Detroit | Pension360

After Massive Investment Losses, Michigan Pension Funds Benefit From Settlements with AIG, Private Equity Firms

AIG revealed in an SEC filing this week that it plans to pay out a massive sum of money to settle an ongoing lawsuit claiming the firm misled investors on the quality of certain investments prior to the 2008 financial crisis.

The total settlement: $970.5 million. And certain pension funds in Michigan will likely see a chunk of that change. That’s because they lost a significant chunk of change when they bought investment vehicles from AIG prior to 2008.

The State of Michigan Retirement Systems says it lost between $110 million and $140 million due to AIG.

Detroit’s General Retirement System as well as the Saginaw Police and Fire Pension Board say they lost millions more, as well.

All told, those funds could receive a combined payout totaling eight figures. From Crain’s:

This week, AIG disclosed to the U.S. Securities and Exchange Commission it would pay $960 million under a mediation proposal to settle the consolidated litigation, on behalf of investors from that period.

[…]

The lawsuit alleges AIG executives gave false and misleading information about its financial performance and exposure to residential mortgage backed securities in the run-up to the financial market collapse.

The $54.8 billion Michigan systems — a group of plans administered by the state Office of Retirement Services for former police officers, judges and other state and public school employees — became lead plaintiff for the class in March 2009, after informing the court of its nine-figure losses.

The federal Private Securities Litigation Reform Act of 1995 says a court should presume a plaintiff is fit to lead class actions like this one if it “has the largest financial interest in the relief sought by the class.” In fact, it had about double the losses of any other plaintiff seeking the same lead role — so its piece of the nearly billion-dollar pie may be larger than most.

The bolded is important, because it means that the State of Michigan Retirement Systems will almost certainly be receiving the highest payout of any of the plaintiffs.

Meanwhile, another Michigan fund—the Police and Fire Retirement System of the City of Detroit—was the beneficiary of another settlement today.

Three private equity firms settled a seven-year-long lawsuit today that alleged the firms colluded and fixed prices in leveraged buyout deals. The firms—Kohlberg Kravis Roberts (KKR), Blackstone, and TPG—settled for $325 million.

Among the suit’s plaintiffs were public pension funds that held shares in the companies that were bought out by the firms at “artificially suppressed prices, depriving shareholders of a true and fair market value.” From DealBook:

The lawsuit, originally filed in late 2007, took aim at some of the biggest leveraged buyouts in history, portraying the private equity firms as unofficial partners in an illegal conspiracy to reduce competition.

As they collaborated on headline-grabbing deals — including the buyouts of the technology giant Freescale Semiconductor, the hospital operator HCA and the Texas utility TXU — the private equity titans developed a cozy relationship with one another, the lawsuit contended. Citing emails, the lawsuit argued that these firms would agree not to bid on certain deals as part of an informal “quid pro quo” understanding.

In September 2006, for example, when Blackstone and other firms agreed to buy Freescale for $17.6 billion, K.K.R. was circling the company as well. But Hamilton E. James, the president of Blackstone, sent a note to his colleagues about Henry R. Kravis, a co-founder of K.K.R., according to the lawsuit. “Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,” Mr. James wrote.

Days later, according to the lawsuit, Mr. James wrote to George R. Roberts, another K.K.R. co-founder, using an acronym for a “public to private” transaction. “We would much rather work with you guys than against you,” Mr. James said. “Together we can be unstoppable but in opposition we can cost each other a lot of money. I hope to be in a position to call you with a large exclusive P.T.P. in the next week or 10 days.” Mr. Roberts responded, “Agreed.”

The settlement now awaits approval from the Federal District Court in Massachusetts.

Oral Arguments by Pension Funds and Unions Pushed Back in Detroit Bankruptcy Hearing

When Detroit first raised the issue of cutting pension benefits for the city’s workers, unions and pension funds balked at the idea.

So when a Detroit bankruptcy court ruled that the city could indeed cut pension benefits as part of bankruptcy proceedings, several parties immediately filed appeals, including two public employee unions and one pension fund. They wanted their day in court; a chance to stand in front of a judge and make their arguments face-to-face.

