July 26, 2013

As the Detroit bankruptcy is prepared to begin in the courtroom of Federal Bankruptcy Judge Steven Rhodes, a lot of debate is taking place in muniland. Many of these arguments are over whether secured bondholders will take haircuts, where the money will come from to pay off the swaps termination fees that are currently being negotiated and whether Detroit Emergency Manager Kevyn Orr has authority to cut the earned pensions of the city’s retirees. Orr has been making the media rounds to bolster his case for why these well-funded pensions should be cut. Of course, the more he cuts retiree benefits, the more he can force cuts on bondholders. Let’s shed a little light on Orr’s pension voodoo. Here is how the Detroit pension funds are represented in the 2012  annual financial report (CAFR) (page 145):


We don’t know Detroit’s pension returns for 2012, but it was a good year overall for public pension funds, with an average return of 12.69 percent, according to Wilshire Trust Universe Comparison Service. In 2012, according to the CAFR, Detroit contributed $64 million to the General Retirement System and $50 million to the Police and Fire System (page 146). That is $114 million, or about 10.3 percent of the $1.1 billion of general fund revenues in 2012. The voodoo comes in when Orr projects pension contributions jumping to $285 million in 2017 from $114 million. That is an increase by a factor of about three (June 14 Creditor Proposal page 91):


Why is Orr doing this? Does he believe that the pension funds are not adequately counting their future liabilities? I don’t think so. Ken Klee, one of the smartest municipal bankruptcy attorneys in the nation, who lead Orange County, California out of bankruptcy, lead the Jefferson County, Alabama bankruptcy case. Did attorney Klee go after Jefferson County’s pension fund, which was funded at almost the same level as Detroit’s Police Retirement System? I knew the answer was no, but I wanted to confirm with the Birmingham News reporter who covered their bankruptcy trial since the start:


Here is Jefferson County’s pension fund (Jefferson County CAFR page 155):

Orr is also trying to make the argument that the pension bonds (COPs) and related swaps are liabilities of the pension funds and retirees. They are not. They are liabilities of the city, just like bonds that were issued to build a bridge or a school. I dare say that Emergency Manager Orr has inflationumberitis.


MSRB: Spreadsheet of Detroit’s bonds

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