Detroit Rolls Out New Model: A Hybrid Pension Plan

In the face of Detroit’s tumultuous bankruptcy proceedings, in which multiple parties are quarreling to protect their interests, the city and its unions have negotiated a scaled-back pension plan that could serve as a model for other troubled governments.

One of the most closely watched issues of the case is whether a government pension plan can be legally cut in bankruptcy. Detroit, saddled with a pension system it cannot afford, has introduced a new plan with the cooperation of its unions, which have been among the most vocal opponents of cutbacks.

While both retired and active workers now participate in the same city pension system, the new plan is intended only for Detroit’s active workers, who will shift to it on July 1. Retirees will keep 73 percent to 100 percent of their current base pensions under the city’s proposal to exit bankruptcy.

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. Trading down to a less generous pension plan is often said to be a legal nonstarter for government workers, so if Detroit succeeds, its hybrid could become a model for other distressed governments from Maine to California.

Countless elected officials — from Rahm Emanuel, the Democratic mayor of Chicago, to Chris Christie, the Republican governor of New Jersey — are caught between ballooning pension obligations, angry local taxpayers who don’t want to pay for them and labor lawyers who say it’s impossible to cut back.

“We have a festering sore here,” Christopher M. Klein, the judge in the bankruptcy case of Stockton, Calif., said at a hearing in May, referring to that city’s surging pension costs and its unwillingness to deal with them. “We’ve got to get in there and excise it.”

Detroit’s current pension system simply costs too much relative to its battered tax base, and the watchword for Detroit this summer is feasibility. For the city to emerge from bankruptcy, its emergency manager, Kevyn D. Orr, must convince Steven W. Rhodes, the judge overseeing Detroit’s bankruptcy case, that his long-term financial plan is feasible. The matter is to be decided at a trial scheduled to start in August.

There would be little hope of persuading Judge Rhodes if Detroit’s workers were still covered by the existing pension plan and struggling local taxpayers were still liable for the relentlessly mounting obligations. The current plan lets city workers earn benefits that others in Detroit can only dream about — full pensions at 55, longevity bonuses, annual cost-of-living increases, an extra “13th check” in December and bankable sick leave that can be converted to cash, among others. In recent years, the resulting pensions have been greater than the per capita income of the residents who were expected to pay for them.

On June 30, Mr. Orr will freeze that pension plan, meaning that the city’s current workers will not accrue any further benefits on those terms.

Starting the next day, in the new hybrid plan, they will still earn so-called defined-benefit pensions, something their unions consider critical. But at the same time, they will start to bear most of the new plan’s investment risk. That means Detroit’s taxpayers — who pay a city income tax in addition to property and sales taxes — will no longer face cash calls every time the plan’s investments drop in value. Officials hope that making the workers backstop the investments will discourage the overreliance on high-risk strategies that has characterized the current plan.

This unusual combination of features gives both the city and the unions an opportunity to declare victory and provides Mr. Orr with ammunition for the coming feasibility trial.

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. No such legal protection exists for workers in the private sector, whose pension plans can be frozen at any time. But in the public sector, the vested-rights doctrine is an article of faith, zealously defended, and it helps explain why a bankrupt city like Stockton is proposing to saddle its other creditors with big losses but not touch the pension plan.

The vested-rights doctrine is especially powerful in California, growing out of court decisions dating back to 1947. Unions in San Jose recently used it to keep the city from making its workers contribute more toward their pensions. Employees of four California counties argued in court last year that they had a vested right to pad their pensions by counting things like unused vacation time in their benefit calculations, despite laws prohibiting the practice. In March, Judge David B. Flinn of Contra Costa County Superior Court ruled that there was no such thing as a vested right to an illegal benefit — but the ruling applies only to current workers. Retirees are still receiving the padded pensions.

California’s state pension system, Calpers, is a powerful proponent of the vested-rights doctrine, and many state and local governments follow its lead.