That day was supposed to be Wednesday. But there will be no appeals heard that day, as the Appeals Court in question has postponed the oral arguments that were previously scheduled to be given by the Detroit Fire Fighters Association, Detroit Police Officers Association, the city’s two pension funds and the Retired Detroit Police Members Association.

The groups were going to argue that Detroit is ineligible for bankruptcy because Michigan law does not allow a city to file for bankruptcy. From Detroit News:

A federal appeals court Tuesday canceled oral arguments for two public safety unions, a retiree group and the city’s pension funds, which were trying to overturn the city’s eligibility for bankruptcy and its ability to slash pensions.

The cancellation comes one day before the groups were scheduled to deliver arguments in the U.S. 6th Circuit Court of Appeals in Cincinnati, Ohio, and following a request to delay the hearing by a city bankruptcy lawyer, who cited ongoing negotiations. The groups impacted by the cancellation are the Detroit Fire Fighters Association, Detroit Police Officers Association, the city’s two pension funds and the Retired Detroit Police Members Association.

Oral argument was set for 1:30 p.m. Wednesday and posed one last legal obstacle that could derail an Aug. 14 trial to determine whether Detroit can shed $7 billion in debt and emerge from the biggest municipal bankruptcy in U.S. history. Legal experts, however, believe appeals from pension funds, unions and retiree groups will fail and the bankruptcy case will continue to trial next month.

Robert Gordon, a lead attorney for Detroit’s retirement systems, said the appellate court’s clerk’s office called attorneys involved late Monday and informed them of the cancellation.

A spokeswoman for the Retired Detroit Police Members Association confirmed Tuesday morning the group had struck a deal with the city late Monday night to avoid Wednesday’s planned hearing. That group has argued Michigan’s emergency manager law is unconstitutional because of its similarities to a previous law voters repealed in November 2012.

Detroit has settled with most of its creditors as part of its bankruptcy proceedings. But there has been one notable holdout: Syncora Guarantee Inc, which is facing millions of dollars in potential losses due to the drastic decline in value of the Detroit bonds the corporation holds.

Photo: “DavidStottsitsamongDetroittowers” by Mikerussell – Own work. Licensed under Creative Commons

Could Detroit-Style Cuts Come to California?

Pension benefits, once thought safe, now stand on shakier footing than they ever have. Detroit’s citizens live in a state where pensions are protected by the Constitution, but that didn’t matter when a bankruptcy judge ruled that the city could cut worker pensions as part of its bankruptcy restructuring plan.

California workers are now wondering what this all means for them—particularly the workers in the bankrupt cities of Stockton and San Bernardino. The state heavily protects its pension benefits, present and future.

Still, the question on everyone’s mind is: Could Detroit-style pension cuts come to California? Ed Mendel explored that question in a post today on CalPensions:

U.S. Bankruptcy Judge Steven Rhodes, acting earlier than expected, ruled last December that Detroit pensions can be cut, even though the Michigan constitution says pensions are a “contractual obligation” that can’t be “diminished or impaired.”

The ruling that federal bankruptcy law allowing contract impairment overrides state law was appealed by unions. But the early ruling, along with potential loss of “grand bargain” financial aid, may have added to fear of deep pension cuts, influencing the vote.

A cut of 4.5 percent in active and retired general worker pensions and the elimination of cost-of-living adjustments was approved by 73 percent of voters. Leaving police and firefighter pensions intact but trimming their COLAs from 2.25 to 1 percent was approved by 82 percent.

In a brief supporting the appeal of Judge Rhodes’ ruling, CalPERS argued, among other things, that Detroit has a city-run plan and that an “arm of the state” like CalPERS cannot under federal bankruptcy law be impaired in a municipal bankruptcy.

The judge handling the Stockton case, U.S. Bankruptcy Judge Christopher Klein, has said one of his options is ruling on the general issue of whether CalPERS pensions can be cut without necessarily finding that Stockton pensions should be cut.

