Detroit's two public pension funds are under intense scrutiny and might undergo structural changes to reduce the unfunded pension liabilities, said Kevyn D. Orr, the city's emergency manager.
It is clear that “Detroit spends more than it takes in — it is clearly insolvent on a cash-flow basis,” Mr. Orr said in his first report since being appointed emergency manager on March 25.
What is not clear, Mr. Orr's report stressed, is the true funded status of the $2.77 billion Detroit General Retirement System and the $3.4 billion Detroit Police and Fire Retirement System.
Earlier this year, the state's Detroit Finance Review Team reported that the city's long-term liabilities included $2.1 billion of pension liabilities, of which $1.45 billion were pension obligation certificates, akin to pension obligation bonds.
The funded status of DGRS was 83%, while that of PFRS was 100%, according to June 30, 2011, valuation reports from outside actuaries cited in Mr. Orr's report. But a pension task force Mr. Orr appointed is zooming in on pension valuation practices.
The task force is reviewing pension data and “the reasonableness of the assumptions underlying them, as well as certain disconcerting past practices associated with both pension funds that have adversely affected funding levels,” the report said.
For example, the actuarial value of each plan includes proceeds of 2005 pension obligation certificate sales — $740 million for DGRS and $631 million for PFRS — but “actuarial liabilities do not reflect the obligations to the holders of the POCs,” the report said.
Also, because of seven-year smoothing practices, as of June 30, 2011, the market values of the two plans were much lower than the actuarial values: $660 million less for DGRS and $425 million less for PFRS.
Mr. Orr said city officials and external advisers are looking for ways to reduce pension and retiree health plan liabilities to cut costs and that he “may suggest modifications to the plans” to be sure they are structurally sound.
Mr. Orr could not be reached for an interview, and William Nowling, his spokesman, did not return a call seeking more information.