminate any shortfall, a practice called amortization. Detroit pension funds use 29- and 30-year amortization periods. The EM cuts these periods to 15 and 18 years. While this change doesn’t increase the estimates of underfunding, it does push up the size of the annual contributions that would be needed going forward, making the city’s overall budget situation appear worse as it moves into bankruptcy, thus boosting the case for cuts to pensions.