Study: America’s Public Pensions Are Even Deeper In Debt Than Previously Thought…(They’re Toast!!)
Some funny bookkeeping practices mean that cities like Detroit face an even deeper public pension funding crisis.
By Frederick Reese
September 10, 2013
Thousands of Detroit’s police officers, firefighters, garbage collectors and other municipal workers face a future without promised compensation and even more uncertainty moving ahead.
In the wake of Detroit’s unprecedented July bankruptcy filing — making the city the largest in the United States ever to seek bankruptcy protection — an argument over the health of the city’s municipal pension fund for Detroit’s 11,645 public employees has begun. Kevyn Orr, the state-appointed emergency manager for Detroit, has argued that the city’s pension funds are underfunded by $3.5 billion. The Orr camp argues that the fund managers’ methodology in evaluating the fund’s return — namely, not using a rate of return based in reality — significantly underestimate the fund’s future liability.
What that means is this: Detroit never had the cash to pay for its employees’ pensions, despite reporting to the contrary. Under the system set up by the fund managers, the city was contributing too little toward the fund while overestimating the return on the fund’s investments. The fund would never have been able to meet its obligations, especially considering that the city’s tax base has shrunk.
The Orr camp, per a FOIA-released communique published by the Detroit Free Press, felt that depending on the methodology and “sensitivities” embraced, the rate of return should have been acknowledged at 6.3, 7.0 or 7.5 percent — far from the 8.0 percent the fund managers had been operating on.
Detroit is not alone in this. This “conflicting math” represents the growing problem with the nation’s public pension plans. According to a recently published report from State Budget Solutions, the nation’s public pensions are unfunded by 69 percent, leaving a funding gap of $4.1 trillion. Seven states, per the study, have an unfunded level of 70 percent of more — Alaska, Connecticut, Illinois, Kansas, Kentucky, Mississippi and New Hampshire — while the state with the best-funded public pension system — Wisconsin — had an unfunded level of 43 percent.