Michigan Governor Offers a Helping Hand to Detroit Pensions

(January 23, 2014) — Michigan Governor Rick Snyder has proposed a state contribution of $350 million to Detroit’s pension plans to help pay some of their liabilities, matching the $330 million raised by in-state endowments and foundations.

“This is a settlement,” Snyder said in a news conference. “This is not a bailout. This is not geared toward bondholders or Wall Street, but toward Michiganders who worked really hard for our state.”

Detroit’s two pension plans—the General Retirement System (GRS) and the Police and Fire Retirement System—had $3.5 billion of debt and $11.5 billion in unsecured liabilities as of July 2013. In addition, the bankrupt city faces $18 billion in outstanding loans. The two pension funds combined have about $5 billion in assets.

Snyder’s proposal is in the early stages, and much of its discussions and negotiations surrounding it are unavailable to the public under court order. However, the governor revealed that the $350 million contribution will be part of his proposed 2014 budget, and would be distributed to the pension systems over 20 years.

According to the governor, tobacco settlements would most likely fund the contribution, either directly or securitized to back a 20-year bond.

The state budget office said that the fund accumulates nearly $250 million annually from tobacco companies in perpetuity and maintained a balance of $94.9 million this fiscal year.

“We are working on a fiscally sound mediation solution with clear conditions,” Snyder said. “We will not participate in a bailout, nor allow these funds to go anywhere other than directly to retiree pensions. This is an opportunity to work together to find solutions that will allow Detroit to get on a firm foundation faster, help pensioners, and ultimately save the Michigan taxpayers millions in the long run.”

Other conditions to the contribution include mandating the city and state to reach a settlement with retirees and unions; ensuring distribution of pension benefits to retirees only, especially to those with the lowest earnings; and assigning an independent fiduciary to manage Detroit’s pension plans.

Governor Snyder must pass through many hoops before passing legislation, however, including an agreement from Senate Majority Leader Randy Richardville and House Speaker Jase Bolger. US Bankruptcy Judge Steven Rhodes also needs to approve the proposal to get the ball rolling.

“There’s a long way to go on details before any deal may or may not be reached,” said Bruce Babiarz, spokesperson for Detroit’s Police and Fire Retirement System. “We are hopeful that the mediation process will bear fruit to generate funds to assist the City of Detroit in making its obligation payments to the retirement system.”

Kevyn Orr, the city’s emergency manager, is another player in the discussions of additional funding to the pensions systems. Appointed by Governor Snyder in March 2013, Orr recently made an executive order to freeze benefits for employees and retirees to save the city money as it reorganizes debts and liabilities in bankruptcy court.

“[Orr’s] order freezing pensions has been temporarily stayed in the hopes that continuing mediation could result in a mutual resolution to the outstanding issues with the city’s pension funds and unions,” said Bill Nowling, spokesperson to Orr’s office.

However, Orr has expressed support for the state’s actions to help Detroit’s retirees in a statement: “The level of proposed investment by the philanthropic community and the state will go far in helping reach a timely and positive solution to of the city’s financial emergency. A mutually agreed resolution to outstanding bankruptcy issues is the best way to help the city restore basic and public safety services to its 700,000 residents.”

The $350 million proposal would also help prevent the sale of art pieces owned by the Detroit Institute of Arts (DIA)—a collection that was appraised at between $452 million to $855 million, according to the Detroit Free Press.