Study: Detroit can make good on pension promises
A new report on Detroit’s employee and retiree pension promises suggests the city should be able to make good on them if its investments meet their projected targets.
But the report, released Wednesday by nonprofit Pew Charitable Trusts, warned budget challenges and unforeseen costs could still derail such a possibility.
Pew Charitable Trusts, an independent nonprofit, on Wednesday released its report, “The Challenge of Meeting Detroit’s Pension Promises,” evaluating the overall health of the pension systems.
The report recommends city officials make adjustments to increase the viability of the plan that was forged as part of Detroit’s bankruptcy proceedings. Among them is to set a funding policy beyond 2023 for its pension plans, plan for liquidity issues caused by potentially 20 years of negative cash flow as well as manage administrative costs.
“Detroit’s recent steps to plan for future pension costs are proactive and commendable, but other issues identified in the analysis could impede the path to enduring fiscal soundness,” the report says.
Critics have been concerned about overly rosy financial projections cast as Detroit exited bankruptcy and so monitoring their trajectory has been seen as essential to avoid catastrophic financial problems decades later.
“A strength we see in how Detroit has managed its pension challenges is how the city reacted to the worsening news with a plan to address the issue,” said David Draine, senior officer of the public sector retirement systems project for Pew Charitable Trusts. “The city has started setting aside funds now to make it easier to return to making actuarial contributions in 2024.”
Draine noted updated assumptions have increased the estimated unfunded liability by 2024 by $1.3 billion to about $2.7 billion.
Draine said by 2024, there is expected to be nearly $400 million in a trust fund, “which will help the city meet the additional cost of this $1.3 billion in extra pension debt as well as any other subsequent challenges.”
Under the oversight of Detroit Emergency Manager Kevyn Orr, the city ended its bankruptcy period in 2014 after filing for Chapter 9 in July 2013. That filing allowed the city to get rid of $7 billion in debt, restructure another $3 billion and put about $1.7 billion into service improvements. But it also cut $7.8 billion from payments to its retired workers and allowed the city to escape $4.3 billion in retirement health care benefits.
A funding plan that was key to Detroit’s bankruptcy exit — coined the “grand bargain” — relieved the city of much of its financial obligations through 2023. But in 2024, the city will have to start funding a substantial portion of the pension obligations from its general fund for the General Retirement System as well as the Police and Fire Retirement System.
If earnings meet the bankruptcy plan’s assumed return rate, the city’s contribution in 2024 will be closer to $167 million, officials noted last year in revised estimates. If there are no earnings, it could soar to $344 million or more. The contributions would be annual, not one-time payments, and could continue for 20 to 30 years.
The Duggan administration announced plans last year for the dedicated fund they project will pull together $377 million in the coming years to help address the pension shortfall that comes due in 2024.
The Pew report says city officials should, among other things, closely coordinate decision-making with the investment committees of the two retirement systems.
"Coming out of bankruptcy there was no greater priority for me than ensuring our pensioners receive the money they earned after decades of service to the City of Detroit and after the concessions they made, which was central to our ability to exit bankruptcy,” Council President Pro-tem Mary Sheffield said.
“Thus far, I have relied on information received from Detroit's Chief Financial Officer with respect to ensuring we were taking the necessary steps to prepare for any potential shortfall in meeting our obligation to our pensioners. In light of the report issued by the Pew Charitable Trusts, I will be initiating further discussions and eliciting opinions from our legislative policy division and the CFO to get their responses to the issues raised.”
In one dire scenario in the Pew report, the General Retirement System could potentially run out of money between 2038 and 2044.
The city of Detroit would be on the hook to cover costs directly out of the city budget rather than from pension assets in a pay-as-you-go situation, Draine said.
“If the GRS runs out of money, the city is obligated to pay their checks,” he said. “Retirees can feel secure there will be money around to cut the checks they’re depending on.”
But Draine added: “This would be a concern if making the pension payments would require a major increase in city payments, but what the numbers actually show is that a moderate bump in employer contributions would be sufficient to directly make pension.”
John Naglick, the city's finance director, said the General Retirement System has $2 billion in assets with a liability to retirees of $3 billion while the Police and Fire Retirement System also is $1 billion behind with $3 billion in assets with a $4 billion liability.
“The city realizes that substantially more funding will be required to the two legacy pension plans beginning in 2024, and is planning to work with the board of trustees of both boards to come up with a funding policy well in advance of 2024,” Naglick said.
The General Retirement System has 23,000 retirees or beneficiaries who either are drawing or will draw pensions, while the Police and Fire Retirement System has 14,000 retirees or beneficiaries who are drawing or will draw pensions.
“Many governments around the country have the same issues relative to pensions as we do, so developing best practices for solutions is the name of the game,” Naglick said.