Detroit to hire consultant as $196M pension hit looms
The city of Detroit plans to hire a consultant to examine massive legacy costs that come due when its recovery plan winds down, a report to Gov. Rick Snyder says.
In the Nov. 24 biannual report publicly released Monday, Detroit’s Financial Review Commission writes that the city is implementing programs in accordance with its bankruptcy plan and anticipates a larger than expected surplus for the 2015 fiscal year.
But it also hits on recent actuarial projections that suggest the city’s required contribution to its two pension funds in 2024 could jump by more than $80 million.
The state-mandated review commission was installed to oversee the city’s finances after bankruptcy and to ensure that Detroit complies with its court-approved exit plan.
Detroit’s bankruptcy “grand bargain” funding plan relieves the city from much of the contributions to the General Retirement System and Police and Fire Retirement System through 2023. But in 2024, the city would have to start funding a substantial portion of the pension obligations to the systems from its general fund.
The amount projected in fiscal year 2024 was contemplated at $113.9 million. But this month, the actuarial firm for Detroit’s retirement systems issued a report that suggests the city’s general fund contribution in 2024 would increase to about $196 million, says Detroit’s Finance Director John Naglick.
Among the factors cited in the study by Southfield-based Gabriel Roeder Smith & Company is mortality data used in the city’s bankruptcy plan projections. Initially, the assumptions had been based on 2000 mortality tables. Gabriel Roeder performed a mortality study for each pension system for years 2008 to 2013, which concluded in early 2015. The pension systems changed mortality tables from year 2000 to fully generational 2014 mortality tables, wrote Ronald L. Rose, executive director of the Financial Review Commission.
The plan also assumed the plan would be effective June 30, 2014. It actually went into effect on Dec. 10, 2014, and it took a few months to implement the changes, the letter says.
Naglick said findings from the pension fund actuaries have prompted the city to seek an expert to examine how the plans could potentially be funded sooner or what other options Detroit might have. The city hopes to have the consultant on board early next year.
“Now that you look at these early numbers, they are higher than what the plan assumed,” he said. “It’s suggests that the retiree cuts could have been substantially more if these numbers would have been fully known.”
Under the bankruptcy plan, general workers took a 4.5 percent base cut in pensions and saw the elimination of an annual cost-of-living increase. The pensions of police and firefighters were not cut, but an annual 2.25 percent cost-of-living adjustment was reduced to about 1 percent.
The city’s plan of adjustment laid out a schedule for pension payments for the first 10 years. In the year ending June 30, 2015, the state contributed $96 million and foundations chipped in $18.3 million toward the police and fire fund. Additionally, the state paid $98.8 million and the Detroit Institute of Arts kicked in $5 million for the general retirement fund.
Foundations have a nine-year commitment of $18.3 million annually toward funding police and fire pensions and the DIA is to contribute $5 million toward general pensioners each of those years.
The city’s general fund did pay $12.5 million into the general pension for 2015 and is to pay $20 million each year between 2016-19. Detroit’s Water and Sewerage Department also is paying into the fund.
Naglick and Rose noted that changes in the projections over the next few years could be positive or negative.