[00:00:00] Ryan Wrecker: Hello and welcome to the Facts Matter, a podcast by Citizens Research Council of Michigan. I’m Ryan Recker. I’m a reporter and anchor for WWJ Newsradio 950 here in Detroit and hosting today and proud to be here on the Facts Matter podcast with Eric Loufer, president of the Citizens Research Council. Of Michigan.

Thank you for having me,

[00:00:25] Eric Lupher: Ryan. I’m glad you could join us.

[00:00:26] Ryan Wrecker: You have a recent blog post on the CRC mish. org Detroit’s pension benefit restoration should remain limited. And I’m hoping we can kind of back up and talk about maybe the state of the pension fund today. Post bankruptcy were about 10 years removed.

What does that look like now?

[00:00:48] Eric Lupher: So when they hit bankruptcy The unfunded liability was a major part of the amount that the city owed and had trouble paying. The solution at that time was to freeze the benefit payments. So everybody who had become vested in the system, if you had enough time and salary into it.

You wouldn’t lose your pension, but new employees and existing employees going forward didn’t accrue any more benefit than they’d had as of the time of the bankruptcy. And from that point forward, they had what we call a defined contribution. And when you think about an IRA or a 403B It’s it’s that type of thing where the employees are investing and choosing how to invest it and the city matches a little bit.

So those people who were vested, whether they were already retired or they were still working, but had that pension system waiting for them, they experienced a four and a half percent cut. If you were just a general employee and then they had what they used to call a COLA, a cost of living allowance that said if inflation was going up, then they would adjust your payment, your monthly payment to reflect that and you weren’t losing your purchasing power.

So they had that 4. 5 percent cut and they ended the COLA adjustments. So everybody who was receiving a pension, It felt bad, right? If you’re getting a pension, you’re not living high on the hog. These pensions were never really big to begin with. It’s sort of a haircut, 4. 5%. You took a hit and it was significant that those people who got it, but relative to the bonds and things like that, who, Lost a lot of money through the, it wasn’t really that significant.

The other part of it was the uniformed officers, the police and fire, they had their own pension system. They didn’t take any cut because of this. And the reason why not was because they were not enrolled in social security. Like all of us are, right? We pay a little bit in the social security and knock on wood.

That money will be there when we come ready for retirement. But the police and fire were not part of that. So they didn’t take the cut. But they lost the COLA adjustments. They also were put into this defined contribution plan going forward. So the current state of it it’s not a real rich payment for anybody who spent a lifetime working in the city and giving their blood, sweat, and tears.

It’s less than it was before bankruptcy and they’ve lost purchasing power. Inflation was not really that much. Until the last couple of years, but now it’s pretty significant inflation. And there’s no adjustment to their monthly payments to account for that.

[00:03:52] Ryan Wrecker: And that’s why they’re considering perhaps a hopeful one time payment, but the 13th check is where it comes back in.

But they always said there was two things in life. That are guaranteed death in taxes. There may be a third that’s guaranteed among all generations. You’ll be told that social security will not be there when you’re older. Every generation has been told that as well. So, yeah, sort

[00:04:16] Eric Lupher: of the third rail though, isn’t it good luck trying to get rid of that,

[00:04:19] Ryan Wrecker: but for the pensions and being that.

They want to at least try to do the right thing. I think a lot of these people are hurting, you know, the way inflation is today. Looks like the city of Detroit proposed perhaps a supplemental payment to try to make up for some of that, which is kind of a reminder of the 13th checks that Of years past would help distribute some extra funds that were in there, but that actually turned out to be a bad thing from what I understand.

And I read the latest blog post that 13th check, as opposed to preparing for the future, maybe supplementing some downs of the future instead that 13 check was paid out. And then they drain the account and there wasn’t really anything left. If there was a downtime, which put them in a rough spot and kind of Maybe the same situation the city of Detroit was in when it wasn’t being necessarily wise with their finances and preparing for the future.

So the whole gist in the whole idea of this latest blog post on crcmich. org is the idea that the 13th check is all good to try to do right for the people, but you don’t want to fall into the same mistakes of the past that. Puts you in that mistake and to begin with.

[00:05:30] Eric Lupher: So let’s explain, start by explaining the 13th check.

And I think it’s useful to use an analogy of a bathtub, right? If you start the water, but you don’t, you don’t put the stopper at the bottom. There’s, there’s money flowing in water flowing in and there’s money flowing out. The, the payments to the actual pensioners and the goal of the. Pension system. The pension trust is to have the amount in the bathtub go up every year.

Even though money’s going out the bottom, you want more coming in than is going out. Well, it’s they’re investing money in the stock market, which is gonna vary, go up and down. So in good years, you’re gonna raise that water level. In bad years, you’re going to lessen that water level. The 13th check was taking the excess earnings in the pension and distributing it to the employees.

