OT: Judge rules on Detroit pensions in BK case

[SD Realtor]

“They don’t need to do that, just pass a prop like we did to do taxes on the rich, but classify tax from government pensions differently and subject them to a 50% tax over a certain amount, say $50,000.”

This clearly should be the nominated as the best post of the year.

[CA renter]

Let’s make damn sure we cap executive compensation for govt contractors while we’re at it.

Agencies have reimbursed contractors for their executive salaries in one form or another since a 1997 law enabled it, a practice that seems reasonable to some and objectionable to others.

While there is a debate over whether government should do it at all, perhaps the more pressing issue is at what level the reimbursements should be capped.

“We’re near the boiling point,” said Trey Hodgkins, senior vice president of global public policy at TechAmerica.

The cap, calculated based on a formula first devised by the Clinton administration’s Office of Federal Procurement Policy, was $693,000 in 2010 and rose to $763,029 in 2011. According to current OFPP administrator Joe Jordan, the cap will next have to be bumped to $950,000 if no legislative action is taken.

The struggle over current federal contractor reimbursement levels has its roots in 1997’s Internet-fueled economy. At the time, now-retired Sen. Joe Lieberman, (I-Conn.) and others in government were concerned that top executive talent at private companies, immersed in the white-hot, high-tech-driven environment of the time, would eschew government contracts in favor of more lucrative private industry work. The idea was to sweeten the pot for contractors, adding funds to cover some or all of their executive salaries. It applies only to cost-reimbursement contracts.

http://fcw.com/articles/2013/07/03/contractor-compensation-debate.aspx

[livinincali]

[quote=SK in CV]I’m not sure where it says the state’s obligation can be dismissed. The state isn’t even a party to the bankruptcy.

If two parties owe a debt, and one of them is bankrupt, that doesn’t dismiss the other party. I don’t think the bankruptcy judge has the power to dismiss any obligations of the state.[/quote]

The problem is bankruptcy is a federal proceeding and in section 8 of the constitution it says

“To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;”

The federal constitution trumps the state constitution and this bankruptcy proceeding is in federal court not state court.

[SK in CV]

[quote=livinincali][quote=SK in CV]I’m not sure where it says the state’s obligation can be dismissed. The state isn’t even a party to the bankruptcy.

If two parties owe a debt, and one of them is bankrupt, that doesn’t dismiss the other party. I don’t think the bankruptcy judge has the power to dismiss any obligations of the state.[/quote]

The problem is bankruptcy is a federal proceeding and in section 8 of the constitution it says

“To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;”

The federal constitution trumps the state constitution and this bankruptcy proceeding is in federal court not state court.[/quote]

Per my comment above:

If the Michigan constitution is interpreted to mean that city pension obligations are also obligations of the state, federal supremacy is moot. The federal bankruptcy court can only rule on the obligations of the bankrupt debtor. The bankrupt debtor is the city of Detroit. It can’t rule on the obligations of a non-bankrupt debtor. It has nothing to do with supremacy.

[livinincali]

Obviously if the bankruptcy proceeding results in a pension haircut I would expect the unions to sue the state. They would use this clause in the constitution to say the parent (i.e. the state) is responsible for the debts of the subsidiary in this case Detroit. Bankruptcy law doesn’t seem to stop the creditors from going after the parent even once the subsidiary bankruptcy has been completed. I would guess that whatever the state court decides would be the end of it. The USSC probably doesn’t get involved because I can’t think of a way that Michigan’s constitutional pension guarantee violates anything in the federal constitution.

Now say the unions win and enforce Michigan to make up the debts of Detroit. That would force Michigan to raise taxes and I would guess that you’d end up with a referendum to overturn that constitutional guarantee.

[Anonymous]

[quote=SK in CV]Michigan constitution has an awkwardly worded section:

§ 24 Public pension plans and retirement systems, obligation.
Sec. 24. The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

This can be read to mean that pensions of political subdivisions {cities} are an obligation of the state. I’d be lying if I said this is clearly what it says. But neither do I think that it’s clear that it says something different.[/quote]

It is poorly worded, and of course the final interpretation is up to the lawyers and judges, but I don’t don’t see it as saying that the state is effectively a co-signer of every city’s pension debt. Seems to me that it is just affirming that government pension obligations cannot be altered after the fact by one party (the government), just like any other contract.

What the judge said in this recent ruling is actually consistent with the clause cited above: Yep, pensions are contracts, and therefore can be restructured in bankruptcy, just like any other contract.

