26 September 2013

Detroit Asides

It's not easy to shock me and on reflection perhaps this shouldn't but read the NYT DealB%k here for an initial account of actions by the trustees of Detroit's pension plans. Hundreds of millions over the years paid above and beyond what the pension plans provided.
Detroit has nearly 12,000 retired general workers, who last year received pensions of $19,213 a year on average — hardly enough to drive a great American city into bankruptcy. But the total excess payments in some years ran to more than $100 million, a crushing expense for a city in steep decline. In some years, the outside actuary found, Detroit poured into the pension fund more than twice the amount it would have had to contribute had it paid only the specified benefits. (Emphasis added.)
How could this happen? "Most of the trustees on Detroit’s two pension boards represent organized labor, and for years they could outvote anyone who challenged the payments." While this may explain the initial decision, it fails to explain why non-union board members violated their fiduciary duties by not going immediately to Michigan's attorney general to stop the payouts. Unless, one wonders, those members received their own payoffs.

Incompetence? No surprise in the world of public pension finance. Venality and small-time fiddling with the system? Of course. But straight-out corruption and breach of fiduciary duties? Well, one hopes that the current government of the State of Michigan cleans house. One might also hope for a federal DOJ investigation but given weakness of law (ERISA does not apply to state or municipal pensions (for more on that and other esoterica go here to download my article about Stockton's bankruptcy)) and weakness of will (does anyone expect the current Administration to bite the hand of the unions that have fed it?), little can be expected from Washington.

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