Detroit Bankruptcy Hearings update...

Some interesting things came out during recent testimony given in Federal Court by Michigan's governor and by Kevyn Orr, the Emergency Manager he hired away from the Jones Day Law firm to handle Detroit's bankruptcy.

• Snyder acknowledged that he deliberately allowed retiree pensions to be part of the filing, even though the EM statute gives him the power to take pensions off the table. 

• Kevin Orr claims he knew nothing about Jones Day's discussions with the governor when they pitched bankruptcy as the top option in their 2012 presentation to obtain the lucrative restructuring & bankruptcy litigation contract.

• Orr admitted that prior to his filing for Chapter 9 bankruptcy on July18, 2013,  he would not agree to any settlement that did not include cutting retirees' pensions.

• Orr said he "didn't recall" whether he ever discussed the possibility of  State funds as a remedy for the estimated (but contested) $3.5 Billion in pension shortfall. Even Judge Rhodes expressed shock at his answer.  But he did confirm that it was very clear that the state would not provide assistance in debt restructuring prior to the filing of Detroit's bankruptcy petition.

• According to an October 29th account of the court proceedings by Detroit News Columnist Daniel Howes:
  "In a July 9 e-mail, state Treasurer Andy Dillon signaled flexibility to manage the city’s unfunded pension liabilities, pegged by Orr at $3.5 billion: “Because pensions have such a long life,” Dillon wrote, “there are a lot of creative options we can explore to address how they will be treated in a restructuring.”
   
• Again from the same Detroit News article: "In a July 12 e-mail, the governor’s counsel, Mike Gadola, suggested to Snyder’s key advisers that he consider placing conditions on a Chapter 9 bankruptcy petition for anything that could impact pension benefits, general obligation debt and the sale of certain assets over a pre-determined value."
  
  From The Detroit News: http://www.detroitnews.com/article/20131029/BIZ/310290031#ixzz2jFnbvQp7

• From a Detroit Free Press article on the same court proceedings, by Teresa Baldas & Alisa Priddle: 

 " Nine months before Jones Day secured a contract with the city of Detroit, the law firm and attorneys for the state of Michigan were discussing filing bankruptcy for the struggling city...
according to the testimony Friday of investment banker Kenneth Buckfire, ...who testified that he knew as early as March of 2012 that the state and Jones Day were contemplating filing bankruptcy that spring. But when Buckfire was hired in January to be the city’s investment banker to restructure debt, he did not disclose that information to city council or Mayor Dave Bing,..Those discussions on bankruptcy occurred before the city entered into a consent agreement with the state in April 2012."

This information is important because it goes to the heart of the "negotiate in good faith"  requirement under Chapter 9, and offers further confirmation that slashing retirees'  pensions was always on the table, and at the top of the list of options. The information gleaned from this testimony also raises questions: Did Orr make it a condition of his acceptance of the EM post, that the governor not restrain or limit him in any way, or did the governor, an attorney and former venture capitalist,  determine that he, Orr, and Jones Day were all on the same page regarding cutting public employee pensions?  I think the latter is the case.  It's also clear that former State Treasurer Andy Dillon did not necessarily share this point of view.

My other question: Is Kevyn Orr getting played?

Photo by Andre J. Jackson, Detroit Free press

Here we have an African American partner in a prestigious international law firm, (this is the law firm that  gave us Supreme Court Justice Antonin Scalia and Fox News anchor, Megyn Kelly.), who was in the process of  moving back to Florida to head Jones Day's practice in that state, and suddenly he 's accepting a controversial position as EM in Detroit, approving all contracts & disbursements, after resigning from his law firm so that they could continue to do business with the city and not appear to have a conflict of interest?

Does something smell rotten here?  Stay tuned for further developments.....

Leadership?

