Trust will earmark $377M for Detroit pension payments

Christine Ferretti
The Detroit News

The Duggan administration is proposing a dedicated fund that officials project will pull together $377 million in the coming years to help address a looming Detroit pension shortfall in 2024.

Mayor Mike Duggan gave an overview of the Retiree Protection Fund to Detroit’s City Council during his presentation of the proposed $1 billion general fund budget for the 2017-18 fiscal year.

The mayor said he will ask the council to create the dedicated account for retirees, above the required contributions laid out in Detroit’s bankruptcy plan. The fund would gather interest and investment earnings so that by 2023 it would have $377 million to help manage massive payments the city must begin contributing in 2024.

“The retirees in this city already had their pensions cut once, and we need to make sure it never happens again,” Duggan said. “We will have a dedicated account that has to be used for retirees. We can’t hit a budget problem and take it back out.”

The pension issue has been a key priority for the administration. The future payments were first contemplated in the city’s debt-cutting bankruptcy plan at $113.9 million. But officials later said the estimates were off because they were based in part on outdated mortality tables. The city has since hired an actuarial consultant to develop a method for calculating the payments.

If earnings meet the bankruptcy plan’s assumed return rate, the city’s contribution in 2024 would be $167 million. If there are no earnings, it could soar to $344 million or more, officials have said. The contributions to the pensions would be annual, not one-time payments, and could continue for 20 to 30 years.

The city’s bankruptcy plan required the city to contribute $20 million per year from its general fund toward pension obligations in the 2016-19 fiscal years. In 2024-26, Detroit must contribute about $143.2 million from its general fund.

By the end of this year, $90 million will be in the trust and begin earning interest, officials said.

The administration proposes the general fund contribution to the protection fund would be $15 million in the 2018 fiscal year, $20 million in 2019, $45 million in 2020, $50 million in 2021, $55 million in 2022 and $60 million for 2023.

As the trust builds up, the general fund obligation would be significantly lessened to $64.7 million in 2024, $69 million in 2025 and $75 million in 2026, according to city projections.

The council will evaluate the proposed allocations during upcoming budget hearings.

“This is our pitch on how to fund it,” said John Naglick, Detroit’s finance director, said of the pension obligations. “Council will wrestle with it and they’ll say ‘can we afford that?’ Maybe they’ll say we need to tighten our belt a little bit and put more in. That could happen.”

Duggan said Thursday he and Detroit Chief Financial Officer John Hill were misled by Detroit’s former emergency manager Kevyn Orr and his team about the range of assumptions from actuaries factored into the city’s debt-cutting bankruptcy plan. The two, he contends, were kept in the dark while testifying on the feasibility of the city’s plan during the bankruptcy trial. Orr could not be immediately reached Thursday.

The city is evaluating whether they have a legal case over the emergency manager’s obligation to disclose the information. In the interim, Duggan said, Detroit can’t wait to act.

Councilman Scott Benson said Thursday he wants assurances the protection fund will be managed by a city-based minority firm.

“I’m very concerned about who manages that money,” Benson told Duggan.

In 2016, the council approved $30 million in funding for the pensions and $10 million more in each fiscal year from 2017-20. The city is also expected to send an amendment that will move $50 million in surplus from the current year to the retiree protection fund.

On Thursday, Duggan also covered plans to increase funding next year for recreation, public safety and beefed-up planning efforts. Specifically, he said the city will hire 19 additional neighborhood planners to help speed up efforts to rebuild the neighborhoods.

“For too long, the neighborhood haven’t had anyone to talk to, to plan together,” Duggan said.

The council also received the four-year financial plan for the 2018-21 fiscal years.

Duggan said 41 percent of the proposed budget is dedicated public safety, mainly for the city’s police department. There are 177 officers in the police academy, and the budget calls for 130 more. For fire, the focus is on upgrading facilities and getting more trucks.

About 75 percent of general fund revenues are income, property, wagering and utility taxes, plus state revenue sharing dollars. The budget covers 9,435 jobs that represent an increase of 268 positions — just over 100 in recreation.

The city is overseen by Detroit’s state-appointed Financial Review Commission, which must sign off on its budget plan, certain contracts and other financial transactions.

The commission must be given the city’s proposed budget on March 23, 100 days prior to the start of the next fiscal year on July 1.