Detroit may be out of bankruptcy but it is not out of danger. On Friday a judge approved the city’s plan to exit bankruptcy—considered “miraculously” successful— but a piece in the NYT on Detroit’s pension system should mute the celebration at least a little. The exit plan leaves in place some pension accounting procedures that got the city into trouble in the first place, and could get it into trouble again. Post-exit plan, the city will have to pay out $500 million per year in public pensions, which is double the revenue brought in through municipal income taxes. The plan therefore depends on both high investment returns—not at all guaranteed—and kicking the pension can down the road:
Success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers. […]Documents filed with his court show that Detroit plans to continue its past practice of making undersize pension contributions in the near term while promising to ramp them up in the future. […]“The city has the potential to be saddled with an underfunded pension plan,” warned Martha E.M. Kopacz, the independent fiscal expert Judge Rhodes hired to help him determine whether Detroit’s exit strategy was feasible.
Detroit is not the only city that depends on high returns to adequately fund its pension plan. As the NYT points out, cities throughout the country could be vulnerable if investments underperform. When you add to that the continued popularity of “rolling amortization,” a pension funding method that defers indefinitely the full funding the system, municipal budgets will continue to suffer serious instability well into the future—both in Detroit and elsewhere.