In Detroit’s bankruptcy, however, the vested-rights doctrine does not appear to be an issue. The Michigan law for distressed cities gives emergency managers like Mr. Orr the power to set the terms of public employment. That means he can legally freeze Detroit’s existing pension plans and establish new ones for city workers, said Bill Nowling, a spokesman for Mr. Orr.

“He is not making any benefit cuts,” Mr. Nowling added.

For Detroit’s retirees, it’s a different matter. They are not being asked to give up benefits they had hoped to earn in the future; they are being told they must give up benefits they have already earned. Michigan’s constitution forbids this, so Mr. Orr is using the Chapter 9 municipal bankruptcy process, in which federal law applies. A bitter battle is already taking shape.

By the time the fate of the retirees has been decided, Detroit’s workers will already be earning hybrid benefits. To shift the investment risk their way, Detroit has set up a series of eight “levers” to pull if the plan’s investments falter. They include setting up a reserve fund that must be used to cover losses, raising the workers’ required contributions, lowering retirees’ cost-of-living increases and making workers build up their benefits more slowly.

In hard times, plan officials will be required to pull as many levers as it takes to keep the plan on track to be 100 percent funded within five years. Only if all eight levers are pulled and the plan is still not responding can Detroit’s taxpayers be called on to rescue it.

To measure the level of funding, the plan will use a rate-of-return assumption of 6.75 percent. That still allows for a substantial amount of risk, although it is less than the 7.9 percent assumption the city was using when it declared bankruptcy. Officials of the American Federation of State, County and Municipal Employees, which led the negotiations, did not respond to calls seeking comment. The union is one of 48 that represent Detroit’s municipal workers.

Even as they were negotiating the hybrid pension plan, Detroit’s unions were still appealing a ruling last December by Judge Rhodes that pensions could be cut under federal bankruptcy law, despite protective language in Michigan’s constitution. The unions are required to drop the appeal if they vote for Detroit’s plan of adjustment. From California, Calpers has asked to serve as a “friend of the court” in the appeal, saying Judge Rhodes’s decision “raises issues that are of critical importance to Calpers and its 1.7 million members.”

Calpers’s brief argues that Judge Rhodes ruled improperly and asks the United States Court of Appeals for the Sixth Circuit to vacate his finding that state laws protecting pensions are not binding in bankruptcy cases. Although California’s laws have no force in a federal case in Michigan, Calpers expressed concern that rulings concerning Detroit’s bankruptcy might recast the legal landscape in California.

“Such a precedent can be, and has been, misconstrued for the broad proposition that all pensions are subject to impairment in Chapter 9,” the Calpers brief said.

New Zealand Rejects Mining Project on Pacific Seafloor

WELLINGTON, New Zealand — A project to mine undersea iron ore deposits off the New Zealand coast has been rejected because of uncertainty about the environmental effects of the project, the country’s Environmental Protection Authority said on Wednesday.

Trans-Tasman Resources, a New Zealand company formed to explore and develop the country’s so-called iron sand deposits, had sought final approvalto excavate but was turned down by a special committee set up by the environmental agency.

The major reasons for the decision “were the uncertainties in the scope and significance of the potential adverse environmental effects and those on existing interests,” the environmental agency said in a statement.

The New Zealand decision was being closely watched by other governments and mining companies around the world looking to mine copper, cobalt, manganese and other metals on the ocean floor.

Diamonds are mined off the coast of Namibia, but the Trans-Tasman project was one of the more advanced being proposed.

Environmental groups, fishing companies and Maori tribes had opposed the project because of the possibility of damage to the environment, including marine mammals and fish stocks.

Trans-Tasman Resources said it was disappointed by the decision, having spent about 60 million New Zealand dollars, or $52 million, on the project so far, and having undertaken significant local consultation and scientific research.

Trans-Tasman’s chief executive, Tim Crossley, said in a statement that the local community would miss out on hundreds of new jobs and an estimated increase of 240 million dollars a year in gross domestic product.

