BLOOMBERG - Further excitement in the
The pensions are now fighting back, challenging this assessment.
Pension funds spokesman Bruce Babiarz said the report "was bought and paid for by the city, but it's not a true actuarial analysis of the funds." The funds, which say they have a total of about $5 billion in assets, estimate they are now underfunded by about $650 million.
Officials working for Mr. Orr said their estimates of a 7% rate of return on the funds' investments is more realistic than the 8% used by the funds, which they said was too high because it didn't account for demographic changes of pensionholders and the funds' investment mix. The emergency manager also estimates the funds' assets based on current market values rather than actuarial values over the life of the beneficiaries, reduces the impact of a "smoothing" process that can mask losses and cuts the amortization period for the liability by about half.
The first obvious question is: Whos right? You can read the reports
If youve followed my writing, you wont be surprised to hear that Im with the actuaries on this: The unions' expectations are
Heres the really interesting question, however: Why is the pension fund arguing about this? Heading into the bankruptcy, a pension fund would normally try to inflate the underfunding estimates as high as possible, not minimize them. Thats because the unfunded pension liability is treated as an unsecured debt; it has to assemble with other unsecured creditors to collect whatevers left over after the secured creditors have been paid. The bigger the claim, the larger the amount youre likely to collect.
Chapter 9 bankruptcy is a little different, of course. Still, it doesnt seem possible that transforming a $3.5 billion claim into a claim for less than $700 million could be in their interest. So why are they fighting this estimate so hard?
One possibility is that
Because theyre trying to keep the city out of bankruptcy altogether, says the Wall Street Journal.
While pension shortfalls are only part of the city's $18 billion in estimated liabilities, any challenge to the city's calculations could give ammunition to those who question if Mr. Orr moved too quickly to seek bankruptcy protection for the city at the behest of Gov. Rick Snyder, who has insisted that Detroit is insolvent. A trial on whether Detroit is eligible for bankruptcy protection is scheduled for Oct. 23. The funds and others argued in their filings that cutting benefits earned by the city's employees and retirees would violate the state constitution. The city's largest public employee union, Michigan Council 25 of the American Federation of State, County and Municipal Employees, said in a court paper that the city's emergency manager "hastily commenced" the Chapter 9 filing to "slash pension and other post-employment benefit obligations."
This seems more delusionally optimistic than their projected investment returns. The city is running out of cash -- in fact, it already has run out of cash, which is why it is borrowing to pay pension contributions and
Oh, perhaps Detroit could somehow stave off the inevitable for a while, but you can't easily envision a situation in which the city suddenly and for no apparent reason develops hundreds of millions of dollars of extra tax revenue. If its not this year, it will be the next, or the one after -- and the union pensions will take their haircuts, just the same.
The people who actually have good reason to fight this are the unsecured creditors, who are likely to see their share reduced if the citys assessment stands. Although Im sympathetic to their plight, Im also sympathetic to the folks who worked for decades, and now face the possibility that the pensions they expected will be drastically cut -- in at least some cases without even Social Security to fall back on. Unfortunately, for Detroits creditors, there arent any happy options left -- just a reasonably fair allocation of the losses.