03.21.14

Motor City Public Pension Plans. The funded level of the Detroit’s two pension plans is projected to have dropped, a result tied in part to the city’s failure to contribute millions owed last year, actuaries for the boards say. The city’s Police and Fire Retirement System learned during a presentation Thursday that its funded level of 96.1 percent is projected to have fallen to 89 percent as of June 30, 2013.

The preliminary draft, which reflects the funding decline, factors in $71 million in unpaid contributions from the city in 2013. The funds are also operating under the assumption that Detroit will not pay another $63 million it owes by the close of the current fiscal year on June 30. The impact of that loss would be reflected in an actuarial report next year.

Yesterday, the city’s General Retirement System received its preliminary draft, which pegs its funded level at 70 percent for 2013, said Tina Bassett, a spokeswoman for the fund. The funded level for the GRS had been around 78 percent. Ms. Bassett said the GRS is owed $36 million in payments from the city from last year. It is expected to be owed $80.6 million for 2014. The city has said it stopped paying into the funds because it could no longer afford to do so. “The missed contributions are a very big deal,” Judy Kermans, Midwest regional director for Gabriel, Roeder, Smith & Company, told the PFRS board. “It is our opinion that you get that money as soon as possible. No bones about it … you need that money.” After the presentation, PFRS Chairman George Orzech remarked: “They (the city) don’t contribute. You heard the results.”

The fund has written off the missed contributions for accounting purposes, but says it has not relinquished the claims. Emergency Manager Kevyn Orr has said the city would not make further contributions to the funds during the city’s Chapter 9 bankruptcy, except under a confirmed debt-cutting plan of adjustment. Bill Nowling, a spokesman for Orr, said Thursday that the city does expect the funds to be repaid. “The city owes that and to the extent that the city will repay that, that’s the subject of ongoing negotiations,” Nowling said. Gabriel Roeder actuaries on Thursday noted that the board should collect the owed funds in a lump sum. If they do not or cannot, it would essentially be amortizing the past-due amount over 28 years.

Not only is the lack of contributions from the city hurting the funds, they both are rolling in losses from prior fiscal years. Both funds experienced market gains in 2013, the actuaries have noted. “Certainly there has been great impact due to the fact that the city has not made its contributions,” Bassett said Thursday, noting the GRS fund earned on its investments, but that gains were minimized due to the city’s lack of contributions to the plan. “If we had that money, we could have been investing it and making more on it,” she added. Mr. Nowling conceded that the nonpayment has contributed to the underfunding of the pensions, but says many factors are to blame: “It’s the result of bad planning, bad investment decisions and just lack of oversight,” he said.

Earlier this month, the police and fire fund announced it had outperformed 89 percent of the public pension plans in its class during the 2013 calendar year. The fund, at that time, said it had earned 18.5 percent on its portfolio investments, ranking it near the top among plans in the U.S. with assets of more than $1 billion. “Who has got $3.3 billion and who is in bankruptcy?” Bruce Babiarz, a spokesman for the fund, said in response to claims of poor investment and planning. “We had an economic breakdown in the country and truly in the world. Had that not occurred, Detroit would be in better shape, so would the pensions,” Bassett said. “That’s truly what happened.”

This week’s presentations come after attorneys for the funds argued this week that federal judges should rush an appeal of the city’s bankruptcy eligibility, since thousands of retirees face poverty if Detroit is permitted to slash pensions. The funds are asking the 6th U.S. Circuit Court of Appeals to hold oral arguments in mid- to late June before Detroit seeks approval of a restructuring plan that proposes cuts to municipal pensions and other benefits.

In his debt-cutting plan, Orr is calling for a 26 percent reduction in pensions for non-uniform employees, if they agree not to pursue a sale of city-owned art or drag out litigation over state constitutional protections of pensions. If they don’t accept a “timely settlement” within the next month, Orr said they could see their pensions reduced 34 percent. Police and fire pensioners would get a 4 percent cut if they accept Orr’s deal or a 10 percent cut if they continue to fight the proposal in court, according to the plan. “We want to assure retirees we are still negotiating in good faith and we will get through this bankruptcy,” Bassett added.

City retirees are seeking protections from cuts to more than $18 billion in city debt, including an estimated $3.5 billion long-term liability in the two pension funds. Orr is urging pensioners to accept an $815 million rescue package and to drop the appeal. The police and fire fund’s obligation to current retirees and beneficiaries is $2.9 billion and is 100 percent funded at current levels. The obligation to active duty beneficiaries is $777 million and is 47 percent funded, partly due to the lack of employer contributions. Actuaries on Thursday said retirees within the police and fire fund outnumber actives by a ratio of 2 1/2 to 1. The fund has experienced a reduction in workforce from about 5,000 in 2004 to 3,266 in 2013. It has about 8,476 members receiving pensions. The average pension for PFRS is about $31,000 a year, including annuities, and beneficiaries do not get Social Security.

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