Detroit pension.

[clifp]

I figured there had to be some fiscal mismanagement, along with the collapse of the big 3 to make Detroit financial situation so bad...

But even I was surprised by some of the revelations in Megan McArdle's column

’m rarely speechless, but I’m having trouble putting my emotions into words after reading the latest report on the Detroit pension situation. Now, I admit it: I’m kind of naïve. Usually when I see an underfunded pension, I think to myself “poor pensioners -- undone by a combination of stupid tax rules, volatile stock markets and mismanagement by trustees who tried to restore depleted fund assets with an investment approach you might call ‘desperate optimism’." Thus, I was not entirely prepared for the new revelations about the Detroit trustees’ custom of handing out annual holiday “bonuses” to workers, retirees and the City of Detroit. Between 1985 and 2008, they handed out roughly $1 billion this way. Had they been invested, one estimate says those funds would be worth almost $2 billion today -- or more than half the current shortfall in the funds.These “bonuses” were used to lower the contribution the city was required to make, to give retirees a little something extra around Christmas time, and to fund individual savings accounts that workers are offered along with their pensions. In 2009, when the financial markets were completely frozen and the automakers were shotgunning through the bankruptcy courts, the pension trust paid 7.5 percent interest into those accounts -- which is about 7.5 percent more than they would have gotten at a bank. This while the pension funds were busy losing about a quarter of their value.

I don't understand why some of the trustee's aren't in jail.

 

[2B]

I'm not sure how this is "FIRE and Money" but I'll comment on it. It shows how an individual is ultimately at the mercy of many things (including criminals and idiots) that can derail plans. Risk comes in many forms and is almost always worse when it comes from an unexpected quarter. I'm sure the retirees all thought the nice bonuses and high interest rates were wonderful. Now, I'm sure they are anguishing over their financial future.

 

[ERD50]

Here's the link to the Bloomberg article, the link in the OP seems to be malformed:

Detroit's Pension Madness - Bloomberg

-ERD50

 

[REWahoo]

I'm not sure how this is "FIRE and Money"...

If your pension came from Detroit you'd see the connection.

 

[2B]

If your pension came from Detroit you'd see the connection.

I agree but the OP was referencing an opinion piece on Bloomberg. I've heard various claims from various souces on how secure the pension plans would be if separated from the bankruptcy. Separation would be the second choice of the pensioners with the first being to continue getting their pensions without interruption (not likely). The people pushing the bankruptcy want to pull the pension plan assets back into the general pool of money to pay off different constituencies.

Detroit brings forward all sorts of potential precedent setting events. The one that shocks me the most is the lumping together of the various municipal bond classes. Up until now, a revenue bond (to be paid out of a functioning activity like a hospital or arena) was considered to have more risk than a bond issued with the full faith and credit of their tax base. Much of what people know about evaluating municipal bond risk would go out the window if this becomes a legal precedent. So far, the municipal bankruptcies have protected these bonds.

 

[chrisaukcam]

Stuff like this is the main reason I took my funds out of my ex companies pension fund as soon as I was allowed. I wanted to have control, not some trustee's who may or may not have my best interests at heart.