Dennis Leone: Comments on Detroit Free Press editorial and Why the STRS board won't change
Dennis Leone to John Curry, July 17, 2013
Subject: Re: Are we retirees, at STRS, going to face a similar
fate?
This is precisely the trend at STRS.
And, in case you are wondering, here is how the STRS membership has changed
over the past 10 years:
2002 = Retiree Members (105,300) 37.1%, Active Members (178,557) 62.9%2012 = Retiree Members (143,256) 45.3%, Active Members (173,044) 54.7%
The trend WILL continue. The above information is another reason why the
STRS Board must change from a board that has 5 active teachers and 2 retirees to
a board that has 4 active teachers and 3 retirees. Do you think the current
STRS Board will recommend such a change? Not a chance. Why? Because the
current board doesn’t think this way, and because McGreevy and Stein act more
like active teachers on the board than they do retirees. The current STRS Board
basically has 7 active teachers.
It is rather sad situation. Not a single current board member, for
example, is willing to admit how wrong the recent online board member voting
system was. Simply put, if retirees attempted to vote online for just one
candidate, the online system would not accept this attempt until retirees
rejected a second ballot that appeared which urged them to vote for a second
candidate. Truly unbelievable. The STRS online voting system definitely helped
the 2 incumbent board members in 2013, as did Mike Nehf’s own paper ballot
voting instructions that commanded retirees to “Select Two Candidates” instead
of saying “You May Choose Up To Two Candidates.” This was so wrong.
Dennis Leone
From John Curry, July 17, 2013
Subject: Are we retirees, at STRS, going to face a similar fate? It sure is!!!
Subject: Are we retirees, at STRS, going to face a similar fate? It sure is!!!
After all...thanks to Kasich and friends, we have fewer and fewer educators
to pay into the STRS.
Editorial: How Detroit came to betray its
retirees
July 14, 2013
Rick Nease/Detroit Free Press
By The Detroit Free Press Editorial Board
By The Detroit Free Press Editorial Board
Detroit’s pensioners are right.
But it is true that the funds are not generating enough income to keep pace
with the projected number of retirees and structural costs of the system over
the next 30 years.
So why is this a problem now?
• Susan Tompor: Don't blame pensioners for Detroit's fiscal
crisis
• Full coverage: Detroit’s financial crisis
The number of retirees drawing benefits from the fund continues to
increase, hastened by layoffs or workers retiring ahead of feared pension
changes, so the number of workers paying into the fund continues to shrink.
Meanwhile, the city’s annual contribution to the funds keeps getting bigger. And
because the city’s revenues have fallen so dramatically, that means the city’s
growing pension contributions are consuming a greater and greater percentage of
the city’s cash — or they would, if the city were even able to make the
payments.
As it is, the cost of providing pensions for Detroit’s 21,000 retirees is
the second-biggest drain on the city’s bank account, second only to the tab for
police and fire services. The estimated $3.5 billion that the city owes its
pension funds is a little more than one-sixth of the $18 billion in long-term
debt and obligations that consumes about 46 cents of every dollar Detroit has
for basic services.
All that means we’ve hit the end of the road: The city can’t pay what it
owes the funds this year, much less make up its arrearage.
As emergency manager Kevyn Orr mulls how to restructure Detroit’s pension
costs and even considers altering payouts, it’s more important than ever to be
clear about how the city’s pension funds got into this fiscal mess: Decades of
mismanagement and bad practices, coupled with catastrophic market declines, have
altered the pensions from a reliable way to assure retirees’ futures into a
massive financial burden.
Unfunded liability
There wasn’t any one thing that brought Detroit’s pension funds to this
low point. Bad decisions were compounded by bad luck, and sometimes decisions
that seemed sound wound up causing more problems than they solved.
The city operates two pension funds, the General Retirement System and the
Police and Fire Retirement System; each has its own set of rules and conditions
that dictate when an employee can retire and how much compensation that employee
will receive.
Accounting guidelines require pension costs to be accounted for over a
30-year period, allowing funds to project earnings, income and payouts,
spreading risk and reward over decades to help correct for market ups and
downs.
When times are good and the pension funds are managed well, investments
generate a significant return, and the city’s contribution can be minimal.
But when things don’t go well, and investments don’t pay off, the city has
to carry more of the burden.
For Detroit, times have rarely been good.
The city has struggled to meet its pension obligations since the 1950s.
Post-war Detroit invested heavily in infrastructure, shortchanging the pension
funds to pay for those improvements. Then came the auto industry recession of
the late 1950s, leaving city finances in a tailspin, and leading to the first
city income tax imposition.
For elected officials, frequent defaults on pension obligations to save
operating cash became something close to standard operating procedure. So far,
it hasn’t affected pension checks, which are paid out of money that was invested
years before. But it blows a hole in the 30-year projections and long-term
solvency, and it requires bigger payments from the city than would originally
have been necessary.
By 1991, for instance, a Wayne County Circuit Court judge was forcing
then-Mayor Coleman Young to make $53 million in overdue payments to the pension
funds. Young, attempting to plug a $50-million deficit, had delayed the payment
pending a tax-credit sale.