The company said it would study the ruling and look at its options. The decision can be appealed only on points of law.

Environmentalists called the outcome a victory for common sense.

During hearings on the project, it became clear that the company “had not done its homework on the full environmental impact of digging up 50 million tons of the seabed every year for 20 years,” said Phil McCabe, the chairman of Kiwis Against Seabed Mining.

Another New Zealand deep-sea mining project was proposed last week by Chatham Rock Phosphate, which wants to mine the fertilizer component in waters up to 1,300 feet deep about 300 miles east of the country. The application will now undergo a six-month investigation period, including public and scientific submissions.

Elsewhere, Nautilus Minerals is working on a deep-sea project off Papua New Guinea that it wants to start in 2017.

The Biology of Risk

SIX years after the financial meltdown there is once again talk about market bubbles. Are stocks succumbing to exuberance? Is real estate? We thought we had exorcised these demons. It is therefore with something close to despair that we ask: What is it about risk taking that so eludes our understanding, and our control?

Part of the problem is that we tend to view financial risk taking as a purely intellectual activity. But this view is incomplete. Risk is more than an intellectual puzzle — it is a profoundly physical experience, and it involves your body. Risk by its very nature threatens to hurt you, so when confronted by it your body and brain, under the influence of the stress response, unite as a single functioning unit. This occurs in athletes and soldiers, and it occurs as well in traders and people investing from home. The state of your body predicts your appetite for financial risk just as it predicts an athlete’s performance.

If we understand how a person’s body influences risk taking, we can learn how to better manage risk takers. We can also recognize that mistakes governments have made have contributed to excessive risk taking.

Consider the most important risk manager of them all — the Federal Reserve. Over the past 20 years, the Fed has pioneered a new technique of influencing Wall Street. Where before the Fed shrouded its activities in secrecy, it now informs the street in as clear terms as possible of what it intends to do with short-term interest rates, and when. Janet L. Yellen, the chairwoman of the Fed, declared this new transparency, called forward guidance, a revolution; Ben S. Bernanke, her predecessor, claimed it reduced uncertainty and calmed the markets. But does it really calm the markets? Or has eliminating uncertainty in policy spread complacency among the financial community and actually helped inflate market bubbles?

We get a fascinating answer to these questions if we turn from economics and look into the biology of risk taking.

ONE biological mechanism, the stress response, exerts an especially powerful influence on risk taking. We live with stress daily, especially at work, yet few people truly understand what it is. Most of us tend to believe that stress is largely a psychological phenomenon, a state of being upset because something nasty has happened. But if you want to understand stress you must disabuse yourself of that view. The stress response is largely physical: It is your body priming itself for impending movement.

As such, most stress is not, well, stressful. For example, when you walk to the coffee room at work, your muscles need fuel, so the stress hormones adrenaline and cortisol recruit glucose from your liver and muscles; you need oxygen to burn this fuel, so your breathing increases ever so slightly; and you need to deliver this fuel and oxygen to cells throughout your body, so your heart gently speeds up and blood pressure increases. This suite of physical reactions forms the core of the stress response, and, as you can see, there is nothing nasty about it at all.

Far from it. Many forms of stress, like playing sports, trading the markets, even watching an action movie, are highly enjoyable. In moderate amounts, we get a rush from stress, we thrive on risk taking. In fact, the stress response is such a healthy part of our lives that we should stop calling it stress at all and call it, say, the challenge response.

This mechanism hums along, anticipating challenges, keeping us alive, and it usually does so without breaking the surface of consciousness. We take in information nonstop and our brain silently, behind the scenes, figures out what movement might be needed and then prepares our body. Many neuroscientists now believe our brain is designed primarily to plan and execute movement, that every piece of information we take in, every thought we think, comes coupled with some pattern of physical arousal. We do not process information as a computer does, dispassionately; we react to it physically. For humans, there is no pure thought of the kind glorified by Plato, Descartes and classical economics.

