Misplaced "trust" in "trustee"

It appears that I was, if anything, too kind about Detroit's pension problem. The outside audit report has been released, and it apparently does not make for pretty reading:

[Pension trustee spokesperson Tina Bassett] said that the trustees were administering benefits that had been negotiated by the city and its various unions and that they had established an internal account to set aside “excess earnings” that would cover the cost. She said it was appropriate for retirees to benefit from market upturns because they had paid into the pension fund, so their own contributions had generated part of the investment gains.
In other words, whenever returns went above projections they promptly gave away the excess. And when returns went below projections, and the huge gap was visible, what did they do?
So much money had been drained from the pension fund that by 2005, Detroit could no longer replenish it from its dwindling tax revenue. Instead, the city turned to the public bond markets, borrowed $1.44 billion and used that to fill the hole.
Even that did not work. In June, Detroit failed to make a $39.7 million interest payment on that borrowing — the first default of what was soon to become the biggest municipal bankruptcy case in American history.
Detroit said at the time that making the interest payment would have consumed more than 90 percent of its available cash.
I'm not sure that there are words in the English language suitable to describe this.

Policy wonk Megan McArdle nails the most likely explanation for this demented behaviour by the trustee:

My best guess is that they were thinking the pensions would have to be paid, one way or another. After all, it’s in the Michigan State Constitution. So they could pay out bonuses, please various constituencies, and then force the city or the state to make them whole when it all came tumbling down. They didn’t reckon with the possibility that the city would simply run out of money, and the state would decline to step in, leaving them with no deep pockets to make up for their mismanagement.
This is only speculation, but I fear it's an all-too plausible motivation for the trustees. I cannot see how a pension fund trustee can see this hole growing steadily in the accounts over many years and yet blithely continue handing out "excess" cash. Whom exactly did they think they were helping?

It appears that Detroit pension trustee spokesperson Tina Bassett used to be Chief Communication Officer for the city of Detroit and was "widely recognized for her innovative and creative development of high-impact communication programs." I'll say; the pension trustees have had quite the impact on Detroit.

Fortunately now the city unions have recognized the severity of the financial situation and are stepping up to the plate to be responsible:

Detroit's bankruptcy judge should allow a state employment panel to reinstate a pension program that gave an extra check to retirees every year using excess earnings, a city union said in court papers.
Oh. Maybe not, then.

There was a lot wrong with Margaret Thatcher's policies, like any politician, but she very accurately anticipated this situation back in 1976:

I think they've made the biggest financial mess that any government's ever made in this country for a very long time, and Socialist governments traditionally do make a financial mess. They always run out of other people's money.
She was talking about the UK Labour government at the time, but the criticism could be perfectly well pointed at Detroit. And probably LA, Washington D.C., San Diego, San Jose,...

I was talking to a Canadian the other day who said that the best option for Detroit was to raze most of it to the ground and just let Canada extend its border a few miles to include the Detroit metropolitan area and airport. Canada gains a handy additional major airport, can move people and industry out of the overcrowded Greater Toronto Area a few hours west to Detroit (provisionally renamed "Harperville"), and the remaining Detroit residents get proper Canadian healthcare and easier access to Tim Hortons coffee and donuts. What's not to like?

No comments:

Post a Comment

All comments are subject to retrospective moderation. I will only reject spam, gratuitous abuse, and wilful stupidity.