The fate of Detroit's two public pension funds is uncertain as emergency financial manager Kevyn Orr assesses just how bad the city's finances really are.
The Motor City was officially declared to be in a financial crisis in early March by Michigan Gov. Rick Snyder. Exercising his authority under state law, Mr. Snyder appointed Mr. Orr, an experienced bankruptcy attorney, to turn the city around.
The state's Detroit Finance Review Team reported in February that the city had a $327 million budget deficit last fiscal year and a cumulative cash deficit that was expected to swell above $100 million by June 30, the end of the current fiscal year.
Detroit's long-term liabilities totaled $14.99 billion as of June 30, $2.1 billion of which were pension liabilities including $1.45 billion of pension obligation certificates, akin to pension obligation bonds, the review team said.
The City of Detroit Retirement System is made up of the General Retirement System of the City of Detroit, with $2.77 billion in assets, and the Police and Fire Retirement System of the City of Detroit, with $3.4 billion in assets as of Sept. 30.
Mr. Orr could not be reached for comment. But in a March interview with Pensions & Investments' sister publication Crain's Detroit Business, he said he plans to work quickly to restructure the city's finances and hopes to avoid a Chapter 9 bankruptcy, although it is a tool at his disposal. Under a new emergency manager law that went into effect on March 28, Mr. Orr can be ousted by a two-thirds vote of the Detroit City Council and approval of the mayor after 18 months.
Given that pension liabilities represent 14% of the city's total long-term obligations and retiree health-care liabilities totaling $5.27 billion account for 38% of the obligations, sources said pension and post-retirement benefits are one of the biggest issues Mr. Orr must face.
Mr. Orr is expected to start pension fund negotiations immediately, said Patrick O'Keefe, founder and CEO of turnaround specialists O'Keefe and Associates Consulting LLC, Bloomfield Hills, Mich. “Everything is on the table, everything's possible,” Mr. O'Keefe said.
Not on the menu are the accrued benefits of city employees covered by the two pension plans, said Bettie Buss, senior research associate at the Citizens Research Council of Michigan, Livonia, which focuses on local and state government.
“The Michigan Constitution has special protections for participants in local and state defined benefit plans,” Ms. Buss said. “Providing benefits is a contractual obligation. The emergency manager of any Michigan municipality can't reduce the earned benefits of existing participants.”
3 main tasks
When it comes to pension issues, Mr. Orr has three main tasks, Ms. Buss said:
- Obtain accurate information about the status of the pension funds and the level of participants' earned benefits;
- Provide regular funding for the plans based on proper actuarial valuations; and
- Come to an agreement with all parties about the regular functioning of the pension plans.
The first two points are critical to resolving the looming pension crisis, Ms. Buss stressed. “Kevyn Orr has to insist that the actuarial assumptions for the pension plans are accurate. This is an endemic problem for Detroit, as it is for many public pension plans. You can't assume that the pension funds' reported numbers are correct.”
Cynthia A. Thomas, executive director of the Detroit Retirement System; David Cetlinski, assistant executive director, Police and Fire Retirement System; and Marilyn Roc Bedijo, assistant executive director of the General Retirement System, did not respond to telephone calls seeking comment.
The accuracy of the funded status of the plans has been the subject of considerable controversy in Motown over the past month. The General Retirement System's funded ratio was 82.8% while the Police and Fire Retirement System ratio was 99.9% as of June 30, 2011, the most recent date for which actuarial assets are available, according to P&I's analysis of data from City of Detroit's Comprehensive Annual Financial Report for the fiscal year ended June 30, 2012.
Importance of funded status
The funded status is of extreme importance because under the emergency manager rule, Mr. Orr can assume control of the pension plans if either plan's ratio falls below 80%.
The Detroit City Council hired actuarial consultant Milliman Inc., Seattle, late last year to prepare a report about ways to reduce pension and retiree benefit costs. A “very rough preliminary guesstimate” by Milliman adjusted the actuarial assets of the plans to 32% from 87% for the General Retirement System and to 50% from 102% for the Fire and Police fund as of June 30, 2010, according to the Milliman report, which was obtained by P&I.
Milliman made its adjustments by accounting for market value of the funds, the discount rate, mortality assumptions and the amount of the pension obligation certificates.
The calculation Milliman used is atypical, said David Driscoll, Boston-based principal, actuarial consultant and head of the public pension fund practice at Buck Consultants LLC, New York. “Absent an unusual circumstance, the issuer of POBs holds the liability, not the pension fund, which is merely the recipient of the proceeds of the bond sale,” Mr. Driscoll said.
Matthew Gnatek, chairman of the Police and Fire System board, said in a statement that the fund was “appalled and dismayed at the media coverage of our funding levels based on a study by a party that made no attempt whatsoever to verify any pension funding facts.” He added the plan's funded ratio was 96.1%, but he did not specify a valuation date.
Thomas Sheehan, chairman of the General Retirement System board, said in a statement that trustees were “concerned about the accuracy of the report, as it appears to be based upon preliminary reports and projections, not an actuarial report.”
Milliman spokesman Jeremy Engdahl-Johnson declined to comment.
Southfield, Mich.-based Gabriel Roeder Smith & Co., actuary for the Detroit Retirement System,issued a statement that the firm “stands by its work” for the city pension funds.
Regardless of the flap about funding ratios, Mr. Orr said he will work with industry consultants to determine what restructuring measures are fair to the city's employees and retirees.
“We have to look at what is sustainable and what is possible,” he told Crain's Detroit Business.
Kirk Pinho and Dustin Walsh, reporters for sister publication Crain's Detroit Business, contributed to this story.
This article originally appeared in the April 15, 2013 print issue as, ""Emergency czar' to look at Detroit's pension problems".