Wayne County Michigan – Following Detroit into Bankruptcy
Just as Detroit is coming out of bankruptcy, the entire county is about to go under.
This will be especially aggravating because Detroit pensioners are already extremely upset with the pension haircuts they received.
In the “too late to complain now” category, Wayne County now seeks to overturn the Detroit bankruptcy settlement. Lawyers will have a field day with this setup.
Cries of Betrayal
Crain’s Detroit Business reports Pension Cuts, Interest Paybacks from Bankruptcy Prompt Cries of Betrayal.
Pension checks will shrink 6.7 percent for 12,000 Detroit retirees beginning in March. Making matters worse, many also must pay back thousands of dollars of excess interest they received.
It’s a bitter outcome of Detroit’s record $18 billion municipal bankruptcy for David Espie, 58, who will repay the city $75,000 in a lump sum while his $3,226 monthly pension is cut by $216.
As retirement costs swallow larger portions of U.S. city budgets, Detroit’s bankruptcy plan resolved a pension crisis with creative strokes, though at a cost to retirees who thought their benefits were untouchable.
“I feel betrayed,” said Espie, who may abandon plans to move to Alabama.
In addition to absorbing pension cuts, almost 11,000 retirees and current employees must repay an estimated $212 million in excess interest they accrued in a city-run savings plan, which is separate from the pension fund. The annuity plan guaranteed a 7.9 percent annual return even when the pension lost money, and employees also received bonus interest in some years.
They can either pay the money back in a lump sum or have it deducted gradually from their monthly pension check with 6.75 percent interest.
Henry Gaffney, 61, a retired bus driver, said he’ll pay back $56,000 of the $300,000 he saved by deducting $428 from his monthly $3,100 pension check for 19 years. He said he pays $375 more for health insurance each month.
“I may have to find a part-time job,” said Gaffney, former president of Detroit’s bus-driver union. “I guess the city wants us to work until we’re dead
Simple Math Lesson (Yet Again)
This just goes to show you: What cannot be paid, won’t.
Hot Air Category
Here’s one for the meaningless “hot air” category: Wayne County Threatens Detroit Bankruptcy Deal.
Wayne County is threatening to unravel a breakthrough deal that settled Detroit’s bankruptcy case unless it receives land or more than $30 million — money the city needs to bankroll Detroit’s revitalization.
The fight could undo a hard-fought bankruptcy settlement the city reached with its fiercest bankruptcy creditor, bond insurer Syncora Guarantee Inc.
It’s far too late to go whining about something approved months ago. Worse yet, Wayne County has far bigger problems.
Wayne County in Serious Financial Difficulty Over Pensions
On Thursday, Wayne County Executive Warren Evans went over the county’s finances at a news conference.
His conclusion Wayne County Finances are in Trouble, Could Worsen.
Wayne County needs to close a $70 million budget deficit, shore up pension plans that are nearly $1 billion underfunded and keep its general fund from running out of money in 2016, county Executive Warren Evans said of a recent financial review.
Evans announced Thursday the county has averaged about a $50 million annual deficit over the past three years in its general fund budget, which had $49 million of pooled cash last September and could be in a liquidity crisis as early as August, before the fall property tax collection.
An independent financial outlook report prepared for the county by Ernst & Young LLP found that the nearly $500 million general fund is creating a $50 million to $70 million structural debt each year for the county, which already had $159 million accumulated budget deficit at the end of fiscal 2013.
But perhaps most critical is an $850 million unfunded liability in the defined benefit pension plans for the county, which had more than 2,000 full-time employees in 2014. Pension plan contributions, retiree health care costs and some debt service are expected to drain a combined $92 million from the general fund in fiscal 2015.
Evans said the county pension plans were 95 percent funded about 10 years ago, but were only about 45 percent funded in 2013 and are on pace to be 39 percent funded by around 2023 without corrective action.
This is not a “Liquidity Crisis“, it’s a solvency crisis. Wayne County is bankrupt. The only solution is a bankruptcy filing followed by pension haircuts.
Pension Promises Not Sacrosanct
As I have stated many times, pension promises are not sacrosanct no matter how much unions pretend that they are.
Instead of fighting this, I suggest unions ought to figure out how to protect the pensions of the most people. Instead, they will likely engage in futile time-wasting fights only have a unilateral, across-the-board pension solution imposed by the courts.
My idea, which will be quickly discarded by the unions, is to quickly agree to a plan that caps benefits at some level so that haircuts do not fall most on those who get the least.
America Watch Closely!
America, please watch closely. What’s happening in Michigan, won’t stay in Michigan!
In spite of this massive rally in both stocks and bonds, Wayne County pension assets have declined, and are on a pace for that decline to continue.
Any turndown in stocks and bonds will crush pension plans across the country. This will get very serious, very soon.
About the Author: Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.