Last week Detroit outlined its plan for necessary financial restructuring in bankruptcy. The emergency management team reviewed the cities public pension plans and found that the combined underfunding totaled $3.5 billion for the $2.77 billion Detroit General Retirement System and the $3.4 billion Detroit Police and Fire Retirement System, including the COPs and swaps liabilities. In particular the committee found that previous aggressive actuarial assumptions “substantially understated” funded status for each city pension plan.
“At this level of underfunding, the city would have to contribute approximately $200 (million) to $350 million annually to fully fund currently accrued, vested benefits. Such contributions will not be made under the plan…
“Because the amounts realized on the underfunding claims (the COPs and swaps unsecured debt) will be substantially less than the underfunding amount, there must be significant cuts in accrued, vested pension amounts for both active and currently retired persons.”
And finally the creditor committee articulated the painful truth about the high paid risk-sellers, fancy products and their aggressive return assumptions: “As discussed in the creditors’meeting today, if these pension funds’ assets had just been invested in a conservative way, instead of investing in risky development projects around the city and loans that will never be repaid, they probably would be fully funded now.“
These are timeless words admitting a truth that most financial ‘engineers’, investment firms, and their clients try to avoid at repeated peril. The answer to financial health and sustainable plans is not in subjecting capital to higher and higher risk but rather in higher contributions/savings and carefully controlled risk that focuses first on minimizing capital losses. Cat just leapt out of the bag in Detroit… See: Detroit Plan includes ‘significant cuts’ to pension benefits.