Detroit: A pension fantasyland

Headlines blare: “Detroit Avoids Fiscal Collapse With Landmark Pension Overhaul”

The reality is quite the opposite.  As in New Jersey, Detroit has assured fiscal collapse by passing weak reforms that artificially reduce contribution ‘requirements’ while leaving the unsustainable benefit structure in place and even crowing about their accomplishments.

The reforms to the Detroit Police and Fire Retirement System consist of:

• Defined benefit pension plan multiplier reduced for service accrued by members after Sept. 1.
• Pension benefits earned based on service rendered after Sept. 1 will no longer receive an annual COLA escalation.
• New hires would receive an annual employer contribution of 10% of the participant’s annual base salary and an annual employee contribution of 5%.
• a 13th trustee will be appointed by the parties to assure against tie votes.

Two minor benefit changes applicable only to future accruals, doing presumably younger new-hires a favor by putting them in a generous Defined Contribution plan, and adding one trustee.  That’s it.

Current retirees won’t be disturbed, for now, but the actuaries have more to work with to lower the city’s contribution, augmenting what they were provided in May when the Board of Trustees, “after consultation with its actuary (Gabriel Roeder Smith & Company), voted to

• (i) increase its assumed actuarial rate to 8%,
• (ii) change its smoothing period to seven years from its current three-year period, and
• (iii) adopt a 30-year amortization period.”

with the Board of Trustees noting  “that the employer sponsor of the Retirement System is likely to be pleased with the result of the above action, being the reduction of the employer contribution to the fund of approximately $47.7 million for the 2011-2012 fiscal year.”

According to the June 30, 2010 audit report the Detroit Police & Fire Pension Plan had about $3 billion, largely due to proceeds from the pension obligation certificates of obligation (COPs) that the city sold in 2005 and 2006.  Annual payouts are around $300 million and contributions for the last few years have averaged $45 million (25% employee).  There were 9,448 retirees (8,560 under the DB plan and 88 under the DC) and about half the money is in stocks with another 20% in real-estate related investments.

All the factors remain in place for fiscal collapse and five years from now when Detroit Police and Firemen are told the truth the only difference is that it won’t be in a Central Falls auditorium but in Cobo.