Detroit Dropped; What’s Next

The sixth ever blog post here was on the crisis in defined benefit plan funding for our major cities (updated soon after) with a drop-dead date estimated for each.  The methodology was simply projecting the numbers that were least susceptible to fudging (deposits, payouts, market value of assets) to a time when all assets would be exhausted.  Detroit’s General Retirement System and Police and Fire Plan were projected to drop dead in 2017 and 2020, respectively.  I was wrong but I have an excuse.

It wasn’t clear from the actuarial valuation reports from which the data was taken that the $5.4 billion in plan assets included $1.5 billion in Pension Obligation Bonds that were about to default or that $1.7 billion of those assets were of indeterminate value or that $600 million in employee contribution money was supposed to be a separate Defined Contribution Account.  It is clearer now and Detroit officials have set their own drop-dead date:

Orr has promised that retired city workers, police officers and firefighters will not see pensions or health benefits reduced for at least six months. But on Sunday, he said those retirement benefits will have to be cut down the road.

“There are going to be some adjustments,” Orr said on “Fox News Sunday.” “. . . We don’t have a choice.”

“This is a question of necessity,” he added.

My guess is that effective January 1, 2014 all benefits will be annuitized at market rates which could mean benefit cuts in the 50% range depending on how Howdy Doody and pals sell.

As to what city is next the obvious guess is Philadelphia but that’s not a lock.  If you only had the actuarial reports as guidance the Detroit plans, with their funded ratios far above the 80% ratio sold as acceptable, would not have been the death-pool pick two weeks ago.   We simply don’t have the information – which is the way some politicians and actuaries would have it.

 

5 responses to this post.

  1. Posted by Javagold on July 21, 2013 at 11:42 pm

    Philly is next. Guaranteed. Well IOU Guaranteed……LOL….the race to ZERO has begun

    Reply

  2. Posted by Tough Love on July 22, 2013 at 3:03 am

    I’m more interested in when NJ’s Plans go bust …… and given that they are “State” plans and States can’t file for Bankruptcy, are the Taxpayers going to be stuck with a pay-as-you-go pension system with the huge Tax increases that will cause.

    And if so, will the politicians at least have the guts to end the retiree healthcare subsidies.

    Reply

  3. Posted by Anonymous on July 22, 2013 at 3:45 pm

    If they ended the health care in retirement, all of that money could be used to satisfy pension contributions required by the State.

    Reply

  4. […] I will leave with John Bury's prediction on Detroit pensions: […]

    Reply

  5. Posted by bpaterson on July 23, 2013 at 11:54 am

    no need to apologize JB1. Your dates may be fuzzy but your reality is here.

    Reply

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