Our challenge response, and especially its main hormone cortisol (produced by the adrenal glands) is particularly active when we are exposed to novelty and uncertainty. If a person is subjected to something mildly unpleasant, like bursts of white noise, but these are delivered at regular intervals, they may leave cortisol levels unaffected. But if the timing of the noise changes and it is delivered randomly, meaning it cannot be predicted, then cortisol levels rise significantly.

Uncertainty over the timing of something unpleasant often causes a greater challenge response than the unpleasant thing itself. Sometimes it is more stressful not knowing when or if you are going to be fired than actually being fired. Why? Because the challenge response, like any good defense mechanism, anticipates; it is a metabolic preparation for the unknown.

You may now have an inkling of just how central this biology is to the financial world. Traders are immersed in novelty and uncertainty the moment they step onto a trading floor. Here they encounter an information-rich environment like none other. Every event in the world, every piece of news, flows nonstop onto the floor, showing up on news feeds and market prices, blinking and disappearing. News by its very nature is novel, adds volatility to the market and puts us into a state of vigilance and arousal.

I observed this remarkable call and echo between news and body when, after running a trading desk on Wall Street for 13 years, I returned to the University of Cambridge and began researching the neuroscience of trading.

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How the Fed Tried to Rein in Volatility

Arthur

F. Burns

Paul A.

Volcker

Alan

Greenspan

Ben S.

Bernanke

FEDERAL

RESERVE

CHAIRMEN:

G. Wm.

Miller

1974

’80

’85

’90

’95

’00

’05

’10

2014

ROLLING

6-MONTH CHANGE IN

10

8

FED FUNDS RATE

The Federal Reserve largely reined in volatility of short-term interest rates starting in the mid-1990s...

(PERCENTAGE

POINTS)

6

4

2

0

–2

S&P 500

AVG.

–4

1,500

–6

but instead of calming the markets, it made crashes in the 20 years after 1994 longer and more severe than in the previous 20.

1,000

500

0

Sources: Federal Reserve Bank of St. Louis; Standard & Poor’s

In one of my studies, conducted with 17 traders on a trading floor in London, we found that their cortisol levels rose 68 percent over an eight-day period as volatility increased. Subsequent, as yet unpublished, studies suggest to us that this cortisol response to volatility is common in the financial community. A question then arose: Does this cortisol response affect a person’s risk taking? In a follow-up study, my colleagues from the department of medicine pharmacologically raised the cortisol levels of a group of 36 volunteers by a similar 69 percent over eight days. We gauged their risk appetite by means of a computerized gambling task. The results, published recently in the Proceedings of the National Academy of Sciences, showed that the volunteers’ appetite for risk fell 44 percent.

Most models in economics and finance assume that risk preferences are a stable trait, much like your height. But this assumption, as our studies suggest, is misleading. Humans are designed with shifting risk preferences. They are an integral part of our response to stress, or challenge.

When opportunities abound, a potent cocktail of dopamine — a neurotransmitter operating along the pleasure pathways of the brain — and testosterone encourages us to expand our risk taking, a physical transformation I refer to as “the hour between dog and wolf.” One such opportunity is a brief spike in market volatility, for this presents a chance to make money. But if volatility rises for a long period, the prolonged uncertainty leads us to subconsciously conclude that we no longer understand what is happening and then cortisol scales back our risk taking. In this way our risk taking calibrates to the amount of uncertainty and threat in the environment.

Under conditions of extreme volatility, such as a crisis, traders, investors and indeed whole companies can freeze up in risk aversion, and this helps push a bear market into a crash. Unfortunately, this risk aversion occurs at just the wrong time, for these crises are precisely when markets offer the most attractive opportunities, and when the economy most needs people to take risks. The real challenge for Wall Street, I now believe, is not so much fear and greed as it is these silent and large shifts in risk appetite.