CalPERS filed the brief in question shortly after the Detroit ruling. The premise of CalPERS argument was that the Detroit ruling didn’t apply to them because Detroit is a city, while CalPERS operates on the state level.

But as Mendel points out, there are a few key similarities between Detroit‘s bankruptcy and those of California. From CalPensions:

Although differing on pensions, the Detroit and Stockton plans to exit bankruptcy are similar on retiree health care. Detroit announced last week that a 90 percent cut in retiree health care was approved by 88 percent of voters.

Judge Klein ruled in 2012 that retiree health care can be cut in bankruptcy, acknowledging the result may be “tragic hardships” for some. A Stockton retiree health care debt of $544 million was reduced to a one-time payment of $5.1 million.

Another similarity is that the Detroit and Stockton “plans of adjustment” to cut debt and exit bankruptcy face challenges from bondholders. Making little or no reduction in massive pension debt, but deep cuts in bond payments, is said to be unfair.

What happens in California will have a ripple effect across the country as cities nationwide are increasingly weighing the prospect of going through municipal bankruptcy proceedings. The judges presiding over these cases will be wading in uncharted waters—and their word will be law. Pension360 will be following subsequent developments closely.

Detroit’s Pension-Slashing Plan Passed, But Creditors Remain the City’s Biggest Obstacle

When Detroit bankruptcy judge Steven Rhodes considers whether to approve the city’s sweeping debt-cutting plan, he will take into strong consideration what the city’s voters had to say. He’ll see that Detroit’s pension holders overwhelmingly approved the ballot measure today which cut pension benefits and cost-of-living-adjustments, among other things.

But he’ll also see the discontent coming from another group receiving much less media attention: Detroit’s creditors. Those include banks, hedge funds, individual investors and average Detroit citizens who hold the city’s bonds, which have become worthless. Some of these bondholders are going to be paid back in full, but others won’t; Detroit is offering as little as 10 cents on the dollar to investors who own certain bond classes.

Needless to say, the owners of those bonds aren’t happy. And they expressed that discontent by voting “no” on the ballot measure that passed today. Still, Judge Rhodes will consider their opinions when ruling whether Detroit’s restructuring plan is legal.

There are twelve classes of bonds, and the Detroit Free Press has a fantastic breakdown of how those classes voted and their unique situations. You can read the whole thing here, but here are some of the more interesting ones:

Class 1: Water and sewer bondholders

Who owns or controls this debt? Major bond insurers, individuals and financial giants such as Black Rock

What they’re owed: $5.8 billion

The city’s offer: 100%

Back story: This debt is secured, which means it’s protected from cuts. Nonetheless, mediation talks between the city and the bondholders have tarried without a settlement. Why? Because the city is trying to replace the bonds without paying all future interest.

How they voted: 119 sub-classes of bondholders voted no, while 32 voted yes.

Classes 2-4, 6: Secured general obligation bonds, other secured claims, U.S. Housing and Urban Development loans, parking bonds

Who owns or controls this debt? A variety of investors (Classes 2-3, 6); Uncle Sam (Class 4)

What they’re owed: $494 million (Classes 2-3); $90 million (Class 4); $8 million (Class 6)

The city’s offer: 100%

Back story: This debt has rock-solid legal standing and the city can’t get out of it.

How they voted: These creditors don’t vote because they are receiving full payment.

Class 7: Limited-tax general obligation bonds

Who owns or controls this debt? Ambac Assurance and Black Rock control most of it, with Syncora holding a smaller amount.

What they’re owed: $164 million

The city’s offer: 34%

Back story: Black Rock and Ambac agreed to a tentative settlement, but all of the terms have not been released.

How they voted: Bondholders representing 99.8% of the claims and the votes rejected the plan — likely because the settlement has not been finalized.

Class 8: Unlimited-tax general obligation bonds

Who owns or controls this debt? The lion’s share is controlled by bond insurers Assured, Ambac and National Public Finance Guarantee.

What they’re owed: $388 million

The city’s offer: 74%

Back story: The bond insurers agreed to a deal to allow the city to divert 26% of their debt to low-income retirees who face pension cuts. But this deal will face legal challenges during the trial.

