Public Employee Pension Roundup - Illinois, Detroit Update

Here is a summary of key areas in the fight to prevent state and local public employee pensions from bankrupting governments.

Detroit. Judge Stephen Rhodes will rule today at 10:00 a.m. (EST) on whether the city is eligible to enter bankruptcy.  From the LATimes. Most legal experts expect Rhodes to declare that Detroit is eligible for bankruptcy protection.  A ruling to enter bankruptcy would give emergency city manager Kevyn Orr leverage to bargain with unions over pension reductions or to make unilateral changes.  Whether such changes would be constitutional would be decided later.
UPDATE:  The NYTimes is reporting that Detroit is insolvent and eligible for bankruptcy:

Judge Steven W. Rhodes of the United States Bankruptcy Court, found that Detroit was insolvent and that the pension checks of retirees could be cut during a bankruptcy proceeding, a crucial part of his decision

I had not expected that a ruling on pensions to be part of the judge's ruling.  USAToday has some amazing facts about Detroit's situation including the fact that it has three times as many retirees as workers.

Illinois. As I discussed earlier, the state is poised to vote on huge pension reform and the outcome is in doubt.  A vote is expected in both the state House and Senate, also today.  The outcome is clouded because Republicans who normally would vote for such a measure will be helping the state's Democratic governor.  My answer, be known as the party of principle, it works better for you in the long run.  Meanwhile, some Democrats will have to vote against the unions for this to pass.    More detail on the plan:

About $90 billion to $100 billion of that savings is expected to come out of the wallets of state workers, teachers outside Chicago and public university employees. The other $60 billion to $70 billion in savings is expected to come from the state owing less as it seeks to pay down the pension debt sooner — a move akin to a homeowner saving money by paying down the principal on a mortgage more quickly.

UPDATE:  The WSJ is reporting that pension reform has passed the Illinois state legislature.  The Chicago Tribune reported that the House voted 62-53 in favor and the state Senate passed with a 30-24 vote.  In reviewing the details in the Tribune article, I am inclined to agree with Brian Brady, frequent SD Rostra commenter and blogger, that the reform doesn't go far enough.


San Diego. Proposition B remains held up in administrative limbo by the California Public Employment Relations Board (PERB), no relation to Bob Filner.  Craig Gustafson reports in the U-T that the key cost saving measure of Proposition B has been implemented.

. . . the city and its unions reached a deal earlier this year on a five-year freeze on the pensionable pay of current city workers, a provision in the ballot measure that is projected to save the city nearly $1 billion over the next three decades. By agreeing to terms, the city has locked in those savings even if Proposition B is later found to be illegal.

Unfortunately, the city may have to wait until April 2015 to get a ruling.  Implementing remaining pieces of the proposition may become an issue in the mayoral campaign. Meanwhile, the city of San Diego chose to settle a lawsuit where the city tried to get the city employees to be responsible for half of any shortfall in the pension funds investment rate.  I am concerned, as is the U-T editorial board, that this signals a lack of willingness on the city council to tackle tough pension issue.

California. The mayor of San Jose, Chuck Reed, is attempting to put pension reform on the state ballot in 2014.  Reed is a Democrat, like Governor Pat Quinn of Illinois.  The Pension Reform Act of 2014 would give cities more flexibility in changing pension retiree health care rules for future retirees.  The public employee unions are actively opposing the plan of course.

“What they’re trying to do is overturn decades of case law, Supreme Court decisions and change the California constitution to allow public employers to either change, cut or eliminate public employees’ pensions in the middle of their career,” said Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees.

Exactly.  Of course we need to change decades of case law because these retirement benefits are unsustainable if we are to have government perform any function at all.

Rhode Island. In the mostly Democratic state of Rhode Island, the legislature passed pension reform in 2011 that included a temporary halt in cost of living increases and moving part of the retirement to a 401(k) style plan.  From the state's web site:

The Rhode Island Retirement Security Act of 2011 as Amended includes language that: 

• Suspends  new  cost‐of‐living  adjustments  (COLAs)  to  retirees’  benefits  until  the system is better funded but provides for an intermittent COLA every five years until 80% funded.
• Moves all but public safety employees to hybrid pension plans.  
• Increases minimum retirement age for most employees not already eligible to retire.
• Preserves accrued benefits earned through June 30, 2012. 
• Begins to address independent local plan solvency issues.

Recent complaints about the investment strategy pursued by the state's treasurer do nothing to change the basic impetus for pension reform.  There are allegations by a long time financial industry critic, "Ted" Siedel on inappropriate investing in hedge funds that result in hefty Wall Street fees. (Hedge funds received over half of the fees paid out by the pension fund last year.) However, 401(k) style pensions could reduce the opportunity for abuse, if employees are given the opportunity to choose their own fund in which to invest.  More important to note for supporters of pension reform, the legal struggle over pension reform in Rhode Island continue two years later, with no end in sight.

Lesson learned: You have to be in this fight for the long haul.

What You Should Be Reading

• San Diego blogger W.C. Varones asks if media bias has any impact on economic performance? Fascinating answer.  Maybe it can benefit your market timing.
• The VOSD takes a look at a San Diego couple's questions about the ACA.  It quickly gets complicated.  Note how the question of subsidy isn't fully resolved. 

