Detroit pension problems: Who is right?

Detroit emergency manager, city pension boards in battle

By Rod Meloni - Reporter, CFP ®

DETROIT - This is why we have judges!

It is going to be one of Judge Steven Rhodes' jobs to determine the city of Detroit's pension underfunding level as part of Detroit's Chapter 9 municipal bankruptcy filing. Should the city eventually qualify for Chapter 9 the pension underfunding -- or lack thereof -- is a particularly important number; vital because it will, in large measure, determine whether Detroit's retirees have to take a significant cut in their pension benefits. This, for many, could be the difference between eating or not.

Read more: Meeting seeks to clear air on Detroit pension shortfalls

There has been a pitched battle between Detroit Emergency Manager Kevyn Orr and the City of Detroit Pension Boards. Orr has asked for an audit of just how the pension boards are run because he suspects wrongdoing that has left the pensions underfunded by roughly three and a half billion dollars. The Pension Boards vehemently deny that number and claim to have no idea where Orr came up with that number.

So Orr brought in the nationally-known Milliman Actuarial Group to ballpark the numbers for him. Two reports came out Monday essentially saying the pensions are underfunded by a lot, particularly the general pension fund. It estimates the shortfall not in hard numbers but in percentages. Milliman says the general fund is between 40 and 50 percent underfunded depending on the scenario you run. Miliman says the police and fire pension fund is 20 to 30 percent underfunded but it is not in seriously dire straits considering the federal government allows to keep these pensions funded at roughly 80 percent at any given time.

So what do you do here? Orr awaits his audit, and he also is considering putting someone [perhaps even himself] in charge of the general pension fund. This is according to Orr's spokesman Bill Nowling. But Nowling also said the federal government has changed the generally accepted accounting practices when it comes to pensions and he says the feds are getting stricter in their requirements for municipalities to become more conservative with their assumptions.

Milliman's report is not a deep dive into the numbers, and now Orr wants that. The only thing left as the Chapter 9 filing moves toward the next gear is for the pension board members and Milliman to start talking about where the funding levels lie.

On Monday they held their first meeting inside city hall. They obviously will not bridge this funding gap problem in one meeting but the fact they spoke at all is a new and happy development. Perhaps they can meet in the middle, perhaps not. If they can't then the judge will decide. Twenty thousand pensioners are hoping they can get this right and have more money than the projections are saying right now.

When this happens it will be the fulcrum moment for Detroit's retirees in this Chapter 9 case.

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