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.”