I consult regularly with risk managers who must grapple with unstable risk taking throughout their organizations. Most of them are not aware that the source of the problem lurks deep in our bodies. Their attempts to manage risk are therefore comparable to firefighters’ spraying water at the tips of flames.

THE Fed, however, through its control of policy uncertainty, has in its hands a powerful tool for influencing risk takers. But by trying to be more transparent, it has relinquished this control.

Forward guidance was introduced in the early 2000s. But the process of making monetary policy more transparent was in fact begun by Alan Greenspan back in the early 1990s. Before that time the Fed, especially under Paul A. Volcker, operated in secrecy. Fed chairmen did not announce rate changes, and they felt no need to explain themselves, leaving Wall Street highly uncertain about what was coming next. Furthermore, changes in interest rates were highly volatile: When Mr. Volcker raised rates, he might first raise them, cut them a few weeks later, and then raise again, so the tightening proceeded in a zigzag. Traders were put on edge, vigilant, never complacent about their positions so long as Mr. Volcker lurked in the shadows. Street wisdom has it that you don’t fight the Fed, and no one tangled with that bruiser.

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 8 days ago

Having studied risk tolerance in compulsive gamblers, I think the author is onto something that bears taking seriously - or perhaps I should...

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Unlike the author, I do not believe that the more we understand the extent to which we humans are neuro-chemical survival machines, the...

mary

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I believe these bubbles - housing, student debt, etc. - occur because of the Fed and it's very bad decisions driven by politics and the...

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Under Mr. Greenspan, the Fed became less intimidating and more transparent. Beginning in 1994 the Fed committed to changing fed funds only at its scheduled meetings (except in emergencies); it announced these changes at fixed times; and it communicated its easing or tightening bias. Mr. Greenspan notoriously spoke in riddles, but his actions had no such ambiguity. Mr. Bernanke reduced uncertainty even further: Forward guidance detailed the Fed’s plans.

Under both chairmen fed funds became far less erratic. Whereas Mr. Volcker changed rates in a volatile fashion, up one week down the next, Mr. Greenspan and Mr. Bernanke raised them in regular steps. Between 2004 and 2006, rates rose .25 percent at every Fed meeting, without fail... tick, tick, tick. As a result of this more gradualist Fed, volatility in fed funds fell after 1994 by as much as 60 percent.

In a speech to the Cato Institute in 2007, Mr. Bernanke claimed that minimizing uncertainty in policy ensured that asset prices would respond “in ways that further the central bank’s policy objectives.” But evidence suggests that quite the opposite has occurred.

Cycles of bubble and crash have always existed, but in the 20 years after 1994, they became more severe and longer lasting than in the previous 20 years. For example, the bear markets following the Nifty Fifty crash in the mid-70s and Black Monday of 1987 had an average loss of about 40 percent and lasted 240 days; while the dot-com and credit crises lost on average about 52 percent and lasted over 430 days. Moreover, if you rank the largest one-day percentage moves in the market over this 40-year period, 76 percent of the largest gains and losses occurred after 1994.

I suspect the trends in fed funds and stocks were related. As uncertainty in fed funds declined, one of the most powerful brakes on excessive risk taking in stocks was released.

During their tenures, in response to surging stock and housing markets, both Mr. Greenspan and Mr. Bernanke embarked on campaigns of tightening, but the metronome-like ticking of their rate increases was so soothing it failed to dampen exuberance.

There are times when the Fed does need to calm the markets. After the credit crisis, it did just that. But when the economy and market are strong, as they were during the dot-com and housing bubbles, what, pray tell, is the point of calming the markets? Of raising rates in a predictable fashion? If you think the markets are complacent, then unnerve them. Over the past 20 years the Fed may have perfected the art of reassuring the markets, but it has lost the power to scare. And that means stock markets more easily overshoot, and then collapse.

The Fed could dampen this cycle. It has, in interest rate policy, not one tool but two: the level of rates and the uncertainty of rates. Given the sensitivity of risk preferences to uncertainty, the Fed could use policy uncertainty and a higher volatility of funds to selectively target risk taking in the financial community. People running factories or coffee shops or drilling wells might not even notice. And that means the Fed could keep the level of rates lower than otherwise to stimulate the economy.

