Detroit Bankruptcy Judge: Pension Ruling Was “Not Particularly Difficult” Decision


U.S. Bankruptcy Judge Steven Rhodes – the judge that authorized Detroit’s pension cuts as part of its bankruptcy plan – said this week that, from a legal standpoint, the decision to let the city cut pensions was “not particularly difficult”.

But from a personal standpoint the cuts were more difficult, according to Rhodes.

Here’s what Rhodes had to say about the ruling, according to the Detroit Free Press:

Michigan’s Constitution describes public pensions as a contractual obligation that cannot be cut, but federal bankruptcy law allows contracts to be severed.

“I have to say that from a legal perspective, it was not a particularly difficult decision,” he said.


He felt still compassion for the city’s retirees and citizens who suffered because of the city’s financial collapse and water shutoffs.

Rhodes, who presided over the largest municipal bankruptcy in U.S. history from start to finish, told WDET’s “Detroit Today” that he invited citizens to speak in his courtroom on multiple occasions during the case because he wanted to hear their input.

“It wasn’t just show. It wasn’t just me trying to persuade people that I’m fair,” he said. “I was genuinely interested in what their concerns were and how I could possibly deal with them, if I could. So that was important to me.”

Rhodes also said in the interview that Detroit should have filed for bankruptcy as early as 2005.

Read the full interview here.


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Detroit Pension Fund Fires Top Lawyer


Detroit’s Police and Fire pension fund fired its general counsel, Joseph Turner, on Thursday.

Reports had surfaced weeks ago that trustees were uncomfortable with having Turner on staff because he was with the fund when it was embroiled in corruption scandals.

Trustees reportedly wanted a clean break from the pension fund’s past mismanagement.

From Detroit News:

The 9-7 vote to fire general counsel Joseph Turner and his law firm, Clark Hill, comes three weeks after The News exclusively reported that some members of the pension fund had lost confidence in Turner. His continued involvement in the pension board raised questions about the city’s ability to move past a history of corruption, mismanagement and bad investments that helped push Detroit into bankruptcy, critics said.

“I respect their decision,” Turner said after the meeting. “I don’t agree with it, but I respect it.”

Clark Hill will continue to represent the pension fund in matters related to the city’s bankruptcy case, and some ongoing lawsuits, pension fund spokesman Bruce Babiarz said.

The board will seek a replacement in coming months.

Turner admitted in court that years ago, he gave previous trustees large amounts of cash as “birthday presents”. Those same trustees later voted to give Turner a raise.


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Michigan’s $195 Million Payment to Detroit Pension Systems Approved


A board on Monday approved a $195 million payment that Michigan will make to Detroit’s pension system as part of the city’s plan to avoid steeper benefit cuts.

From the Lansing State Journal:

Detroit’s two pension funds are expected to receive the state’s “grand bargain” bankruptcy contribution of $194.8 million on Feb. 9 after a state panel gave final approval to the payments on Monday.

The three-member Michigan Settlement Administration Authority approved the payments after board members were advised all legal claims against the state related to the largest municipal bankruptcy in the nation’s history had been dismissed.

The authority — made up of Treasurer Kevin Clinton, Budget Director John Roberts, and Huntington Woods attorney William Cohen — is not expected to meet again. Its sole function was to oversee payment of the state’s contribution to a grand bargain that helped settle the bankruptcy. The Legislature approved the payments last May.

The state’s contribution is part of more than $800 million raised from foundations, private donors and the Detroit Institute of Arts to shore up city pension funds and protect a sell-off of the DIA’s collection of artwork during Detroit’s Chapter 9 proceedings, which ended this month.


The money will go into the investment funds of the two pension funds.

The state is financing the payments from a fund established from money it received through the settlement of a multi-state lawsuit against tobacco companies.

Detroit will reportedly receive the money on February 9.


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Detroit Pension Chair Calls for Firing of Lawyer Employed During Bribery Scandal


The Chairman of the Detroit Police & Fire pension fund is calling for the termination of the fund’s general counsel. That’s because the lawyer was employed at the fund during the bribery and pay-to-play scandal that cost the fund millions.

The general counsel, Joseph Turner, was not charged with any crimes. But the trustees have said publicly that they don’t trust him and want a clean break from the years of bribery that have plagued the fund.

From the Detroit News:

A powerful lawyer who factored into the Detroit pension fund bribery scandal and continues to wield influence over the Police & Fire retirement system could soon be out of a job.

