Detroit’s Hidden Pension Shortfall

The June 30, 2012 valuation for the Detroit Police and Fire Retirement System is out* and it claims that the system is 96.1% funded with $3,675,459,604 in assets to cover $3,822,676,002 in liabilities, an enviable ratio for most public pension plans these days.  So why the need for cuts?  What’s the problem?

Basically that the valuation is a joke.  It doesn’t honestly value the pension liabilities it recognizes while ignoring others and  pretends to have more money than it reports is in the plan.  What they try to hide:

1) The market value of assets as of 6/30/12 is really $2,974,461,633  The extra $701 million is a pretend number based on what was in the fund over the last 7 years and has no place in any discussion among serious company.

2) $552,110,000 of that asset amount is the remaining principal on a 2005 bond issue that brought $630,829,189 into the plan to make it appear fully funded then.  That is a pension obligation though the money is supposed to be going to bondholders.  I say ‘supposed’ because Detroit defaulted on that bond issue last week.

3) The plan includes a Defined Contribution component where participants put in 5% of pay which theoretically they will get returned to them with interest.  The value of those accounts as of 6/30/12 was $215,827,424 and should be reduced from both the asset and liability side when considering the actual pension portion.

4) Two years ago pensions for incoming police officers were replaced by a one-time payment at retirement outside the plan (unspecified as far as I could find):
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It’s supposed to save “over the next few years tens of millions of dollars” in pension contributions but when those people retire (if Detroit exists) there will hundreds of millions of unfunded liabilities for someone to deal with.

5) Liabilities are grossly understated.  Based on the terms of the plan, with 8,451 retirees getting an average of $30,607 annually (with a 2.25% COLA for most), another 975 participants entitled to future benefits, and a DROP component, the real liability for pensions alone would be close to double what’s reported.

Put it all together and you have maybe $2 billion that the trust can call its own to pay for $6 billion in liabilities with $300 million in benefit payouts going out annually and what Detroit is determined to be $0 in employer contributions coming in.  An ugly situation that takes a lot of actuarial lipstick to pretty up for the stakeholders.

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* Still waiting on the 6/30/12 General Retirement System valuation which is suspiciously late but that’s likely because it’s even worse than the PFRS numbers even with the lipstick.

13 responses to this post.

  1. Posted by brooklyn91941 on June 20, 2013 at 1:02 pm

    Doesn’t the lipstick case eventually un out? Where do we in NJ stand with our Pension Obligation Bonds?

    Reply

  2. Posted by Tough Love on June 20, 2013 at 1:04 pm

    I suggest you e-mail this write-up to the President of the American Academy of Actuaries stating that such “professional’ valuations are an embarrassment to the profession.

    Ask how he feels it will reflect upon the profession when a Plan supposedly 96+% fund quickly fails in a rising equity market.

    Reply

    • I would think that question is being posed to him and others right about now. Interesting to see what responses they work out.

      It’s kind of like a rating agency that has a company at AA+ until the day after they default. They manage to find some way to explain their culpability away.

      Reply

  3. Posted by howardmba2 on June 21, 2013 at 11:56 am

    lipstick?I think that it does show that even the most well thought out planswhich include pension plan smoothing as cetera…..eventually hit the fan so to speak.

    Reply

  4. Posted by eatingdogfood on June 22, 2013 at 10:57 pm

    If The Democrats Didn’t Give ” Sweetheart Deals ” To Your Public Service Union.
    Goon Employees To Get Reelected; You Would Have Plenty Of Money and The.
    Taxpayer would have Some Spare Change in His Pockets! Democratic Hustler
    Politicians + Corrupt Union Goons = BANKRUPTCY BABY! Time To Bring.
    RICO Conspiracy Charges Against The Hustler Corrupt Democrats and the.
    Criminal Unions!

    Reply

  5. A preliminary actuary report on the other city pension fund, the Police and Fire Retirement System, pegged its funding level at 96.1 percent for the fiscal year ending June 30, 2012. Fund officials on Thursday said a final assessment confirmed the findings. The general system had contended its funding level was 83 percent. On Thursday, the general retirement system issued a statement saying the draft copy of its actuarial valuation puts the funding level at 77 percent.

    Reply

  6. Posted by Anonymous on June 25, 2013 at 2:47 pm

    What was the point of depositing 1.68 billion into the pension fund. Wasnt that just throwing the money away? How did that actually help or hurt

    Reply

    • Stated reason was that the trust could do better on the investments than the bond interest they were paying.

      More likely reason is that:
      1) it would be future taxpayers who were picking up the past underfunding; and
      2) Funded ratios look a lot better as those bond IOUs get counted as real money.

      Reply

  7. […] Blog offers some skeptical scrutiny for Detroit’s recent rosy valuation of its Police and Fire Retirement System. The city claims the […]

    Reply

  8. 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.

    Reply

  9. […] low or no contributions) must perforce be actuarially sound we now have GASB, Moody’s and Detroit saying otherwise.  Opinion-makers have […]

    Reply

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