How they voted: 87% of bondholders representing 97% of the debt voted “yes” to approve the deal.

Class 9: Pension obligation certificates of participation (COPs)

Who owns or controls this debt? Syncora and FGIC insured the debt, which is mostly owned by European banks and five major hedge funds that recently acquired about half of it

What they’re owed: $1.473 billion

The city’s offer: 0% to 10%

Back story: The fiercest fight in the bankruptcy is here. Syncora and FGIC argue they are being unfairly treated and have pushed for the City of Detroit to consider selling Detroit Institute of Arts treasures to pay their debts. The hedge funds have also objected to the city’s proposal.

How they voted: It was an emphatic “no,” with not a single “yes” vote.

Class 10: Police and Fire Retirement System pensions

Who owns or controls this debt? Police and fire retirees and active uniform employees who are vested in their pensions

What they’re owed: $1.25 billion in unfunded future pension promises

The city’s offer: 100% payment of their monthly pension checks and a reduction in annual cost-of-living adjustment (COLA) increases from 2.25% to 1%.

Back story: The U.S. government-appointed Official Committee of Retirees, a major retiree association and the pension board representing the police and fire retirees reached a deal with the city to recommend a “yes” vote. With a “yes” vote by Classes 10 and 11, the city would agree to transfer the DIA to an independent charitable trust in exchange for foundation, state and DIA donations directed toward pensions.

How they voted: 82% of police and fire pensioners representing 82% of the debt voted “yes” to support the deal.

Class 14: Other unsecured claims

Who owns or controls this debt? A variety of creditors, including people who sued the city and won settlements, as well as city vendors that had contracts canceled

What they’re owed: An estimated $150 million

The city’s offer: 10% to 13%

Where they stand: This group of creditors is not well coordinated, but it includes a major Macomb County water claim expected to vote no.

How they voted: This class voted no by a 53-47% margin in number and by a 61-39% margin in total claims.

There are two ways this could play out:

1) Detroit reaches a settlement with creditors, likely paying them around 10 cents on the dollar for many of their bonds.

And, if a settlement can’t be reached:

2) Judge Rhodes will determine whether to force the creditors to accept cuts.

The trial starts next month, but likely won’t be finished until September.

Detroit Voters Pass Pension Cuts By A Landslide

The long-awaited news has finally come: Detroit’s pension holders have approved a ballot measure that cuts their pension benefits as part of the city’s bankruptcy plan. There was much speculation about whether the measure would pass. In the end, though, it wasn’t even close. The Wall Street Journal had the final tally:

The official count, filed late Monday night, showed 82% of those eligible for a police or fire pension who voted supported the plan. Roughly 73% of other retirees and employees with pension benefits who voted favored the plan. Voting lasted through early July.
The voting margins from pension holders were seen as an endorsement for the city’s plan to confront an estimated $18 billion in long-term obligations.
“The voting shows strong support for the City’s plan to adjust its debts and for the investment necessary to provide essential services and put Detroit on secure financial footing,” Detroit Emergency Manager Kevyn Orr said.
Despite the critical nature of the vote, a sizable chunk of those eligible sat out. About 59% of police and firefighter pension holders and 42% of other pension holders cast ballots, according to the city’s legal filing.

Need a recap of what exactly the “yes” vote means? Here’s an explanation from Click On Detroit:

General retirees would get a 4.5 percent pension cut and lose annual inflation adjustments. Retired police officers and firefighters would lose a portion of their annual cost-of-living raise.
Ballot approval of the pension changes triggers an extraordinary $816 million bailout from the state of Michigan, foundations and the Detroit Institute of Arts. The money would prevent the sale of city-owned art and avoid deeper pension cuts. The judge, however, still must agree.

That last line is key: the city’s bankruptcy judge still has to OK the plan. But it was always assumed that if voters passed it, the judge would too.

To read the official declaration released by the bankruptcy court, click here.

