Monday, January 27, 2014

Michigan State Funding of Pension Funds and DIA Deal Debated

January 27, 2014 at 11:50 am

Snyder weighs how to pay $350M to help DIA, pension funds

State could borrow or pledge tobacco funds in pension deal

Chad Livengood and Marisa Schultz
The Detroit News

Lansing — Gov. Rick Snyder’s administration is considering whether to borrow $350 million to pump into Detroit’s pension funds or set aside $17.5 million in annual payments for the next 20 years from the state’s tobacco lawsuit settlement fund.

Issuing the bonds to borrow the money up front would infuse Detroit’s two pension funds with the entire sum that could grow by $65 million at a modest 7 percent investment return over two decades.

In an interview Friday, Snyder said he’s undecided whether to borrow the money or get lawmakers to earmark an annual payout to Detroit’s pensions, shielding the financial pledge from the Legislature’s annual appropriations process.

“In some ways, you could argue it could be simpler and easier to figure out what the present value of that $350 million is, sell a bond now and use essentially that $17.5 million as debt service to pay back that bond,” Snyder told The Detroit News. “There could be some benefit to the bond just because it would be all done. But, again, that depends on what the bond market looks like and the interest rates that would be on the bond.”

But a bond could lead to a larger long-term financial commitment to the state through lending costs, and some financial experts question the wisdom of borrowing money to pump up a pension fund — something former Mayor Kwame Kilpatrick’s administration did in a move blamed as a contributing factor to the city’s bankruptcy.

“That’s just transferring risk from Detroit to the state of Michigan,” said Robert Brooks, a professor of finance at the University of Alabama in Tuscaloosa. “I’ve never thought it was a good idea if you’re running a pension fund to go out and borrow money.”

But another financial expert watching Detroit’s Chapter 9 case closely says the added debt for the state pales in comparison to the $3.5 billion bill it could face if Michigan was found legally liable to cover pensions under the state constitution, an unresolved legal issue in the case.

“This politically would be a huge win for Snyder in that he keeps the DIA intact, and he resolves a claim that could be significantly higher if litigated,” said Patrick O’Keefe, a Bloomfield Hills corporate financial consultant.

Another lingering legal issue is whether the state of Michigan could be held liable for $220 million in revenue-sharing payments that past city leaders have contended Detroit is owed for the state breaking its end of a deal for the city to reduce its income tax, O’Keefe said.

“Nobody ever said Rick Snyder is an idiot,” O’Keefe said of the governor, an accountant by trade. “He’s going to make the best financial deal that he can.”

The governor has pitched the state aid as a settlement with retirees and labor unions over all legal claims against the state. The money would be pooled with another $330 million that nine local and national foundations have pledged to bolster pension funds and shield the Detroit Institute of Arts’ city-owned collection from a bankruptcy asset sale to satisfy creditors.

The Snyder administration is considering both options for using the tobacco money, though a definitive plan may not be ready for the governor’s Feb. 5 budget presentation to lawmakers, spokeswoman Sara Wurfel said.

Whatever path Snyder chooses, it’s already facing scrutiny from both lawmakers and Detroit’s creditors.

“I don’t think I could support a bond sale. I don’t like debt,” said state Sen. Jack Brandenburg, R-Harrison Township.

More details sought

Like other lawmakers, Brandenburg is looking for more details from the Snyder administration. He also questions why the city-owned art would remain protected when pensioners, by Snyder’s admission, will still see cuts to their monthly pension checks.

“If I had to chose between someone’s pensions and city-owned art, I’m coming down on the side of the pension guy,” said Brandenburg, who added he has Detroit retirees in his Macomb County district and has never been to the DIA. “It looks to me that the pensioners are being asked to take a short end of the stick.”

Tim Wittebort, a corporate finance attorney at Howard & Howard in Royal Oak, said the nearly $700 million pool of state and private funds for pensioners remains fraught with problems because it gives one class of unsecured creditors — retirees — preferential treatment over other creditors with claims that aren’t backed by dedicated revenue, such as general obligation bondholders.

“I don’t know how they’re going to do it,” Wittebort said. “That doesn’t prevent the (other) creditors from going after the DIA.”

$90M from tobacco deal

To pay for the state’s commitment to Detroit’s pensioners, Snyder wants to tap into $250 million the state gets from tobacco companies as part of a 1998 nationwide settlement over smoking-related illnesses. While the tobacco settlement fund has other commitments to economic development and state debt payments, there is nearly $90 million in excess money available, according to the state budget office.

With the state expecting a $1 billion general fund surplus, Brooks said the state would be wise to pay the $350 million in the short term rather than spread it out over 20 years.

“The more you borrow money, the less flexibility that you have. That just seems to be not a good idea,“ Brooks said. “It’s just so much better to say, ‘Hey, we’ve got the money, let’s not do the bonds, let’s just pay it.’ And that makes it more flexible.”

Tom Diehl, a Mount Clemens certified public accountant, said it would be to Detroit’s advantage to get the state to issue a $350 million bond for the entire sum.

“The reason to do that is they don’t have to dip into the general fund and they don’t have to play with the $1 billion surplus they’re making all sorts of promises with right now,” Diehl said of the governor and lawmakers. “If I was Detroit, I would much prefer the money up front.“
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