When Pension Reform Goes Bipartisan

Eventually the mathematical results of under-funding ever more generous pension benefits for state and local employees becomes a problem for Democrats too.  Illinois legislators are expected to vote this week on pension reform that would pare back pension benefits in three important ways.

• Reducing cost of living increases.
• Increases retirement age.
• Capping the salary amount available for pension calculations.

There are few other means short of bankruptcy that can be used to reduce pension obligations.  However, Illinois has rejected attempts at pension reform before, so the path to success in the legislature is not certain.  Of course, the state employee unions are waiting to sue if a pension reform measure passes.  This is one of the most important long term issues for state and local government.  Without pension reform here in California and San Diego, the state and city governments will eventually have no money for basic services.  Rahm Emmanuel, not known for his tea party rhetoric, made the same point.

The [state] agreement also is expected to provide a template for Chicago Mayor Rahm Emanuel to follow for his city, which for years has paid far less into its retirement system than needed to keep it solvent. City payments to local pension funds are set to more than double to nearly $1.1 billion starting in 2015. Mr. Emanuel has warned that if changes aren't made, the city will face a combination of property-tax increases and cuts in services, equating the scheduled increase to the cost of having 4,300 police officers on the street.

It is important to note how a deal was reached among Illinois legislative leaders.

Labor officials excluded from the talks found out about the eventual Wednesday breakthrough from reporters. 

. . .   

“I think it’s going to be difficult,” said Sen. Linda Holmes, D-Aurora, a member of the pension conference committee and supporter of labor’s arguments in pension talks. “I’m uncomfortable they didn’t have a seat at the table when they’re the people who’ll be impacted by this.”

If Democratic politicians feel the need to exclude labor from pension reform talks, then the situation must certainly be dire.  Illinois is paying a 2% premium on its bonds while pension reform remains unresolved. (California and Michigan are paying about a half-percent premium, source: WSJ.)  

This is one of the key issues of our day, because the proper functioning of government is being put at risk by the expense of public employee pensions.  I support Kevin Faulconer for mayor of San Diego, primarily because I am convinced he can be trusted to continue the fight to reform pensions that was approved by voters under Proposition B.  Alvarez' response on this issue does not "inspire confidence" as a U-T editorial put it.  I would prefer to deal with our pension problems before they become a crisis like Illinois' and Chicago's.

What You Should Be Reading

• Victor Davis Hanson provides the most complete compendium of Obama-fail I have seen assembled in one column.  
• In the same vain, Charles Krauthammer outlines the utter lawlessness of this administration and its Democratic allies in the Congress.  The destruction of the rule of law under Obama is frightening, it troubles me greatly that this doesn't get more attention, we are on the path to dictatorship; our long history has made us believe we are immune, we are not.
• Local blogger KTCat reminds us of the real spirit of Thanksgiving in light of the President's request that we "talk about healthcare" at Thanksgiving dinner.  After the ACA fully crashes and burns, what will you do? Great question. 

Detroit Bankruptcy Constitutional Issues

Bankruptcy proceedings underway in Detroit will go a long way in determining what path cities might take in reducing unsustainable pension benefits. Attorneys for the City of Detroit are taking an aggressive stance in arguing that the city has standing in federal bankruptcy court.  However, the key issue of pension "impairment" is not addressed directly by the city's filing.  City lawyers skirted the constitutional issue of pensions by arguing in their filing that no impairment of pensions has yet been taken by their filing.  An excerpt from Michigan's constitution highlights the conundrum:

§ 24 Public pension plans and retirement systems, obligation.
Sec. 24. The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

One would think this is case closed, the state of Michigan, through its constitution, is now on the hook for Detroit's pensions.  However, this case has a federalist element.  The bankruptcy was filed under federal bankruptcy laws.  Was it the intent of Congress in passing the bankruptcy laws to supplant state constitutions?  If so, under the Supremacy Clause in Article VI, the city's lawsuit should be heard and trump federal law.  There is an entire section of the bankruptcy code devoted to municipalities, Chapter 9.  Pensioners are arguing that the courts must first hear constitutional issues before the bankruptcy hearing can proceed and have moved to remove the case out of bankruptcy court to district court.

Since I am not a lawyer, I turn to the analysis of University of Pennsylvania law professor David Skeel, to make the case.  From the WSJ:

Article IX, Section 24, of the Michigan state constitution says: "The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby." Yet Chapter 9 of federal bankruptcy law clearly authorizes a city to restructure its obligations to restore financial health. How will the conflict be resolved?

Chapter 9 should prevail. The U.S. Constitution (Article VI) states that the laws of the United States are "the supreme law of the land," and furthermore, that judges in every state are bound by them, "anything in the constitution or laws of any state to the contrary notwithstanding."

Seem clear enough to me.  Here is some more perspective.

Seven states have specific clauses in their constitutions that protect public employee pensions: Alaska, Arizona, Hawaii, Illinois, Louisiana, Michigan, and New York.

Some of these states might eventually have the biggest bankruptcies from pension obligations.  Without at least the threat of bankruptcy, I don't think unions are ever going to back off from claims that the constitution protects retiree benefits, even if there are no taxpayers left to foot the bill.

Who's going to pay for the pensions now?