Monday, for the first time in state history, Michigan's governor, Rick Snyder, was asked to testify under oath in the Detroit bankruptcy trial. He said he felt Detroit filing for bankruptcy was the right thing to do, although it was "a difficult decision."  he also expressed his poll tested sentiment, oft repeated, that he "wanted the people of Detroit to get the services they deserve," adding churlishly that," that includes retirees."  He dodged a lot of questions, using attorney/client privilege, and the predictable "I don't recall."  But his actions leading up to and since the filing have less to do with any concerns about  services and a moral high ground, and everything to do with political expediency.

Governor Snyder took an oath to uphold the Michigan Constitution. Public Pension Protection is part of the State Constitution. It isn't just for Detroit, it's for all public employees in Michigan, nearly 600,000 people and their families. When Governor Snyder deliberately chose not to protect those pensions, which he is sworn to do, he didn't exercise an option, he violated his oath of office.

When asked in federal court, he asserted that the state could pay the City's pension shortfall, but only if the judge instructed him to. Does this mean he's daring the federal court to force him to do something he's reluctant to do, or does  he want to be taken off the political hook with re-election looming in 2014,  and shift responsibility for a Detroit bail out decision to the Federal court?

These are the same public employee pensions Snyder and his Republican dominated legislature  raised income taxes on when he took office. Michigan now has a budget surplus, yet aside from his sentiment about "the services people deserve," Snyder's spending tens of millions of dollars of tax payer money on law firms and consultants, but he's put no state resources into Detroit.  Rather, he's made it clear Detroit should expect no help from the State.

 The financial institutions that share a large portion of responsibility for the crisis may walk away with .75 on the dollar, but workers, who are not creditors, who earned their pensions, face foreclosures and Food Stamps. Public Pensions in Illinois, California, New Jersey, and other parts of the country, are in trouble. According to credible estimates, New Jersey teachers' pension fund is only 10% funded.  They're all watching Detroit right now. Tens of millions of lives will be affected by the precedents set in this trial.

 It doesn't take an expert to slash pension benefits. It is the easiest, most expedient thing to do. An intelligent leader would search for ways to resolve this bankruptcy without imposing undue hardship on retirees. Those same people who now contribute to the local economy, will most assuredly become a burden to taxpayers if they lose their benefits, so the myth that taxpayers won't have to pay for this bankruptcy has already been disproven.

The provision in the State Constitution to protect public pensions is there for a reason. If there were no danger of abuse, why have a law? The law exists to protect from harm. That law is not applicable when there is no threat, but precisely for those times when there is a threat.  Detroit is not General Motors. That's why Chapter 9 exists. Corporations and personal bankruptcies have their own set of federal statutes.

An important distinction between Chapter 9 Bankruptcy protection and Chapters 7 & 11, is that Chapter 9 attempts to preserve the democratic process, to give proper acknowledgement to state and local rights, insisting on negotiated settlements approved by, but not imposed by a Federal court.  That provision in the State Constitution exists so our elected officials will have a care for the public good, in a way that is not required of corporate America. It's not up to Gov. Snyder to abrogate that provision of the State Constitution.  For the Governor of the state to play these legal games demonstrates a moral bankruptcy that is unconscionable, and a contempt for the law that is disgraceful.

California Ballot Initiative a Bellwether...

cui bono?.....

Retirees with public pensions have no leaverage....often portrayed as obstructing progress...

One of the best articles on the crisis facing public employee pension security you will ever read...

Benefits from benefits...

According to a recent AARP study, Social Security pumps $2 dollars in to the national economy for every dollar a recipient spends.

Cutting Social Security and pensions would harm the economy.

More on ALEC & the National effort to steal public pensions...

Conservative efforts may "reform" public employee pensions out of existence...

Former Wall Streeter runs Rhode Island's pension funds, fights transparency and full disclosure for public pension investments and fees.

Beware of ALEC's Agenda.....No, this isn't a Halloween Prank

The American Legislative Exchange Council, (ALEC) a conservative think tank that's been around since 1973, has put gutting public pensions at the top of their hit list for the 2014  election cycle.