Critics of the retirement system’s general counsel, Joseph Turner, say his continued involvement in the pension board raises questions about the city’s ability to move past a history of corruption, mismanagement and bad investments that helped push Detroit into bankruptcy.

Detroit Police & Fire pension fund Chairman Mark Diaz said he is prepared to ask board members to fire Turner and his law firm Clark Hill PLC, now that a corruption trial has ended in six convictions and Detroit has emerged from bankruptcy.

The pension board’s next meeting is Thursday.

Here’s what trustees have said of Turner, from Detroit News:

“Very simply: we don’t have confidence in him,” [Chairman] Diaz told The News Wednesday. “This is a multi-billion-dollar corporation and we cannot have the air of impropriety whatsoever.”

Fellow Trustee Georze Orzech was blunt when asked about Turner.

“He’s got to go,” Orzech said. “I don’t trust him.”

According to Detroit News, in 2007 Turner gave thousands of dollars of “birthday money” to various trustees. Soon after, the trustees voted to raise Turner’s pay from $225 to $300 an hour.


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Two Former Detroit Pension Officials Found Guilty of Fraud


Three former Detroit officials – including two who worked for the city’s pension systems – were convicted Monday of conspiracy to commit fraud.

The men accepted bribes and other kickbacks in exchange for directing pension money to certain investments.

From the Wall Street Journal:

A former treasurer for the city of Detroit — along with two other former city pension officials — were convicted Monday of conspiring to defraud retirees by trading lucrative investment deals for bribes and kickbacks as the city’s finances spiraled out of control.

A federal jury convicted former treasurer Jeffrey Beasley, 45, of Chicago following a two-month trial. Ronald Zajac, who was an attorney for the pension fund and Paul Stewart, a former pension trustee, were also found guilty of corruption charges.


All three defendants were convicted of conspiring to defraud the city’s pensioners by accepting bribes. In addition, Mr. Beasley was convicted of two counts of extortion and one count of bribery. Mr. Beasley was acquitted on three other counts of extortion.

The evidence at trial, according to federal prosecutors, showed that Detroit’s two retirement systems lost more $97 million on pension deals corrupted by bribes and kickbacks taken or paid by the defendants…

Messrs. Beasley, Zajac and Stewart conspired with each other and, prosecutors alleged, with former Detroit Mayor Kwame Kilpatrick and others to take bribes and kickbacks in return for votes on investment decisions made by the boards of trustees of Detroit’s two pension systems.

This happened under the watch of former city Mayor Kwame Kilpatrick, who is currently serving a 28-year prison sentence for racketeering, tax crimes and bribery.


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Detroit Pension Funds’ Legal Fees to Be Reviewed


U.S. Bankruptcy Judge Steven Rhodes said Wednesday that there will be a review of the legal fees incurred by Detroit’s pension funds – the Police and Fire Retirement System and General Retirement System – during bankruptcy proceedings.

More details from Detroit News:

U.S. Bankruptcy Judge Steven Rhodes ruled Wednesday that the Police and Fire Retirement System and General Retirement System should be subjected to the court’s review of costs associated with litigating the largest bankruptcy in U.S. history.

Robert Gordon, an attorney for the pension funds, argued in court Monday that they should not be subject to fee examiner Robert Fishman’s ongoing reviews because Detroit taxpayers are not directly footing their legal bills.

Rhodes disagreed, while acknowledging there’s no legal precedent for having a creditor’s legal fees subject to court review in a Chapter 9 municipal bankruptcy.

“Simply stated, the city funds the plans and the plans pay its professional fees and expenses from those funds and their earnings,” Rhodes wrote in a five-page ruling. “Contrary to the retirement systems’ assertion, the application of the statute does not depend on a line-item administrative expense paid directly by the city.”

The final cost of millions of dollars in fees charged by an army of city consultants and attorneys remains one of the last hurdles to Detroit’s exit from bankruptcy. Fees from financial advisers, restructuring consultants and law firms had topped $140 million, according to Emergency Manager Kevyn Orr’s office.


Mayor Mike Duggan has expressed concerns that cost overruns from legal bills could endanger the city’s plan of adjustment, the budgetary blueprint that will govern Detroit’s finances for the next decade.

On Monday, an attorney for Greenhill & Co. disclosed that the financial firm has billed the two retirement systems $3.55 million for its services. The firm’s advisers helped General Retirement System and Police and Fire Retirement System officials negotiate with Orr’s legal team over changes to pensions and long-term investment assumptions.