I suspect the courts will be inclined toward a very narrow interpretation of this clause. Any ruling that the state is on the hook for paying the debt of any city could have huge consequences. It would effectively give every small-town council in the state a multibillion-dollar line of credit.

[SK in CV]

[quote=harvey]
Any ruling that the state is on the hook for paying the debt of any city could have huge consequences. It would effectively give every small-town council in the state a multibillion-dollar line of credit.[/quote]

I’m not sure how this is true. The state law only applies to pension contracts, not to any other contracts. Cities would still be responsible for their own bonds.

[Anonymous]

So I don’t have to worry, because I only co-signed for just one of my kid’s credit cards?

[SK in CV]

Pretty much. Do you think it should be different than that?

[UCGal]

I would expect there will NOT be an elimination of the pension obligation – just a readjustment of it.

I expect the BK court to use the PBGC as a guideline – and cap the biggest pensions at a much lower level… but the folks who didn’t have fat pensions will see a much smaller reduction. (Similar to what happened to the airline employees.)

What bugs me the most about this is the fact that the politicians who decided not to fund the pension are feeling little to no pain for their decisions.

[CA renter]

[quote=UCGal]I would expect there will NOT be an elimination of the pension obligation – just a readjustment of it.

I expect the BK court to use the PBGC as a guideline – and cap the biggest pensions at a much lower level… but the folks who didn’t have fat pensions will see a much smaller reduction. (Similar to what happened to the airline employees.)

What bugs me the most about this is the fact that the politicians who decided not to fund the pension are feeling little to no pain for their decisions.[/quote]

Totally agree with this.

[njtosd]

[quote=harvey][quote=SK in CV]Michigan constitution has an awkwardly worded section:

§ 24 Public pension plans and retirement systems, obligation.
Sec. 24. The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

This can be read to mean that pensions of political subdivisions {cities} are an obligation of the state. I’d be lying if I said this is clearly what it says. But neither do I think that it’s clear that it says something different.[/quote]

It is poorly worded, and of course the final interpretation is up to the lawyers and judges, but I don’t don’t see it as saying that the state is effectively a co-signer of every city’s pension debt. Seems to me that it is just affirming that government pension obligations cannot be altered after the fact by one party (the government), just like any other contract.

What the judge said in this recent ruling is actually consistent with the clause cited above: Yep, pensions are contracts, and therefore can be restructured in bankruptcy, just like any other contract.

I suspect the courts will be inclined toward a very narrow interpretation of this clause. Any ruling that the state is on the hook for paying the debt of any city could have huge consequences. It would effectively give every small-town council in the state a multibillion-dollar line of credit.[/quote]

Harvey, I’m agreeing with you on this. The question is not whether the state is on the hook. The question is whether the city can shed or reduce its pension obligations. State law says no, Bk law (fed) says yes. Supremacy clause says fed law prevails – which was how the recent decision went.

[FlyerInHi]

Sounds pretty reasonable, njtosd. Each legal issue is separate.
The federal bankruptcy court will rule on the bankruptcy.

The unions might pursue a parallel case in state courts.

We will see if the state of michigan is forced to make the pensioners whole.

[njtosd]

[quote=FlyerInHi]Sounds pretty reasonable, njtosd. Each legal issue is separate.
The federal bankruptcy court will rule on the bankruptcy.

The unions might pursue a parallel case in state courts.

We will see if the state of michigan is forced to make the pensioners whole.[/quote]

First, I feel very sorry for the people who will very likely see their pensions drastically reduced. I would think that there might be differing treatment based on age (i.e. 80 year olds who can’t go back to work vs. 45 year olds who are hoping that their pension will still be there when they retire), if you were trying to be realistic about it.

These pension promises always remind me of Wimpy in the Popeye cartoon. The employer (Detroit, GM, whatever) says “I’ll gladly pay you tomorrow for a hamburger (labor) today.” It sounds good but you have to be suspicious. Especially when the city was clearly doing poorly. Anyone who has believed over the last 20 or so years that unfunded pension obligations (Detroit or elsewhere) will be honored in the future is very trusting. Legislation prohibiting unfunded or underfunded pensions is desperately needed.

I don’t expect pensions to be there when I retire, I don’t expect Soc. Sec. to be there when I retire. Maybe they will – but I have to make sure that I can take care of myself whether those safety nets are there or not.

[Author]

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