Morning Agenda: Detroit’s New Pension Plan

By SYDNEY EMBER

 

In the face of Detroit’s tumultuous bankruptcy proceedings, the city and its unions have quietly negotiated a scaled-back pension plan that could serve as a model for other troubled governments, Mary Williams Walsh writes in DealBook. One of the most closely watched issues of the case is whether government pensions can be legally cut in bankruptcy. Now, Detroit has introduced a new plan with the cooperation of its unions, which have been among the most vocal opponents of cutbacks.

The new plan is called a hybrid, which means the workers will keep some of their current plan’s most valuable features but will give up others. If it succeeds, the city’s cost-cutting hybrid pension plan could be a model for solving government budget crises across the country. Under the new hybrid plan, which goes into effect on July 1, the city’s current workers will still earn so-called defined-benefit pensions ‒ a specified monthly payment based on tenure, age and earnings history. But they will also start to bear most of the new plan’s investment risk, which is meant to discourage overreliance on high-risk strategies.

The combination of features gives both Detroit and the unions an opportunity to declare victory and gives the city’s emergency manager, Kevyn D. Orr, a fighting chance at convincing Steven W. Rhodes, the judge overseeing the bankruptcy case, that his long-term financial plan is feasible. But it also flies in the face of a legal principle known as the vested-rights doctrine, which holds that the pension formula in force on the day a public worker goes on the job cannot be reduced for the full duration of employment.

MARKIT TO BEGIN TRADING  |  Markit, a big financial data provider, is set to join the public stock markets on Thursday ‒ and generate a payday for the banks that are both owners and customers of the firm, DealBook’s Michael J. de la Merced writes. The company raised nearly $1.3 billion in its initial public offering on Wednesday, valuing it at $4.3 billion. Underwriters priced the stock sale at $24, in the middle of its expected range.

Some of the world’s biggest banks have backed Markit’s offerings from the beginning ‒ 12 of its 15 underwriters own shares in the company &#x2012 and all of them are expected to sell stock in the I.P.O. The underwriters are poised to raise hundreds of millions of dollars in the offering, but the fact that many are also selling shareholders complicated an inherent tension in the I.P.O. process: The company selling shares wants to raise the most amount of money possible from an offering, while institutional clients who are prospective buyers obviously desire the lowest possible price.

FUND BREAKS TIES WITH CHARITABLE ARM  |  When Christopher Hohn, the founder of the one of Britain’s biggest and most successful hedge funds, decided to structure his fund to automatically donate a portion of its fees to his wife’s charity, people, including former President Bill Clinton, took notice. Now, Mr. Hohn and his wife’s marriage has come to an end, and the fund and the foundation have also split up, Jenny Anderson writes in DealBook. According to regulatory filings, the Children’s Investment Fund, known as TCI, will no longer donate money to the Children’s Investment Fund Foundation on a contractual basis.

The split, set in motion in 2012, means that TCI is now just another big hedge fund that makes outsize gains when it has big returns. The change in structure coincided with the Hohns’ separation, but another reason given for the split was that the charity was now big enough to run without TCI’s contributions. Over the last five years, TCI donated $950 million to the foundation. Since TCI’s founding in 2004, it has donated $1.9 billion. The foundation now has $4.6 billion in assets. TCI, which was an activist fund in Europe before activism became popular, now manages $8.8 billion, and an additional $4 billion for the foundation.

ON THE AGENDA  |  Weekly jobless claims are out at 8:30 a.m. The index of leading indicators is released at 10 a.m. The Commodity Futures Trading Commission holds a public round table at 9:30 a.m. to discuss position limits for physical commodity derivatives.

World Cup watch: Colombia vs. Ivory Coast at 12 p.m. Uruguay vs. England at 3 p.m. Japan vs. Greece at 6 p.m.

BANK CASES RAISE QUESTION OF DOUBLE STANDARD  |  The Justice Department’s effort to bring criminal charges against two of the world’s biggest banks, Credit Suisse and BNP Paribas of France, has rankled Europeans, who say they see a double standard in the way the United States is going about prosecuting wrongdoers, Jesse Eisinger writes in his column, The Trade. In particular, the moves against the European banks come as the Obama administration faces intense criticism for failing to pursue the American banks and bankers whose actions fueled the financial crisis, leading France to suggest that the United States is pushing its own interests.

The question of whether the Justice Department has two standards, one for companies with representatives in Congress and the other for those that do not, grows more acute if you look beyond the two bank cases, Mr. Eisinger writes. But there is more to the issue. “The real problem is not that the Justice Department singles out foreign companies; it’s that the way it metes out corporate justice is so toothless, arbitrary and opaque,” Mr. Eisinger writes. “The randomness and lack of transparency are not fair. Its approach opens the Justice Department up to legitimate criticism as well as conspiracy theories.” (http://dealbook.nytimes.com)