Conservative legislative agendas are being played out in State Houses all across the U.S.

 

 

 

To  get a better sense of what ALEC is up to and how they operate, check out this chart and discussion of their past legislative "accomplishments." I guarantee you it's scarier than an episode of Walking Dead.

 

 

 

Zombie State Legislators Swallow ALEC's Agenda Whole

 

 

 

 

Congress Wishes Millions of Americans a Happy Thanksgiving...

For millions, it's no SNAP to feed a family

Poor nutrition and children living in poverty costs America $500 Billion annually

Interesting... Wall Street stealing...? Really?

http://www.golocalprov.com/news/REPORT-RI-Public-Pension-Reform-Wall-Streets-License-to-Steal/

Why use a scalpel when a machete will do.....

 Emergency Manager Kevin Orr announced on Monday, that he is cutting healthcare benefits for  City of Detroit retirees.

http://www.detroitnews.com/article/20131015/METRO01/310150035/Orr-cuts-Detroit-retirees-health-care-benefits?odyssey=tab|topnews|text|FRONTPAGE

 In other news regarding the Detroit Bankruptcy filing:

Today, Federal Judge Stephen Rhodes is hearing arguments on whether Detroit has sufficiently demonstrated insolvency to qualify for a bankruptcy filing, whether the state's Emergency Manager law is Constitutional, and whether the Emergency Manager negotiated in good faith before filing the bankruptcy petition. There are also issues being raised  about the legitimacy of reaching for Detroit workers' pensions, and whether state law, which prohibits targeting pensions, is applicable under a federal bankruptcy filing. The hearings will continue for several days, and hopefully the judge will rule on these issues by the end of October.

As I followed along with the live testimony, I was reminded of several public statements Mr. Orr made regarding the City of Detroit's  pensions, both before filing the bankruptcy petition, and since. He indicated that the fact that the City of Detroit owed its pension funds money, was his biggest problem. He also said that federal law trumps state law when it comes to the public employee pension protection legislated by the state. And he also indicated that if the state law did apply, he would work to change that law. These were public statements he made in the days leading up to the filing of the bankruptcy petition, and in the days following that filing.  So reaching for retiree pensions was and remains at the top of the list of expedients Mr. Orr will exercise in "resolving" Detroit's fiscal problems.

Will Federal courts participate in scamming retirees, or will they stop it?

 If Judge Rhodes approves any eventual plan of adjustment that includes cutting retiree pensions, he will set an unusual precedent that, if it is allowed to stand, will have repercussions all across the United States. It will plunge thousands here in Michigan, and millions across  the U.S into poverty. Whether Detroit is solvent or not, the pension obligation is sacrosanct and cannot be treated as
 a creditor liability. Pensioners are not creditors.

As far as I'm concerned, Mr. Orr, who works for Governor Snyder, has not fully explored other options, and the governor has acted precipitously and recklessly, repeatedly applying the Emergency Manager law in a promiscuous fashion all across Michigan, to school districts, and local municipalities while avoiding the basic problem.  The governor increased taxes on retirees receiving public pensions. The state now has a budget surplus, yet the governor has yet to make any real, substantive commitment to Detroit. 

Can you re-invent a city while breaking faith with the workers who spent a lifetime making  it a community?

The remedies taken at the national level to achieve a continuing economic recovery, have ignored the primary victims, the people and communities who are still suffering. We bailed out the banks, we bailed out the automobile industry, but we have not yet addressed the people who have borne the full weight of state and federal shortcomings. To the retirees, Governor Snyder is saying in effect,  "Food Stamps & Foreclosures is your future." The 600,000 public employees and their families in Michigan ought to find that outrageous.