IT may seem counterintuitive to use uncertainty to quell volatility. But a small amount of uncertainty surrounding short-term interest rates may act much like a vaccine immunizing the stock market against bubbles. More generally, if we view humans as embodied brains instead of disembodied minds, we can see that the risk-taking pathologies found in traders also lead chief executives, trial lawyers, oil executives and others to swing from excessive and ill-conceived risks to petrified risk aversion. It will also teach us to manage these risk takers, much as sport physiologists manage athletes, to stabilize their risk taking and to lower stress.

And that possibility opens up exciting vistas of human performance.

For Biden in Brazil: World Cup and Diplomacy

RIO DE JANEIRO — Seeking an opening during the World Cup soccer tournament to thaw relations with Brazil, Vice President Joseph R. Biden Jr. arrived in Latin America’s largest country on Monday, expressing a desire to “rebuild trust” after the souring of ties over revelations of the National Security Agency’s surveillance practices.

While Mr. Biden ostensibly traveled to Natal in northeast Brazil to watch the United States play against Ghana, he made it clear ahead of a meeting on Tuesday with Brazil’s president, Dilma Rousseff, that the Obama administration was hoping to discuss a range of issues including trade and efforts to lure more Brazilians to study in American universities.

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While Ms. Rousseff had shown indignation last year after news reports revealed that the N.S.A. had spied on her and her top aides, pushing her to postpone a state visit to Washington, she said in an interview in Brasília this month that she was also prepared to repair ties with the United States.

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“I think the conditions have matured,” said Ms. Rousseff, 66, emphasizing that she still felt it was “extremely lamentable” for the N.S.A. surveillance to have occurred. Still, she said, pointing to resilient trade ties: “From Brazil’s point of view, the relationship with the United States is a strategic one. We’re the two largest democracies in the hemisphere.”

For both countries, the stars may be aligning for repairing ties after nearly a year in which the relationship had stalled. As Iraq is roiled by the advances of Sunni rebel extremists and relations with Russia remain tense over the intervention in Ukraine, rekindling bonds with Brazil gives Washington a chance to raise its diplomatic profile in Latin America during the World Cup.

And for Ms. Rousseff, warming again to the United States, which is Brazil’s second-largest trading partner after China, enables her to burnish foreign policy credentials in advance of presidential elections in October as rivals criticize her administration’s close ties with leftist governments in nations including Venezuela and Cuba.

Curiously, Ms. Rousseff, a former Marxist guerrilla who has evolved into a moderate leftist, and Mr. Biden, a foreign policy authority in the Senate before becoming vice president, appear to have developed a strong rapport. At a dinner in Brasília this month with foreign correspondents, a relaxed Ms. Rousseff jokingly called Mr. Biden “very seductive.”

However, both Brasília and Washington still seem to be approaching their strained ties with caution.

In an interview published on Monday by the Brazilian newspaper Folha de S. Paulo, Mr. Biden said that the invitation for Ms. Rousseff to attend a state dinner still stands, but he did not say whether the Obama administration would issue an apology for the N.S.A. spying, as Ms. Rousseff had requested.

Instead, Mr. Biden emphasized the deep trade ties between the two countries, pointing to the examples of American companies like Anheuser-Busch and Burger King, which have come under Brazilian ownership, and American companies like Ford and General Motors with huge Brazilian subsidiaries.

“Brazil cannot and should not be isolated,” Mr. Biden said. “That would go against our national interests, as well as the interests of the rest of the countries of the hemisphere.”

As Brazil projects more influence in Latin America, partly through newintergovernmental unions that exclude the United States, the visit by Mr. Biden also gives Washington a chance to build support here for next year’s Summit of the Americas, a gathering of regional leaders organized by the Organization of American States, which has its headquarters in Washington.

