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Detroit Takes Lipstick Off Pension Pig


Burypensions Blog offers some skeptical scrutiny for Detroit’s recent rosy valuation of its Police and Fire Retirement System. The city claims the system is 96.1 percent funded, but the math shows that this may be so much lipstick on a pig. Among the five items Burypensions alleges the city is deliberately concealing:

$552,110,000 of that asset amount [$3,675,459,604] is the remaining principal on a 2005 bond issue that brought $630,829,189 into the plan to make it appear fully funded then.  That is a pension obligation though the money is supposed to be going to bondholders. I say ‘supposed’ because Detroit defaulted on that bond issue last week. […]

Liabilities are grossly understated.  Based on the terms of the plan, with 8,451 retirees getting an average of $30,607 annually (with a 2.25% COLA for most), another 975 participants entitled to future benefits, and a DROP component, the real liability for pensions alone would be close to double what’s reported.

Add in overvaluation of the fund’s assets on the market, among other things, and you actually have $2 billion in assets to cover $6 billion in liabilities, the blog concludes.

Detroit’s Emergency Manager Kevyn Orr agrees. Earlier this month, Orr conducted his own analysis of the pension plans and found something similar: The general pension fund and the police and fire funds were estimated to be 65 and 78 percent funded, rather than 83 and 100 percent, as was previously reported.

Rather than spending nearly $300 million per year to keep the plans funded, Orr is instead looking to make significant cuts to benefits, increase employee contributions, and switch some city workers from defined-benefit plans to defined-contribution plans. His proposals also include substantial haircuts for bondholders. Needless to say, no one is particularly thrilled by this news.

[Detroit image courtesy of Shutterstock]

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  • rheddles

    “Needless to say, no one is particularly thrilled by this news.”

    No one except the residents of Realville.

  • three_chord_sloth

    The Burypensions blog always does a good job running these numbers in search of the Big Picture, but even it sometimes underestimates the problems.

    For instance: When a city such as Detroit ends up defaulting on bond payments, what kind of hole does that blow in OTHER city/state pension funds?

    All of these city/state pension funds hold bonds… bonds in their own city/state or others. When the first of the inevitable big defaults happen will that trigger a cascade? How much of these pension “assets” are just a daisy chain of phantom promises from one wheezing government entity to another?

    Nobody really know yet…

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