As for those who only look at the bottom line, mouthing platitudes about "just wanting to see people get the services they deserve," and " Let's bring Detroit back as a thriving, world class City," I'd like to know how Michigan, and Detroit recover, when you are taking money out of the local economy by cutting the income of thousands of people, and adding to the Taxpayers' burden by making these public employees eligible for public assistance. Mr. Orr is resolving one problem, by shifting the costs to another entity. Because one way or another, this is going to cost the State of Michigan.

$$ Timeline $$

As the Federal Government shut down continues, this Washington Post article shows how the damage from it increases with each passing day. And who's affected...


http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/10/nine-ways-the-shutdown-will-get-more-painful-as-it-drags-on/

New York Starts an Audit

http://www.detroitnews.com/article/20131011/METRO01/310110100/1361/New-York-auditing-pension-funds-after-Detroit--wake-up-call-

The cost of doing nothing...

For each week the federal government remains shut down, without an operating budget for the new fiscal year which began on October 1, 2013, or without a Continuing Resolution that maintains current levels of funding until a new budget is enacted,  the nation's GDP is reduced by $1.6 Billion.

I guess it depends on who's doing it...

In his excellent analysis in Rolling Stone Magazine, about the attack on public employee pensions, Matt Taibbi observes:" ...The battle increasingly centers around public funds like state and municipal pensions...In state after state, politicians are using scare tactics and lavishly funded PR campaigns to cast teachers, firefighters, and cops - not bankers - as the budget devouring bogeyman responsible for the mounting fiscal problems in America's states and cities."

If we look at  recent media discussions about the annual bonuses given to City of Detroit workers, popularly referred to as the "13th check," we can almost  see those PR wheels grinding. The media treatment of the so-called 13th check requires a more balanced perspective than we've seen so far, and overlooks a few important factors. Hopefully we can provide some context to demonstrate that there's nothing inherently evil about city workers receiving a bonus.

Giving city workers a small bonus once a year, wasn't an unusual step when it began in 1985. Detroit was part of an environment all across Southeastern Michigan, where thousands of autoworkers were benefiting from these incentives too. Betty Buss, a former City of Detroit budget analyst, now with the Citizens Research Council of Michigan,  observed recently that,  "...The auto industry was the goose that laid the golden egg for us...It formed a lot of cultural expectations of decent wages for low-skilled jobs. It affected the wages and fringes in the public sector....”


Diego Rivera mural at the Detroit Institute of Arts, a City of Detroit asset.

That extra paycheck came to city employees and retirees in time to help with winter living expenses.  These workers have been asked to take pay cuts, pay freezes, and layoffs regularly, so  this was an important acknowledgement of their sacrifice. Additionally, salaries in  local government are not competitive with the private sector, and historically offered  better job security and better benefits, including pensions, instead of higher salaries. As for bonuses, city workers received, on average, far less than  the average autoworker, and in both cases most of those funds go right back into the local economy.

The fact that these bonuses act as a stimulus to the local economy cannot be overstated.  In fact,  the economic boost of  autoworker bonuses from the Big Three automakers, is heralded with celebratory headlines in the media, as this article in February, 2012, from the Bloomberg Financial News, demonstrates:  "UAW Bonuses on GM Profit May Lift Economy."
Keith Naughton and Jeff Green wrote: "The rebound in carmaker profits is putting money back into the pockets of U.S. workers after years of belt-tightening.....The payouts come on top of similar bonuses at Ford and Chrysler. The money may lift the economy of states with unionized auto factories such as Michigan, Ohio, and Kentucky."

It is further observed that, as a result of these bonuses,  "morale is certainly improving..." In the past, bonuses were usually reserved for top level executives, so the fact that the average worker is also seeing an annual bonus, is viewed as an acknowledgement of their efforts, a way of saying they are valued. In a November, 2012,  Washington Post article, Sarah Halzack writes, "Bonuses help foster a concept known as "employee engagement" which is a measure of how invested a worker is in the company and his/her job."

