Forum du Crain on the town’s pensions
“I think the biggest question I would ask myself if I were a dependent retiree (of the legacy system) is, ‘Are they going to make the 2024 payment?’” Said David Draine, senior investigator of the retirement system of the public sector for The Pew Charitable Trusts which studied Detroit pension funds. “Which, everything they said I’ve seen says they plan to do it. When that happens, if I were a retiree, I would feel more confident in my benefits.”
The city is working to prepare for fiscal 2024, and the Retiree Protection Fund isn’t the only way to do it, according to City Councilor Benson.
Detroit is looking to increase its revenue by attracting business investment, he said.
Whatever the intentions, Detroit faces an uphill battle as its population continues to shrink, the pandemic has hurt economic gains, and spending is expected to exceed income as of fiscal 2025.
The city is also going to have money released as the bond debts are paid off and the money allocated for them will decline slightly in the years to come, Benson said.
Even with all of this planning, Detroit’s budget is highly at risk. On the one hand, there are fluctuations in the performance of pension assets – and they have done less than expected, according to Moody’s. Public pensions across the United States have faced a crisis of underfunding in recent years. But experts, including Draine, say that in general the funds have performed better than expected in the pandemic. However, that doesn’t mean they’re out of the woods.
Pension plans in general have investment return assumptions that are far too optimistic, around 7%, and they fall short of those expectations, said Donald Boyd, a government tax expert at Rockefeller College of Public Affairs and Policy of the University of Albany in New York.
In Detroit, its general pension system recorded returns of -0.96% in FY2020, and the Police and Fire Department (PFRS) pension system recorded returns of 1.6%, according to documents from the city budget office. This means they were performing well below the assumed 6.75% rate of return negotiated during bankruptcy – and would help drive the increasingly expensive payment estimates.