“They’re in the middle of the head count and want Brazil in,” said Julia E. Sweig, director for Latin American studies at the Council of Foreign Relations, while pointing out that neither country appeared ready to surprise their own constituencies or bureaucracies with major initiatives. “You can think of Biden as the whip.”

While warm words are expected on both sides, some Brazilian analysts warned that expectations should remain low for Mr. Biden’s visit as mistrust persists in Brasília over a range of United States policies, from the trade embargo against Cuba to efforts aimed at lowering trade barriers on Washington’s terms.

“We probably won’t see big steps straight away,” said Geraldo Zahran, a specialist on Brazil’s ties to the United States at Pontifical Catholic University in São Paulo, citing the hesitance for big policy shifts before Brazil’s presidential elections. “But there’s a recognition that people are ready and willing to move on.”

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Obama Pushes Iraqis to Mend Sectarian Rifts

Obama Pushes Iraqis to Mend Sectarian RiftsRANCHO MIRAGE, Calif. — As President Obama weighs airstrikes against marauding militants in Iraq, he has concluded that any American military action must be conditioned on a political plan to try to heal Iraq’s sectarian rifts, a senior administration official said on Sunday.

While Mr. Obama has ordered unmanned surveillance flights over Iraq to gather intelligence for possible strikes on militant positions, the official said, the White House’s emphasis, when Mr. Obama returns to Washington on Monday from a weekend in Southern California, will be on prodding Iraq’s leaders to form a new national unity government.

The United States, this official said, has asked Iraq’s prime minister, Nuri Kamal al-Maliki, a Shiite, to work with the Kurds, to seek to persuade the disaffected Sunni minority that the next government will be an “ally not an adversary” and to overhaul Iraq’s routed army. All three groups must be adequately represented in Baghdad, he said.

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The president’s two-track response, the official said, stems from his belief that military strikes on radical Sunni militants, absent parallel measures to reform Iraq’s government, will simply hand the country over to competing Shiite, Kurdish and Sunni fighters, and a future of unending sectarian strife.

Photo

Senator Lindsey Graham of South Carolina said on Sunday that airstrikes in Iraq might be necessary.CreditChris Usher/CBS, via Associated Press

The White House believes it has a brief window to pursue diplomacy, this official said, because after a week of surprising advances across Iraq’s Sunni-dominated north and west, the militant group, the Islamic State in Iraq and Syria, now faces more motivated Iraqi troops and fiercely motivated Shiite militias, defending the gates of Baghdad.

But it is unclear how far the Iraqis would need to go in establishing a multi-sectarian government that would satisfy Mr. Obama. Deep sectarian divisions have persisted since Saddam Hussein was ousted in 2003. As recently as 2010, for example, Mr. Obama personally pursued an initiative asking Mr. Maliki to share power with the leader of a bloc representing many Sunnis; the plan failed.

In addition to such power-sharing measures, the United States has long urged the Iraqis to take other steps, such as integrating Sunni tribes in western Iraq into the nation’s security structure and making their fighters eligible for the same death benefits as Iraqi troops.

On Sunday, reflecting American concerns over the militant advance, the State Department said it plans to evacuate some of its personnel from the heavily fortified American Embassy in Baghdad to Jordan and consulates in more secure cities in Iraq. Most of the staff will remain in Baghdad.

Mr. Obama’s push for political reconciliation has put him in a potential alignment with Iran, a Shiite backer of the Maliki government. On Sunday, Iranian officials seemed to echo Mr. Obama’s admonition to Mr. Maliki that he needed to be more inclusive of the Sunnis to quell the insurgency.

“Iraqi politicians should make tough decisions in order to keep unity in their country,” Hamid Aboutalebi, a top deputy to President Hassan Rouhani, wrote on Twitter. In another tweet, he said, “Iran and the U.S. are the only countries who can manage the Iraq crisis.”