Miss Halzack finds that, "variable pay as a category of compensation that includes bonuses... was used by 82% of employers in 2012, up from 79% in 2011....the increased use of variable pay spans nearly all sectors, even government, education, and non-profit organizations." So employee bonuses are an increasing trend in employment in all sectors, especially in environments where workers are asked to make sacrifices, forego raises, and experience pay cuts as they certainly have in the City of Detroit's case. As Halzack points out:" Variable pay is viewed as a strategy to keep payroll budgets nimble." 

Hindsight's Always 20/20....except when it isn't...

A Detroit Free Press article indicates $445 million was re-invested in the Detroit Pension Fund between 1985 until 2008, a 23 year period during which a controversial "13th check" was annually distributed to active city workers and  retirees. The article, written by Free Press reporter, Nathan Bomey, cites an affidavit presented in federal court, prepared by Pension Board member, John Riehl, for the General Retirement System, (non-uniformed) pension fund.

http://www.freep.com/article/20131002/NEWS01/310020022/Detroit-13th-check-pension-General-Retirement-System

The annual breakdown charted in the article, shows a total if $756.2 Million went directly to active City of Detroit employees, and a total of $195 Million went to retirees. The Free Press article asserts that their own actuarial analysis supports the fact that the Pension Fund would be in better shape today, if only those checks had not been given to workers and retirees, and instead, the entire amount, roughly $1.9 Billion, including the original $445 Million, had been reinvested in the General Fund.  The Free Press did not share any investment strategy that would yield such a return, nor do they explain how the inherently variable nature of the amount of annual re-investment would affect their projections.  But Mr. Riehl pointed out in an Op-Ed that:

From the WSJ

“Some say that if the board had invested those excess earnings funds over the 23-year period, the pension fund would be in better shape today,” Riehl wrote in a Free Press op-ed Sunday. “Given the numerous factors that influence fund performance over such a long period, it’s impossible to predict whether that’s true.”

From the WSJ: The post - 9/11 crash

If you consider the volatility of the auto industry over that same time period, as well as a generally sluggish national economy for 15 of those 23 years,  three stunning stock market crashes, not to mention several rollercoaster "corrections," it's hard to argue with Mr. Riehl's assertion. Context is everything.  For instance, just consider the impact of the events leading up to bankruptcy of Chrysler & GM, and the complete meltdown of our financial institutions, and the fact that  the stock market was in freefall in 2007, 2008, & much of 2009.  In fact, most credible financial analysts put agregate public pension losses at 25% for that three year period alone.
(edited 10/5/13)
 On Friday, October 4th, Federal Judge Stephen Rhodes, permitted Administrative Law Judge, Doyle O'Connor, to proceed with a pending ruling on the banning of the 13th check for active and retired workers. The Administrative Law Judge ruled in favor of the workers, saying that the City was wrong to ban the check in 2011, but compared the ruling to acknowledging a passenger with a ticket that allowed for a complete refund  for sailing on the Titanic. The notion of bonuses deserves a fuller discussion, which we will  attempt to address in future posts.
(Some questions have been raised about whether pension funds were diverted into annuity funds for active workers, which certainly warrants a fuller discussion.)

 

Cha...Ching!

As we write this, the  U.S. enters it's second day of a federal government shutdown.
In Michigan, according to the state budget director, fully 40% of the state budget is federal dollars.
I want to repeat that: 40% of the state budget is federal dollars. This, in a state with a Republican/Tea Party dominated legislature, and a Republican governor. This is the same governor who was conspicuously ungracious in his lack of acknowledgement of President Obama at a recent news conference, where it was announced with much fanfare, that the President insisted the Federal government support Detroit's recovery with $300 Million in old and new federal funding.
Michigan's budget director estimates that Michigan is losing $18 Million per day, every day of the shutdown. So far, 900 federal workers in Michigan have been furloughed.  The complete story is at the link:

http://www.mlive.com/news/index.ssf/2013/10/government_shutdown_costing_mi.html


A complete discussion of the impact of the shutdown, as well as a breakdown state by state, is included in this article from the Huffington Post:
http://www.huffingtonpost.com/2013/10/02/government-shutdown-damage_n_4031714.html?ir=Politics&utm_campaign=100313&utm_medium=email&utm_source=Alert-politics&utm_content=Title

If You Control the Message,You Have a License to Steal...

