The Deceit in Detroit's Bankruptcy Regarding Pensions

Detroit Free Press - How a Chapter 9 bankruptcy could affect Detroit pensions, health care. Detroit is in trouble, Detroit has been in trouble for awhile and now it is declaring Bankruptcy. Detroit had attempted to blame their situation on their pension costs; but, it is a lie. Detroit lost half it's population, it's tax base and property taxes are abysmal and every municipality has been hurt by the economy.

Here is how a public pension works. For most employees they make a contribution and the municipality makes a contribution. This money is put in a bank account that is owned by the employees, not by the municipality although it may help manage it or assign people to it's board overseeing the pension. The question was raised and continues to be raised as to whether or not the pension fund can be raided to help pay the cities debt. It cannot, the money ceased being the municipalities the minute it was put into the pension account, same as if it had been paid directly to the employee and the employee had invested it in a retirement account themselves.

The next trick Detroit wants to try is slashing pensions for people who have already retired even though the money is already in the pension fund. Well, that seems odd doesn't it? It does until you understand the effect it would have, it would allow Detroit to turn that money over to new hires to fund their pension even though they did not work for it. Remember how San Bernardino declared bankruptcy and blamed it on it's pension obligations and then it turned out that CalPers caught them hiding the money that would have more than paid their obligations. I bet they would have found it later.

You might have noticed that municipalities are not going after Police and Fire pensions, have you wondered why when the biggest costs in most cities is for police and fire? Lets consider what happens when you change your pension rules. Many municipalities are cutting benefits for new hires and making them work more years. Instead of being able to retire after 30 years of service, new hires might have to work 40 years. Okay, lets say you worked 4 years with half of them in government, because you will get a pension, you do not get Social Security or it is so reduced as to be ludicrous even though you put my money in social security. Because a government pension seems secure many people choose to enter government.

Now, what happens if you don't have benefits for new people who go into government? You don't get any good people. Maybe you are a young engineer and want to build libraries, you could go into private industry or government. A good engineer who who just wanted security and to know what to expect (most engineers are very conservative), you go into government. Now, if you don't get a pension, why would you go into government unless you couldn't get hired anywhere else. If you don't think the government has any good engineers you should look at the Public Works projects of the last 100 years and you might find they were some of the best construction projects in the world.

A pension is used as handcuffs in the government. You hire them young and hold out the pension as a giant carrot. Once they have sufficient institutional knowledge and experience they won't leave you because by then they have too much invested in their retirement. In private industry the average employee changes companies every 6 years (this may have changed since 2008 with all the layoffs). With a 401k, you have no long term commitment to the company so you jump around as you will. You gain skills from one company and then sell them at a higher price to another company if you are any good. What happens when the average government employee spends six years and then goes into private industry because it no longer benefits them to stay for 30 years? I know this answer, they will sell you out if they can, they will give your inner workings and decision working away to private industry at least the ones who can will and the ones who cannot don't really matter anyways.

You may think generals may make a lot of money and have a great pension, they do not. They live the life of the wealthy; but, do not make the money and don't have to. When they retire if they wish to continue that lifestyle, they have to prostitute themselves out to industry and it pays well, more than they ever made in government. They use their respect from people who used to work for them to sell them on whatever company they work for.

Now lets get back to the article. Now here is the kicker, from the article, "But Orr says the city will stop making additional payments to its pension funds, which would total $200 million to $350 million annually. This could trigger a recalculation of future monthly pension checks." So, his solution to the problem is not have any government contribution to pensions. Wow. That is a disincentive to even consider working for Detroit. Even most companies offer a 401k and kick in something. This is a game, the offer is to have existing employees go into a 401k and the City will contribute something or offer new hires a 401k with no matching contribution. It is a negotiating ploy and a show for the residents of Detroit.

So how will it end. People who are retired and have already made their payments into the system are not going to accept losing what they have paid in and will be paid their pensions. New blood will not be found and the civilian workforce will be contracted out or at least a great majority of it. This reduces the pension obligation of the municipality; but, costs do not go down. This will not happen immediately, it will be a slow painful death.

It begins with municipalities being able to hire anyone and lots of good talent, people who lost their jobs in private industry, people who were raised in private industry. Right now nobody is hiring except in the service industry. Right now you can hire people from private industry at a quarter of what they used to make with 20 years experience. They will do well for government if they can adjust and then, because they get no benefits as new hires, will leave as soon as they can sell your municipality out because that is what they learned in private industry.

The Government Finance Officers Association (GFOA) is the best financial minds in government. They have said that there is no public pension crisis, the pensions are funded and can continue as currently configured. There was a change in how these pensions are reported. It used to be that you showed current expenditures and income and assets. Now you show future expenditures. It is as if you bought a house today for $100,000 and over the course of the 30 year loan would spend $300,000. Now would you show your current costs as the yearly mortgage ($7,000), your total owed if you paid off today ($100,000) or what you expect to pay over the next 30 years, the life of the loan ($300,000). It is an apple to orange question. Municipalities are showing their pension life-cycle debt ($300,000) compared to their annual income rather than what they expect to take in over 30 years.

It is actually quite simple. There is more than enough funds to pay off people's public pensions if we cease giving pensions to new hires. There is no pension problem. New hires can cut their own deals, that is true for every generation. The problem is that it will be real hard long term to get or keep good talent in government if they are not offered some retirement and the politicians don't trust having a workforce that doesn't owe them something and is willing to switch back to private industry and give them up in a heart beat. They lose all leverage.