Detroit Gives Pensioners a Sleight of Hand
Detroit doesn’t have any money. Rather, it doesn’t have enough money: It cannot both pay its debts and run the city. That’s why the city filed for bankruptcy some months back, over the outraged protests of pensioners who stand to lose a big chunk of their monthly checks.
Today, those pensioners are breathing a little easier. The city seems to have struck a deal that will leave their pensions in better shape than previously feared. Instead of cutting those monthly checks by as much as a third, the city will trim them by less than 5 percent.
How did they make such a big change? In part by assuming higher investment returns:
The city initially factored in rates of 6.25 percent and 6.5 percent for the two funds, but eventually agreed that the funds could be presumed to do better -- 6.75 percent -- because of an improved outlook based on the funds’ 2013 performance as compared with 2012.
The city also promises lower or no cost-of-living adjustments, and less in the way of retiree health benefits. And the proceeds from a proposed deal, not yet agreed upon, to save the Detroit Institute of Arts’ collection by soliciting a mix of state and private funds to pay off the pensioners.
Naturally, many other creditors are unhappy. And taxpayers should probably be wary, too. Raising the assumed rate of return on your pension funds is every government’s favorite way to lower its required pension contribution, but if the assumptions don’t pan out, the city will still be on the hook for the pensions -- or back in bankruptcy again. It’s particularly risky if you just had a nice big run-up in the stock market, which seems to promise untold future riches. That, of course, is usually when the market is preparing for a correction.
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