Detroit Gives Raises to City Officials As Vote Nears to Cut Worker Pensions

Detroit’s high-profile bankruptcy has filled the front pages of newspapers across the country, and it seems the new twists just keep coming in this drama. In one corner, public employees and retirees are getting ready to vote on a measure that would cut their paychecks and pensions in unprecedented ways.

In the other corner, Detroit’s Emergency Manager Kevyn Orr is drawing flak for awarding raises to many city officials, including the mayor, city council members, and some non-union city workers:

Effective July 1, they all get 5 percent raises. Before the raise, Mayor Mike Duggan earned $158,000 a year, and Detroit’s nine at-large council members made $73,181 each, along with a pension, cell phone, city car and city-paid gasoline.

By comparison, the median household income in Detroit was $25,193 in 2011, according to the U.S. Census Bureau. Orr’s own salary of $275,000 a year to guide Detroit through the largest municipal bankruptcy case in history will not change.

“We’re still in the middle of bankruptcy, we still don’t know what the cost is going to be, and it seems like the attorney fees, right now, have gone up to $75 million,” [Wayne County Executive Robert] Ficano said live on WWJ 950 Wednesday morning.

Orr’s office says the costs for the increases are covered in the city’s restructuring plan, which is pending in federal bankruptcy court. Later this month, some of those same workers will see larger paycheck deductions earmarked for increased pension contributions. Deductions of 4 percent to 8 percent will begin July 14 to help fund pensions.

Back to the vote: the stakes are high for both the city and its workers. If workers and retirees vote “yes” on the measure, they’ll be giving up big chunks of their paychecks and benefits. If they vote “no”, they’ll likely have to settle for a far worse deal:

Hundreds of millions of dollars in pledged foundation and state money to spare deeper cuts from pensions and to save the city’s art collection depends on approval of the city’s plan by workers and retirees. If they vote against it, the pledged donations vanish. This may be the proponents’ most convincing argument: Vote for the city’s deal, or cuts — as much as 4.5 percent from some retirees’ pensions as well as smaller than expected cost-of-living increases — will get far worse.

If they go along with the deal, retirees and workers would also agree to give up lawsuits challenging cuts to their pensions. Though a federal judge here has made it clear that he believes pensions may be cut in bankruptcy, the Michigan Constitution includes protections, and opponents of the city’s plan say they cannot believe their colleagues would even consider ceding legal challenges.

Meanwhile, another struggling Michigan city, Flint, is considering following in Detroit’s footsteps by declaring bankruptcy. Flint is attempting to cut its retirees’ benefits to improve its financial position. But the legality of that move is dubious and will be decided by a judge soon.

Flint once had 200,000 residents has seen a dramatic drop in population over the past several decades. The birthplace of General Motors (NYSE: GM) has lost many factory jobs and abandonment of properties.

Last year, Detroit became the largest municipality in the U.S to enter Chapter 9 bankruptcy. Flint is about an hour away and if the judge rules against the city’s effort to cut its retiree health care benefits, the city is expected to file for bankruptcy. Flint will join dozens of cities and counties that have sought help from courts to modify their retiree benefit system.

“If we don’t get any relief in the courts … we are headed over the same cliff as Detroit,” said Darnell Earley, the emergency manager of Flint’s finances. “We can’t even sustain the budget we have if we have to put more money into health care for city workers.”

Photo Credit: University of Michigan via Flickr Creative Commons License

After Detroit: How Will Illinois and Its Communities Respond?

Detroit’s fiscal struggles, particularly its bone-dry pension system, have been well documented over recent years. But the city’s problems aren’t unique–and Chicago is one city that is currently dealing with many of the same pension-related fiscal pressures as Detroit. To discuss these problems, the Civic Federation and the Federal Reserve Bank of Chicago held a forum on April 23, 2014, that brought together over 140 participants. Now, the Federal Reserve Bank of Chicago is giving us an inside look at that conference, and has released a detailed article about what was discussed.

To read the article, click here.

Photo by Bitsorf via Flickr CC License

Detroit’s pension landscape altered after major deal between city, retirees

Detroit, labor unions and the retirees they represent have been locked in federal mediation for months in the wake of the city’s bankruptcy proceedings. The negotiations centered on two competing concepts: pulling the city out of bankruptcy without pushing its pensioners into poverty.