Group of Retirees To Appeal Detroit’s Pension Cuts

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The judge overseeing Detroit’s bankruptcy, Judge Steven Rhodes, said this month there was a 25 percent chance his ruling allowing pension cuts could be overturned if appealed.

That was enough to give a small group of retirees hope. The group, consisting of 133 working and retired city employees, is appealing the city’s pension cuts and asked Rhodes on Monday to delay the cuts until after an appeal can be heard.

From the Detroit News:

In a court filing, the group of retirees, survivors and city workers cited the 4-to-1 odds the Denver Broncos will win Super Bowl XLIX on Feb. 1 as part of their justification for time to appeal.

“Therefore, there is a reasonable likelihood of prevailing on the merits,” retired Detroit police officer and attorney Jamie S. Fields wrote in court motion for a limited stay of Rhodes’ ruling.

The appellants asked for a limited stay that wouldn’t impact other settlements tied to Detroit’s plan to fix city services and shed $7 billion in debt.

Fields, who retired in 2010 as a deputy police chief, argued Detroit should not be able “to avoid any meaningful appellate review of the unprecedented approach” used to forge settlements with labor unions, retiree groups, the city’s pension funds and financial creditors.


In his Nov. 7 ruling from the bench, Rhodes acknowledged the pension reductions could be a “real hardship” for some retirees.

“The pension reductions in the pension settlement are minor compared to any reasonably foreseeable outcome for these creditors without the pension settlement and the grand bargain,” Rhodes said.

The pension cuts were voted on and approved by city workers over the summer. They include a 4.5 percent benefit cut for general city retirees, and a reduced COLA (from 2.25 percent to 1 percent annually) for public safety retirees.


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Detroit’s Pension Problems Not Over Yet – As Costs Remain High, City’s Payments Remain Small


Judge Steven Rhodes approved Detroit’s bankruptcy plan last week. But he used the moment to re-iterate that Detroit isn’t out of the water yet.

One thing in particular worries Judge Rhodes, who said his “greatest concern…arises from the risks that the city retains relating to pension funding.”

Retirees have accepted benefit cuts, but pension problems still linger. Among them: Detroit’s unwillingness to make full payments to its pension systems. From the New York Times:

Documents filed with his court show that Detroit plans to continue its past practice of making undersize pension contributions in the near term while promising to ramp them up in the future. This approach is by no means unusual; many other cities and states do it, on the advice of their actuaries. Detroit’s pension fund for general city workers, now said to be 74 percent funded, is scheduled to go into a controlled decline to just 65 percent by 2043; the police and firefighters’ fund will slide to 78 percent from 87 percent. After that, the city’s contributions are scheduled to come roaring back, bringing the plan up to 100 percent funding by 2053.

This will work, of course, as long as the city has recovered sufficiently by then. The state’s contribution to the grand bargain lasts until 2023, with the foundations and the art museum continuing to kick in until 2033. Eventually the payouts will begin to shrink some as current retirees fall off the rolls. Active workers have already shifted to a hybrid pension plan, and they will start to bear most of the new plan’s investment risk. But the city faces decades of payments for retirees under the old plan.

“The city has the potential to be saddled with an underfunded pension plan,” warned Martha E.M. Kopacz, the independent fiscal expert Judge Rhodes hired to help him determine whether Detroit’s exit strategy was feasible.

Ms. Kopacz, a senior managing director with Phoenix Management Services, did find it feasible, but expressed many reservations, especially about pensions.

“The city must be continually mindful that a root cause of the financial troubles it now experiences is the failure to properly address future pension obligations,” she said in her report. Judge Rhodes said on Friday that he agreed.

Despite benefit cuts, the city’s pension costs are still high. Since the city isn’t paying full contributions, even more pressure will be put on investment returns to cover costs. From the Times:

Even after the benefit cuts, the city’s 32,000 current and future retirees are entitled to pensions worth more than $500 million a year — more than twice the city’s annual municipal income-tax receipts in recent years. Contributions to the system will not be nearly enough to cover these payouts, so success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers.

Judge Rhodes’ full opinion can be read here.

Detroit Pensioners Sue Actuarial Consulting Firm Over Allegedly Faulty Assumptions


Lawsuits are rolling in against Gabriel Roeder Smith & Company, an actuarial consulting firm enlisted by pension funds across the country for advice on return assumptions and other calculations.