"$2.6 Trillion in state pension money is under management in America..."

"Today, the same Wall Street crowd that caused the crash, is not merely rolling in money again, but aggressively counterattacking on the PR front. The battle increasingly centers around public funds, like state and municipal pensions...In state after state, politicians are...using scare tactics and lavishly funded P.R. campaigns to cast teachers, firefighters & cops - not bankers- as the budget-devouring bogeymen responsible for the mounting fiscal problems in America's states and cities..." Matt Taibbi

Illustration by Victor Juhasz for Rolling Stone

In a recent Rolling Stone Magazine article, veteran investigative reporter Matt Taibbi exposes the vast national strategy being implemented to undermine public employee pensions.This important article gives context to what is happening in states, counties, public school districts, and cities all over the United States. Here are some highlights:

• In 2011,Rhode Island's newly elected Republican State Treasurer, Gina Raimondo,  a former venture capitalist, "...declared war on public pensions, ramming thru an ingenious new law slashing benefits of state employees..." It was called The Rhode Island Retirement Security Act of 2011. She's currently being touted as a possible Republican candidate for governor in 2014.
• Former Enron executive, John Arnold, one of Raimondo's biggest supporters, has, for years, been funding a nationwide campaign to slash benefits for public workers. After Enron, Arnold made $3 Billion as a wildly successful hedge fund operator,  "...the world's most successful natural gas trader," Arnold set up a foundation dedicated to reforming the pension system. Interesting side note: Arnold pulled off an $8 million bonus from Enron "while the company's pension fund was vaporizing...Public pensions funds lost more than$1.5 billion from their Enron investments."

• In 2011, The Pew Charitable Trusts, "long regarded as centrist and non-partisan..." began to align itself with John Arnold and his foundation, and "both have been proselytizing pension reform all over America, including in California, Florida, Kansas, Arizona, Kentucky, an Montana." with Arnold effectively exploiting Pew's credibility and established status in this field of research.

• States contribute to public employee pensions. This is referred to as ARC - Annual Required Contribution, and in many states it's mandated by law. Over the past 10 years, "...at least 14 states regularly failed to make their ARC. New Jersey made just 33% of its payments, with the teachers' pension fund getting just 10%. Kentucky has paid les than 50% of it's ARC for the past 10 years and is "basically broke, with it's pension fund  27% funded." (To contrast, Detroit's General Pension Fund is credibly estimated at 77% funded at this time.)

• Recognizing that so many states have been under-contributing to their public employee pension funds, the Arnold Foundation's report decided that, " the way to create a sound, sustainable, and fair retirement-savings program, is to stop promising a [defined] benefit."

http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926





 

This Says It All...

Shutdown!

While members of Congress continue to collect a paycheck, more than 800,000 public employees have been furloughed. The federal government has shut down because today, the start of the new Federal fiscal year, we have no federal budget, and Congress refused to pass a continuing resolution to at least authorize continued operations under the FY '13 budget. Why? because the Republican majority in the House of Representatives, wants to delay the implementation of the Affordable Care Act.   The ACA was passed by Congress, signed into law, and upheld by the Supreme Court. So to day, most food inspections will be suspended, our 3,000 airline safety inspectors will be furloughed, veterans waiting for disability benefits will be delayed, paychecks for military personnel will be delayed and 50% of the Defense Department's personnel will be furloughed. The WIC  Program (Women Infants & Children nutrition program) could also shut down. If the shut down lasts long enough, disability and pension checks will be delayed for those already in the system.  Staff members working for Congress will not be paid, but members will be paid.