The looting of public employee pensions

Posted by AzBluMeanie:

PensionsLast week, a federal judge approved the Chapter 9 municipal bankruptcy for the city of Detroit. Detroit eligible for nation's largest municipal bankruptcy filing, federal judge rules. The target of this bankruptcy are the public employee pensions.

Initial reports are that the Detroit bankruptcy proposal would leave pensioners with 16 cents on the dollar. This is despite the fact that Michigan’s state constitution, like those of many other states (including Arizona), specifically protects the pension rights of public employees.

U.S. bankruptcy judge Steven Rhodes set a crucial precedent on a municipality’s right to cut pension benefits through the Chapter 9 process. Detroit judge's pension ruling is no panacea for beleaguered cities:

“Municipal pension rights are contract rights, and…the impairment of such contract rights in a municipal bankruptcy case is a regular part of the process,” Rhodes concluded, according to a court-issued summary of his findings. “Because the State of Michigan authorized the filing of this case, municipal pension rights in Michigan can be impaired in this bankruptcy case, just like any other contract rights.” (Rhodes read his eligibility ruling from the bench; a written opinion is to follow.)

With that finding, Rhodes gave a definitive answer to a constitutional question that the judges overseeing the Stockton and San Bernardino Chapter 9 cases have skirted: Can insolvent cities legally reduce their pension obligations through the federal bankruptcy process? Rhodes has supplied critical precedent that changes the balance of power in municipal bankruptcies. “Pensions can no longer count on getting 100 cents on the dollar in every municipal bankruptcy due to their recognized super-senior status,” wrote analyst Mark Palmer in a blog post for BTIG. “Now, they may be subject to cuts or to being treated as unsecured creditors in the same claim pool as the bond insurers.”

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More fundamentally, though, the impact of Rhodes’s decision is restricted by the peculiarities of Chapter 9, which permits states to determine whether and under what conditions their municipalities can seek bankruptcy protection.

[Even if Rhodes’s decision is ultimately upheld by the 6th Circuit Court of Appeals, it won’t be binding on bankruptcy courts in other federal circuits.]

If you are a public employee with a pension, keep a wary eye on Detroit. David Cay Johnston writng at Newsweek warns, A Hard Lesson from Motown: They Will Steal Your Pension:

Anyone in a public-sector job looking forward to retiring in comfort should look carefully at what is going on in Detroit and Springfield, Ill. Sherlock Holmes would call it the case of the missing pension money.

News leaking out this week from the Motor City tells how the enormous gap between the pensions workers earned and the money set aside to pay for them will be closed. By stealing from the workers.

Courts, legislatures, and corporations are all working in concert not to pay the full benefits owed. For decades, political and business leaders failed to set aside the right amount of money each payday to cover the pensions workers earned and, in some cases, covered up the mismanagement of pension fund investments.

This is nothing short of theft, as pensions are simply deferred wages, that is, money that workers could have taken as cash in their regular paychecks had they not opted to set it aside.

In Detroit, a federal bankruptcy judge handling the city’s Chapter 9 case held Tuesday decided he could safely ignore a Michigan Constitution provision barring any reduction in pension benefits to already retired public sector workers. Judge Steven W. Rhodes went beyond asserting the supremacy of federal law over state regulations, ruling that the pensions workers earned were a mere “contractual obligation,” no different from any other bill the city owes but lacks the money to pay.

The result will mean even worse poverty in the sputtering Motown, where a once robust industrial tax base has withered away, the starkest example of the economic devastation wrought by government policies that for decades have encouraged companies to move manufacturing offshore.

Financial mismanagement in Detroit under every mayor in the past six decades also contributed to the disaster, except for the honorable exception of Coleman Young in the mid-1970s. The result: Public worker pensions averaging $19,000 a year will be cut to the bone. That is sure to increase demands for federally funded food stamps, a program which Congress has just cut, and other welfare to make up for some of pensions workers earned but will not collect.

Norman Stein, a Drexel University law professor who is an expert on pensions, said that if the Detroit order stands it will become standard practice to slash benefits.

“It would be a human catastrophe of the first order if pensions of vulnerable older workers can be cut whenever a local government goes to bankruptcy court,” Stein said. “We will be consigning firemen and policemen, who did nothing wrong other than protecting the city and depending on the city's promise, into old-age poverty.”

In Illinois, legislators have agreed to cut future public employees’ retirement benefits by $160 billion over the next three decades. That 43 percent reduction will be achieved gradually, unlike the draconian Detroit ruling where the loss will be borne heavily by current retirees.

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Properly funded and invested, traditional defined benefit pensions are the most economical way to save for old age, combining contributions in a large pool to absorb short-term swings and the vagaries of professional investment management. They also have much lower costs than 401(K) plans. And they require a much smaller reserve against an unexpectedly long life, where the actuarial risk is concentrated in one person who must save too much or risk dire straits late in life.

But, as millions of workers are learning, the laws requiring that money be set aside and prudently invested are more loophole than safety net. This is producing not just misery for those left broke and helpless in old age, as seems about to happen in Detroit, but it is eroding trust in democratic government and the rule of law.

According to Government Accountability Office research, public employees across America may be cheated out of almost a trillion dollars, nearly half the benefits they have already earned, but not yet collected.

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Failing to turn money over to pension plans each pay period has become commonplace for states and local governments in the past three decades. When Republican Christie Todd Whitman became governor of New Jersey in 1994, she financed a tax cut by not funding the state employee pension plan, fulfilling her promise to that blue state’s voters.

What Whitman really did was force future tax hikes or cuts in government services, but they would not come due until long after she left office in 2001 – another kind of reckless cheating on ordinary folks.

Politicians in both parties have employed similar short-funding strategies across the country. In New Orleans, bankrupt Stockton, Calif., and 3,000 other local government districts, shortfalls have been met by taking on more debt. Instead of investing money and earning interest, these feckless administrators borrowed and paid interest, magnifying taxpayer costs, Boston College researchers found.

 It's not just public sector employees. Johnston also explains how private sector pensions are woefully underfunded, and unprotected from theft. The looting of pensions is pervasive.

Yet this scandal in the way pensions are inadequately funded is not a hot political issue. Neither party appears interested in what is of key importance to all older Americans – and should be of interest to younger ones too.

The number of hearings held by Congress this year on protecting pensions? Zero.

 So the lucky few who still have defined benefit pensions for their retirement security are at risk of seeing their pensions looted by state and local governments, and corporations that have underfunded and mismanaged employee pension funds for decades. At the same time, the "deficit scolds" in Congress want to reduce the social safety net for social security, Medicare and Medicaid. Tea-Publicans in Congress want to privatize social security and voucherize Medicare and Medicaid so the banksters of Wall Street and predatory insurance companies can steal the last of your retirement security.

What we have is a Kleptocracy: government by those who seek chiefly status and personal gain at the expense of the governed.

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