The firm has worked with Detroit’s pension funds for decades. Now, pensioners from several of Detroit’s public pension systems are suing the firm for playing a part in bringing the systems to “financial ruin.”

From the New York Times:

Detroit has been a client of Gabriel Roeder since 1938, when the city first started offering pensions. Now the city is bankrupt, the pension fund is short, benefits are being cut and one of the system’s roughly 35,000 members, Coletta Estes, is suing the firm, contending it used faulty methods and assumptions that “doomed the plan to financial ruin.”

Gabriel Roeder’s job was to help Detroit’s pension trustees run a sound plan, she says, but instead the firm covered up a growing shortfall and encouraged the trustees to spend money they did not really have. Her complaint contends that the actuaries did this knowingly, “in concert with the plan trustees to further their self-interest.” The lawsuit seeks to have the pension plan made whole, in an amount to be determined at trial, and to have Gabriel Roeder enjoined “from perpetrating similar wrongs on others.”

Lawsuits like the one Ms. Estes filed have also been brought against Gabriel Roeder by members of Detroit’s pension fund for police and firefighters, and the fund for the employees of surrounding Wayne County.


Gabriel Roeder said the three lawsuits “are factually, legally and procedurally infirm and reflect a gross misunderstanding of the nature of actuarial services.”

In a written statement, the firm also said that it was still providing services to all three pension funds and would vigorously defend itself against the lawsuits “without further public comment.”

More details on the lawsuits, from the Times:

The three lawsuits are separate from Detroit’s bankruptcy case. They were filed in Wayne County Circuit Court by Gerard V. Mantese and John J. Conway, Michigan lawyers who have tangled with Detroit’s pension system before. The lawsuits focus on the calculations and analysis that Gabriel Roeder provided to the trustees. Like many city and state pension systems, those of Detroit and Wayne County are mature, complex institutions, governed by trustees who do not necessarily have sophisticated financial backgrounds and rely heavily on the meaningful advice and accurate calculations of their consultants.

Detroit’s trustees did not get that, Mr. Mantese and Mr. Conway contend. Even as the city slid faster and faster toward bankruptcy, its workers kept building up larger, costlier pensions, and the actuaries “assured the trustees that the plan was in good condition.”

“Gabriel Roeder recommended that the plan could maintain and increase benefits,” Ms. Estes contends in her complaint, which was filed in September. That might sound odd, coming from a plan member who stood to enjoy any increases. But Detroit was making promises it could not afford, and Ms. Estes is also a Detroit homeowner and taxpayer who argues she was harmed as the city kept piling more and more obligations onto its shrinking tax base.

As the residents of other struggling cities have discovered, public pension promises, once made, are extremely hard to break, even if the city goes bankrupt. Now Ms. Estes has lost not only part of her pension but much of the savings tied up in her house, while she and her neighbors overpay for paltry city services. She says she might have been spared some of the misery had Gabriel Roeder warned the trustees years ago that the pension system was unsustainable and recommended changes.

“We just got blindsided,” she said.

Detroit Announces Trustees For New Pension Investment Committees


One of the final pieces of Detroit’s bankruptcy plan is setting up committees responsible for reviewing investments made by the city’s two major pension funds: the Police and Fire Retirement System and the General Retirement System.

Detroit announced this week the trustees that will sit on those committees. From the Detroit Free Press:

The appointees reflect one of the final steps in reshaping how Detroit’s retiree health insurance benefits are delivered and how two independently controlled pension funds are operated.

The new governance structure for the pension funds and the reduced health benefits for retirees were part of a negotiated settlement to Detroit’s historic Chapter 9 bankruptcy.

Judge Steven Rhodes will rule in the first week of November on whether the city’s plan of adjustment is fair and feasible.

Here are the new appointees, according to a draft version of the city’s eighth amended plan of adjustment, which was filed with the Bankruptcy Court early this morning:

The initial independent members of the committees are:

– Police and Fire Retirement System investment committee: Mark Diaz, Sean Neary, Louis Sinagra, Mike Simon, Woodrow S. Tyler, McCullough Williams III, Robert C. Smith, Joseph Bogdahn and Rebecca Sorenson.

– General Retirement System investment committee: Kerrie VandenBosch, Doris Ewing, Robert Rietz, David Sowerby, Thomas Sheehan, June Nickleberry and Ken Whipple.

As of fiscal year 2012-13, the General Retirement System managed over $2 billion in assets and the Police and Fire Retirement System managed $3.4 billion in assets.

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