The battle over control of Detroit’s two pension funds is heating up, with big consequences for city retirees and other creditors as the city creeps closer to possible bankruptcy.
Detroit has two pension funds: A general retirement system for most employees, and a separate system for the police and fire departments.
The dispute revolves around how well-funded both systems are. The exact number is key, because state law allows emergency managers to replace pension boards if a system is funded below 80%.
According to their own numbers, both Detroit pension funds look pretty healthy. The general retirement system is funded at a fairly strong 77%, while police and fire is even better off at 98%.
But Detroit emergency manager Kevyn Orr has questioned these numbers. Because the city hasn’t been making all its pension payments, “We didn’t think numbers added up based on what the pension fund was telling us,” said Orr spokesman Bill Nowling.
So Orr commissioned Milliman, a national actuarial firm, to look at the numbers. What they found is that the pension funds used “generous” assumptions to calculate how well-funded they are.
When those were adjusted and re-calculated using more conservative assumptions, “You come up with an underfunding level that is significantly higher than what has been reported previously,” says Nowling.
In fact, Orr’s office now estimates that the general retirement fund is only about 65% funded, while the police and fire fund is closer to 78%. In his proposal to renegotiate the city’s debt, Orr pegged Detroit’s unfunded pension liabilities at $3.5 billion.
So this comes down to a dispute based on projections, who’s using the right models to figure out what Detroit actually owes its retirees? Because Orr is proposing to cut pensions along with other city debt — and slashing most bond and pension debt equally — getting that amount right becomes an important goal.
Cate Long, who blogs about municipal finance issues for Reuters, questions how Orr’s numbers ballooned so quickly. She notes that the pension funds’ own actuarial firm, Gabriel Roeder Smith, is also well-respected.
“Really, what you have is a battle between two nationally-recognized actuaries about the health of these plans,” Long says. “These are both very highly regarded actuaries. So as to the truth underlying Orr’s assertions, we’ll have to wait and see.”
The city pension funds stand by their numbers, and have put aside $5 million to fight a potential takeover in court.
Orr, meanwhile, has ordered an investigation into possible mismanagement and corruption within the pension funds.
A restructuring advisor told Detroit’s financial advisory board on Monday that both funds are down a combined $1.6 billion in both payouts and asset losses over the past 5 years.
