Detroit's pension shortfall raises red flags about bankruptcy plan assumptions
Detroit is already facing an unexpectedly large shortfall in its pension fund.
That raises some red flags about assumptions baked into the city’s post-bankruptcy financial plan. The city exited bankruptcy in late 2014.
Detroit Mayor Mike Duggan revealed the shortfall in his annual state of the city address Tuesday.
He said the fund will be short around $490 million by 2024.
The size of the gap and its quick appearance surprised many.
“There were concerns coming out of the bankruptcy about the pension system and its impact on the city. So unfortunately it appears those issues have emerged sooner than expected,” said Eric Scorsone, a municipal finance expert at Michigan State University.
Scorsone said the city will have to find some way to fill that gap in the next eight years, and that means less money to invest in Detroit’s recovery—something Duggan plans to address during a budget presentation to City Council Thursday.
Duggan blames the pension hole on former emergency manager Kevyn Orr, and the various consultants who crunched the numbers during Detroit’s bankruptcy.
Duggan said it appears they used outdated life expectancy tables “to make the numbers look more favorable.”
Though Duggan mentioned possible legal action against the consultants, proving deliberate wrongdoing is unlikely and “actuaries have some degree of discretion in terms of how they do their work,” Scorsone said.
And when it comes to big pension funds over long periods, a lot hinges on the long-term guesses they make on factors ranging from life expectancy to rates of return.
And Scorsone says even small tweaks to any of those assumptions can yield totally different outcomes. “Certainly, any of those little assumptions like that over 30 years adds up to millions and millions of dollars in difference,” he said.