The two sides had long been unable to find common ground, but the urgency of the issue meant something had to give. This weekend, something finally did.

The two sides emerged from mediation last Friday to announce they’d reached a deal in principle that supports Detroit’s restructuring plan but doesn’t gut retirees’ benefits.

USA Today gets into the deal’s details:

Friday’s deal sweetens the stakes for retirees on three major fronts:

• Pension cuts. It would cap total cuts to monthly pension benefits at 20% — critical because some pensioners in the city’s General Retirement System faced huge reductions beyond the base 4.5% cuts to all civilian retiree checks. That’s because Detroit wants to take back what it said were excessive interest payments made to retirees who invested in an annuity savings fund in 2003-2013. The total amount of the so-called annuity “claw back” would be capped at 15.5%, lower than the initial 20% the city had negotiated with the general pension fund.

• Retiree health care. The city agreed to set up a $450 million pot of money for retiree health care, up from less than $300 million previously offered. That additional money would guarantee current retirees monthly stipends for life, instead of eight years, as Detroit had proposed. The stipends vary by worker depending on their income level and whether they were disabled on duty, but the minimum is $125 a month.

• Possible future restoration of money. Detroit and the committee also agreed to firmer targets and goals that would allow retirees’ pension cuts to be reduced if the city’s pension fund investments perform well and other terms are met, Alberts said.

The tentative deal means the retiree committee will recommend that Detroit’s 32,000 pension beneficiaries approve the agreement. Individual retirees still have to vote on the city’s plan before any pension cuts are finalized.

Detroit also reached a separate deal today with 14 of its unions and 3,500 retirees on a five-year collective bargaining agreement.

From the Detroit Free-Press:

The deal includes restoration of some pay for city workers who have faced wage freezes and a 10% pay cut in recent years, although details will vary by union, according to a person familiar with the proposal who wasn’t authorized to discuss it and spoke on condition of anonymity.

Other factors in the deal include work-rules concessions from the unions, the person said.

Detroit’s public safety unions, which have formed a coalition in negotiations with the city, are not part of the deal announced today, said Mark Diaz, president of the Detroit Police Officers Association. The public safety labor coalition also includes the Detroit Fire Fighters Association, the Detroit Police Command Officers Association and the Detroit Police Lieutenants and Sergeants Association.

Diaz said the public safety unions are still open to negotiating with the city, but proposed contract terms so far have been unacceptable. The city has been offering police officers wages starting at $14 an hour, Diaz said.

Union members and federal bankruptcy court will have to ratify the agreement before it goes into effect.

Photo Credit: University of Michigan via Flickr Creative Commons License

CalPERS fires back against Detroit pension ruling

When a federal judge ruled today that Detroit could legally cut pensions as part of its bankruptcy proceedings, it was akin to putting a bullseye on the back of pension funds that had previously been heavily protected by constitutional and contract law.

It didn’t take long for the nation’s largest public pension fund to weigh in on the matter: California’s Public Employee Retirement System (CalPERS) has taken the unmistakably forceful stance that the Detroit ruling is not only misguided, but that it doesn’t affect their system at all.

From a CalPERS statement released just hours after the ruling:

“The Detroit court failed to recognize the difference between a two party contract and the unique nature of a state public employee retirement system…In California, our members’ vested rights to their pensions are protected by the California constitution, statutes and case law.”

The statement goes on to state why CalPERS is confident the ruling doesn’t apply to its system:

“Unlike Detroit, CalPERS is not a city pension plan. CalPERS is an arm of the state and was formed to carry out the state’s policy regarding public employees. The Bankruptcy Code is clear that a federal bankruptcy court may not interfere in the relationship between a state and its municipalities. The ruling in Detroit is not applicable to state public employee pension systems like CalPERS.”

Although Michigan’s ruling isn’t legally binding in California, the judge’s decision sets the precedent that cities in bankruptcy proceedings can “impair” pensions just as they can traditional contracts, constitutional provisions not withstanding.