Detroit’s pension math

August 30, 2013

A lot of ink has been spilled over the assertions of Kevyn Orr, Detroit’s emergency manager, on the level of funding in Detroit’s pensions (Okay, I might be the leader of that pack). The issue has bearing on the benefits that Detroit’s retirees will receive, as well as how much cash-flow the city will have to service its bonds and other debts. The pension question is a major point in Detroit’s bankruptcy negotiations. Reuters described the situation like this:

Detroit’s largest unsecured creditors are its two pension funds, which have claims totaling nearly $3.5 billion in unfunded liabilities, according to a city estimate included in a bankruptcy filing. Pension funds and unions dispute the estimate, claiming Orr has overstated the underfunding.

Orr has said he based the city estimate on ‘more realistic assumptions’ than previously used. His figure is five times more than the $644 million gap the pension funds reported based on 2011 actuarial valuations.

Orr has said many times that Detroit’s two pension funds have overstated their funding levels and used inappropriate assumptions in their valuations. But guess what? The state of Michigan uses almost identical assumptions as Detroit. Michigan’s Employee Retirement System is funded at a 10 percent lower level than Detroit’s General Retirement System (the lesser funded of the two systems).

Orr’s hired actuary, Milliman, has recommended the use of a 6.3-6.5 percent return rate. This varies from the 7.9-8.0 percent rate that is used by Detroit and the State of Michigan. Using the lower rate inflates the unfunded liabilities that Detroit’s pensions face. But curiously, in an advisory to its corporate pension clients, Milliman cites a 7.5 percent rate for estimating median investment returns. It would be interesting to hear Milliman’s explanation for this discrepancy.

Detroit’s nine-member retiree committee, filled with union workers and an official from the United Auto Workers, has just hired Dentons law firm and Salans, Fraser Milner Casgrain to represent them in the bankruptcy proceedings, according to the Detroit News. These law firms may want to examine the exceedingly harsh assumptions that Orr uses to value Detroit’s pensions and how they differ so significantly from what the State of Michigan uses.

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Thank you for this insight into the bankruptcy shenanigans surrounding Detroit.

Posted by oraibi | Report as abusive