Many public pension funds wrestle with trying to come up with a realistic estimate for the anticipated return on investments. The average across 126 public pension plans covering about 85% of the market is 7.75% a year, according to Keith Brainard, research director of the National Association of State Retirement Administrators. The average for most corporate pension funds is about 8%.But recently, both the state of Indiana and the District of Columbia lowered their expected return to less than 7%, according to Mr. Brainard. According to the report prepared by consultancy Milliman, Detroit pension funds should expect a return of only 6.3% to 6.57% a year, even as Mr. Orr’s team is relying on a more optimistic 7% return. With those numbers, the city might actually have underestimated the shortfall, according to the report.
Regardless of how this shakes out, it’s abundantly clear that none of Detroit’s creditors, pension funds included, are willing to take their lumps and move on. Instead, a massive battle between the funds and the city’s other creditors is brewing over who will bear the brunt of the bankruptcy. The outcome of this fight could become the key factor shaping the future of the city.