The messages came a day after Mr. Rouhani said that Iran would not rule out working with the United States to battle Sunni fighters. On Friday, American officials said that Gen. Qassim Suleimani, the shadowy commander of Iran’s paramilitary Quds Force, had flown to Iraq with dozens of his officers to advise Iraq’s beleaguered commanders.

While the United States and Iran have both backed Mr. Maliki — and American officials said they were still standing by him now, while not endorsing a third term for him as prime minister — they have had sharply different goals: The United States has urged him to lead a cross-sectarian government; Iran has wanted him at the head of a Shiite-dominated government.

The deepening crisis in Iraq shadowed a getaway weekend for Mr. Obama, his wife, Michelle, and their daughter Malia in the desert near Palm Springs, Calif. Before teeing off Sunday morning at a golf course owned by the technology billionaire Larry Ellison, Mr. Obama was briefed by his national security adviser, Susan E. Rice, on Iraq and on the evacuation of embassy personnel in Baghdad, the White House said.

The president remains open to the use of airstrikes, either by drones or by fighter jets, an official said, and the Pentagon has moved the aircraft carrier George H. W. Bush and two other warships carrying long-range missiles into the Persian Gulf to be in position for a potential military operation.

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Graphic: In Iraq Crisis, a Tangle of Alliances and Enmities

Among the options under consideration, the official said, are hitting the militants on their front lines north of Baghdad to try to roll them back, striking border crossings with Syria to close off access to Iraq from Syria, or hitting their staging areas in the border region.

But identifying the proper targets is difficult and time-consuming, the official said, particularly since the militants have become more interspersed with other militias and ordinary people as they have advanced across Iraq. The United States is using aerial surveillance.

The complex calculations facing Mr. Obama are evident in the advice he is getting from his critics. Senator Lindsey Graham, Republican of South Carolina, said on the CBS program “Face the Nation” that the United States should conduct airstrikes against the militants, if necessary, working with Iran, given the common interest in saving Baghdad.

The White House has been considering whether, and how, to initiate discussions with Iran on Iraq’s security. Josh Earnest, the deputy spokesman, said Friday no such talks had occurred but did not rule out the possibility they could in the future.

As Mr. Obama pursues a political solution, officials said Vice President Joseph R. Biden Jr. and Secretary of State John Kerry would both play higher-profile roles. Mr. Biden, who held the Iraq portfolio during the administration’s first term, called Mr. Maliki last week. The president has not yet spoken to the Iraqi prime minister during this crisis.

On Saturday, Mr. Kerry called Iraq’s foreign minister, Hoshyar Zebari, to urge the government to ratify the results of its recent parliamentary election “without delay,” and stick to “its constitutionally mandated time frame for forming a new government,” the State Department said.

Mr. Kerry also said Iraq must respect “the rights of all citizens — Sunni, Kurd and Shia — as it fights against terrorism.” On Sunday, he made a round of calls to officials in Jordan, Saudi Arabia, Qatar and the United Arab Emirates to discuss the crisis.

The last time Iraq teetered on the brink of wholesale civil war, prompting George W. Bush’s deployment of additional American troops, a breakthrough came when the United States enlisted Sunni tribal leaders to form militias that supported the Maliki government. In the intervening years, however, Mr. Maliki alienated Sunni tribal leaders, cutting off funding to their forces and driving some key Sunnis out of government posts.

The United States, a senior Iraqi official said, is “conditioning its actions on genuine reconciliation and cooperation among Iraqi leaders, leading to a new representative government.”

Whether those leaders are prepared to take those kinds of steps, especially during a raging insurgency, is far from clear. Lukman Faily, Iraq’s ambassador to Washington, noted that the Strategic Framework Agreement between Iraq and the United States “talks about the importance of maintaining the territorial integrity of Iraq.”

“The urgency on the ground should be enough reason to act,” Mr. Faily said in an interview. “We think that addressing the immediate threat to Iraq’s sovereignty should take priority over discussions regarding political reform.”