Detroit officials have also made a habit of convincing unions to accept
pension sweeteners — shorter terms of employment required, more generous
multipliers, or a “13th check,” essentially an annual bonus — rather than pay
increases. But that has raised pensions costs and had the unintended effect of
shrinking the city’s work force to the point where employee contributions can’t
keep pace with the needs of current pension recipients. The city has just 9,700
workers but 21,000 retirees drawing benefits.
That has meant larger and larger payments by the city to keep the funds
solvent.
In the flush later years of the 1990s, returns were higher, and the systems
were more stable. In 2000, the police and fire fund was actually overfunded by
$622.1 million, meaning the fund’s earnings had exceeded their projected rate of
return.
But by 2005, pension fund practices, questionable investments and the
city’s deteriorating financial position had put Detroit so far underwater on its
debt to the pension funds that it borrowed $1.4 billion to catch up. It was a
temporary fix, and one that had the net effect of digging the city deeper into
debt, struggling to pay both its creditors and its pension obligations.
The 2008 stock market crash dealt devastating blows to both funds — the
general system lost $429 million in the 2008 fiscal year; police and fire lost
$507 million, and losses continued into 2009 as the market reeled.
In 2009, the police and fire fund sued the city to compel a
$45-million payment.
By last year, the city’s finances had deteriorated so badly that it could
make only partial payments to the funds. As of June 30 of this year, the city
owed the funds a combined $103 million; when the city defers or postpones
payments, it’s charged 8% interest.
For a city to have to spend more than it has budgeted is bad enough, but
when the city can’t even afford to make that payment, the problem
snowballs.
That’s what happened in Detroit. And because neither the pension funds nor
the city have changed the way they operated, the problems just kept getting
worse.
Pension practices
Over the years, the funds’ operational practices have worsened the
problems.
The funds’ managers assume a rate of return on their annual investments
between 7.9% and 8%.
When the money doesn’t come through, the city has to make up the difference
— but in the general fund, better-than-average returns, or “excess earnings,”
were distributed into employees’ annuity accounts.
Police and fire annuities support pension benefits, but general fund
employees’ annuities’ earnings are held separately. Retirees can either cash in
the annuity for a lump sum payment, or take an annual distribution. So excess
earnings — which should be banked to help leaven the effect of lean investment
return years — leave the system entirely. That practice ended in 2011, but the
damage was done: Between that distribution and the 13th check, a report by the
city’s fiscal analyst found that $1.9 billion had left the system.
A report by actuarial auditor Milliman, commissioned last year, found that
the pension funds used a few other accounting practices that — while legal —
downplayed the brewing problems in the systems. One example is a 30-year
open-ended repayment schedule for missed or delayed city payments. Because the
schedule is recalculated every year, the city’s payments never significantly
impact the principal of the debt. Milliman also questioned the assumed rate of
return.
Another wrench in the works is the funds’ alternative investments, which
consist mostly of real estate deals such as the new Meijer shopping center at 8
Mile and Woodward. The pension funds invested $28 million in that project.
In 2012, 12% of the general system’s assets were alternative investments;
the police and fire fund’s total was 8%. These alternative investments, the
funds’ annual reports note, don’t have a ready market value. So the value is
determined by the pension systems’ managers, and that means the actual value
could be significantly lower than what’s estimated.
Retirees and union representatives have condemned the Milliman report,
saying that the picture it paints of the funds is too grim. Orr’s response,
meeting with the Detroit Free Press Editorial Board last month, was simple: If
the Milliman report is wrong, then there’s nothing to worry about.
That’s not much consolation for retirees like Detroit resident Juanita
Scott.
Scott, 86, retired from the immunization program in the city’s health
department in 1988.
“I just wonder, what am I going to do?” Scott said last week. “When I
retired, I had a nice bank account, but here the last couple of years, I have to
go in my little savings every month. Everything just goes up.”
Scott raised five children, working part-time until her children were
older. She started working full-time for the city in 1971. Her husband died in
1976. He worked at a small plant, and when he died, Scott received nothing — her
late husband’s Social Security benefits were just enough to see her youngest
child through college. It was hard to save, she said, on a small income with
five children. So Scott’s pension, plus her Social Security check, is what she
relies on.
Her pension check is small — just $594 a month — but coupled with the
$1,100 she receives each month from Social Security, it’s enough to get
by.
“I live in the old neighborhood, and (my) house is depreciated, so I only
had to pay $480 in property taxes. Still, they’re going to be due. I just paid
off my car note, but I still have my car insurance. Last month, I paid $186 a
month for it, next month I have to pay $209. Then my house insurance went up; my
house insurance is going to be $106 a month,” she said, ticking off a list of
bills. “Then I have to pay all of my bills. I don’t go out a lot. I’m on the
Internet, and I have to pay every month for that. Then there’s my gas bill, my
water bill ... I don’t live a fast life. I don’t go out a lot.”
Scott said she’s trying to take it all in stride.
“At my age, I’m not going to let my blood pressure get up worrying about
it. I have children, they’re not going to let anything happen to me,” she said.
“I don’t want to rely on them. But it will take all the money I can get to get
by.”
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