So it was never allowing the amount of water in the bathtub to rise above a certain level. It was always keeping the amount at the bottom open wide enough. That it was maintaining a certain water level, even in the best of circumstances, or if it was a down market, then it was actually losing money. And so in the big picture, you needed to keep investing trying to.

Have enough money that you’re meeting, not only the payments to the current employees, but stashing money away so that when the next generation retires, there would be money there to pay their obligation. And the city was petulantly behind in doing that because it wasn’t making the return on investments.

Because even when it was giving that money away. So they had this 13th check and they also had the cola that was significant, right? You were telling the investors, not only do you have to do as well as the economy, but you have to exceed it because we’re going to give all of the pensioners.

a bump every year for the cost of living. It’s great for the pensioners. They’re not losing their purchasing power, but that’s a lot of pressure on the investors in the system that they have to exceed inflation, at least with everything they’re doing. So we’re now 10 years removed from bankruptcy.

There’s been no change to the the pensions you know, system. Those people receiving pensions have continued to receive it, but they’ve lost that purchasing power, right? They took the cut during bankruptcy and now inflation has gone up. Most significantly in the last couple of years in the city, the mayor and city council went along with it said, you know what, we need to do something for the pensioners.

And they came up with this idea of let’s take 10 million dollars and divide it amongst all of the current participants. It’s coming out of the general fund, which is important. It’s not coming out of that pension trust. You know, so you can make the case they’ve been hurting, they’re not making a lot of money in retirement to begin with, and a little bit of a little bonus, if you will, to make up for their loss is helpful, but we want to make sure let’s keep this as a bonus and let’s make sure it’s coming out of the general fund, not the pension trust fund.

Those who don’t learn from history are doomed to repeat it. So let’s keep reminding people the folly of that 13th check and not fall into that trap again.

Well, there’s a a board of you know, some city representatives, some union representatives, and, and they work with, you know, the smart people who know how to invest that money. It’s not the same

[00:09:31] Ryan Wrecker: people from 10 years ago that changes over some, over the years.

[00:09:35] Eric Lupher: Yeah. It changes over time.

[00:09:37] Ryan Wrecker: So in instances like that, I understand that we want to be compassionate and understand that these people have taken a hit.

And if I were a pensioner and I keep looking at this and saying, wow, the city of Detroit keeps throwing millions and millions of dollars here and there and here and there. They seem like they’ve forgotten about us, during this bankruptcy, we were hurting and all these politicians, they’re still riding high.

They’re still collecting their paychecks. I’m guessing nothing’s going to affect them. I would look at that and say, this is nice that you’re finally remembering us 10 years later, but I don’t want it to be another 10 years before you think about us again, because most of us won’t be around.

So I can understand why they’re upset about this. Is there any way you can fix that pension fund at this time? Or is it pretty much fixed in time? The funds are the funds, or is there something else that could be done to try to make it so, I don’t know, they can make up some of that lost time in that cut they had from the past?

[00:10:37] Eric Lupher: Well, you can, right? I think do it responsibly. We shouldn’t look at going back to a 13th check or, or anything like that. I think even a COLA adjustment. Is given where the Fed wants to be with 2%, you know, hopefully we’ll get back to there and inflation will be much less of a problem. So. Clearly, it’s a big problem now with inflation running higher than normal.

But yeah, the city has stashed money away to pay the pension obligation going forward. It, for 10 years, they were relieved of that responsibility as part of the the bankruptcy, a deal you know, they had that grand bargain, they called it where the foundations and others were Put money into a pot and that was paying it.

And now the city’s back on the hook. So as long as the pension is fully funded the trust fund’s fully funded, the city’s not losing, having to put more money into it and falling behind in its obligations, then it would be responsible to look at, can they give back some 4. 5 percent cut? Going forward I was really surprised a lot of opportunity for it, but let’s make sure it’s done responsibly,

[00:12:02] Ryan Wrecker: I was really shocked to find out that number one, you could even opt out or there were jobs that would opt out of social security, not pay into that pool and then you wouldn’t have it at time of retirement, you know, that must be a pretty unique thing because I’ve never heard of that until learning that fire and police in Detroit were part of a program like that.

[00:12:20] Eric Lupher: It’s not available to the private sector. In the public sector, there are some states that are, their municipal employees aren’t doing it, and it’s a little more common in the public safety field. Oh, I see. But, you know, it really is the exception more than the rule, but it’s just available in the public sector.

[00:12:40] Ryan Wrecker: I’m sure you have colleagues in other states that are in similar positions as yours, that may have used Detroit as a study about what could happen and how they want to try to avoid the mistakes of Detroit when it came to how the people were treated during bankruptcy, at least those that are part of the pensioners.

Do you think other states, other large cities can learn a valuable lesson from the mistakes of Detroit and perhaps maybe look at to your 10 years down the road, we’re looking back at these 13th checks. Maybe we need to reevaluate how we handle this fund. Maybe Detroit has been that case study for other large cities who are going down a similar path.

