December 8, 2013

Detroit's Pensions

There is an excellent editorial in the Detroit Free Press regarding the emergency manager law and pensions that for the most part is correct. Here are some observations warranting consideration. It would be interesting to do the same analysis for the remainder of the state, especially in the Grand Rapids area. My guess is the problems are not as acute.

1. No way should the state offer backing for unfunded liabilities. All that would do is make it easier for local officials to enact laws that create unfunded liabilities with a possible result of putting the state's finances in peril.

2. Local pension funds should not be allowed to invest in local real estate or real estate backed loans. It is too tempting to rationalize such an investment will spur the economy. This puts the local pension manager in a conflict between doing his job of protesting the interests of the pensioners and trying to help the local economy.

3. All pensions need to switch to a defined contribution plan instead of a defined benefit plan. The result will be the managers of the plans, and the pensioners themselves, will pay more attention.

4. Hold the actuaries and CPA's accountable. They are paid good money to calculate the contributions that are necessary to keep the pension funds solvent and they also are paid to render an opinion relative to the solvency of the funds. Looking from afar it appears they have failed. Why isn't the Emergency Manager putting any heat on these entities since the results indicate they did their job poorly?

Here is a related article in the New York Times titled Playing Pension Games in which it says,
"Securities laws require issuers of municipal debt to provide the information investors need to make informed decisions when buying or selling these instruments. But lax disclosure practices remain, making it hard to spot signs of problems like those hobbling some states and cities. Disclosures about the soundness of public pensions, for example, can be essential to weighing the health of municipal bond issuers that are responsible for funding them."
I certainly agree the Emergency Manager law needs changing. It is inappropriate that all power is placed in the hands of the Governor. Not only does the Governor have the Emergency Manager reporting to him, but he appointed all members of the Local Emergency Financial Assistance Loan Board. This board makes the decision on any actions taken by the Emergency Manager and and disputed by the City Council. How do you think the Loan Board will vote....

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