[00:13:21] Eric Lupher: To my knowledge, Detroit was pretty unique in offering these 13th checks. Not the only one, but it’s a rare practice. But yeah, to, to your point, Detroit’s bankruptcy across many, across the hedges that Mayor Kilpatrick put the city into, the pension history, things like that. There were a lot of lessons to learn.

And there’s a number of states, there’s a number of municipalities that have struggled mightily to fund their pension system. And a lot of it is structural, right? Made the comment, right? Do we have the same people investing now as before? And I would say, you know, even going back before bankruptcy, they weren’t doing a bad job investing.

The system was stacked against them. Like, even if you’re really successful, we’re going to give that money away. That’s a hard hurdle, high hurdle to overcome. So. Learning those lessons on funding the pension system, not falling further and further behind, making sure the system is structurally sustainable going forward.

And it gets into a lot of constitutional problems in trying to do that. Michigan’s constitution says for public sector employees, once that benefit is earned once you’ve deferred payment into the future, that cannot be withdrawn. They can’t take that back from you. The bankruptcy court said, well, maybe we can in certain circumstances, but they were clear to say, this isn’t a precedent that others can follow.

This was a one time thing. Okay. But other states have similar language to say this is, etched in stone. This is a deferred payment that the municipal employees should be able to count on in retirement. And in places like Chicago, it gets even stricter that you can’t go in and change the system in a way that would adversely affect.

It requires a bigger conversation about what these states and these local governments are trying to do with their pension system, and is it sustainable going forward?

[00:15:56] Ryan Wrecker: Well, I guess optimism for the future. And sometimes when you follow, Governments closely. It’s hard to be optimistic for the future, quite honestly, but let’s, let’s look at 10 years ago and we look at the financial ruin of Detroit, you see bankruptcy, you see a mayor that drove it to all the financial problems.

He even goes to jail for some other different crimes. Now we’re 10 years later. It’s the NFL draft. They’re showing how beautiful the city of Detroit is. Look, we’ve come back and next thing you know, that same mayor that drove the city to the brink is credentialed and at the NFL draft celebrating with everyone else.

And it makes me wonder, have we actually learned any lessons? Will we ever learn any lesson or are we just doomed to repeat the same mistakes? Do you have any optimism? With what you’re seeing in the state of Michigan or in Detroit or anywhere else, that they will learn from their mistakes and perhaps with a little help of organizations like yours, recognize the pitfalls and hopefully jump over them this time, as opposed to falling in them.

[00:17:03] Eric Lupher: We’ve had 10 years and I have to give a lot of credit to the Duggan administration. They’ve had some really good financial. Management currently the finance officer, Jay rising, doing a really responsible job of working with economists to understand where the economy’s going and how city revenues fit into that and looking forward, not only with projected revenues, but expenditures such as pension coming to pension obligations, coming back into the city’s general fund and prudently planning for it.

So. 10 years out, things look good, right? The city is in a good financial position. There are a lot of you know, relative to other cities. There’s a long way to go 10 years from removed from bankruptcy, the bond rating agencies have helped the city, but, you know, they’ve notched up the credit rating a little bit.

There’s, there’s a lot of good things happening. The question, as you look forward is, Mayor Duggan will not be in office indefinitely. Who will be the next mayor and the mayor after that, and who will they bring in as vice mayor? Chief financial officer who will be on city council. You think back in history and whether it’s mayor Kilpatrick or, or Bing or mayor young before that mayor Archer, and you can go back in history.

Before that, it was often that the. Mayor and city council were at odds at each other and it just wouldn’t get along on things last 10 years have have been a market change from that. So, you know, we need to make sure that. Everybody’s rowing in the same direction, pulling on this in the same way. And that’s really going to be the test of time, who’s calling the shots, or is everybody in unison doing that, working for the same goals, we can’t lose sight of sometimes the politics that get in the way and, and people having their pet projects whether that’s helping a pension system or, or some sort of economic development efforts or, or what have you.

Yeah. Keeping our eyes on the prize that the city has gone through bankruptcy and let’s not let it ever happen again.

[00:19:40] Ryan Wrecker: That’s why I like podcasts like this Facts Matter, a podcast by Citizens Research Council of Michigan. Again I’m Ryan Recker. I’m with WWJ Newsradio 950 here in Detroit. We’ve been speaking with Eric Luffer and you can find them online, CRC of Michigan online, CRC Mich.

Dot org and on Twitter at C R C mish. This is facts matter, a podcast presentation of the citizens research council. Thank you so much for letting me guest host here today. I really appreciate it.

[00:20:11] Eric Lupher: It was been a lot of fun. I hope we can do this again.

[00:20:14] Ryan Wrecker: I hope so too. It’s fantastic. You guys do awesome work.

It’s an absolute honor for me to even be considered to have conversations like this. Keep up the great work. Thank you.