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by Mish

The bondholders were totally screwed in favor of the pensioners (not that I generally like bondholders).

Regardless, everything was supposed to be fixed. It wasn’t.

Please consider Detroit Picks Firm to Help Fix $195M Pension Shortfall.

Detroit is closer to figuring out how to address a hole in pension funding that is far larger than it had anticipated when it exited from bankruptcy.

The city in March put out requests for proposals seeking national firms with expertise in public pension plans to advise the city on how best to address a $195-million payment to the city’s two pension plans that comes due in 2024, under terms of the city’s exit from the nation’s largest Chapter 9 municipal bankruptcy.

Detroit’s bankruptcy exit plan, approved in December 2014, gave the city breathing room before it had to make payments to its two pension plans — the General Retirement System and the Police and Fire Retirement System — on the assumption that the city would be better able to pay once its tax base recovered post-bankruptcy. The bankruptcy blueprint called for Detroit to begin making pension payments with a $112.6-million installment in 2024.

The city now says that actuarial assumptions used in the bankruptcy were inaccurate and outdated. City officials said that new actuarial reports last year by the Gabriel, Roeder, Smith & Co. firm project Detroit may have to pay $491 million over a 30-year period beginning in 2024, including the $195-million payment the first year.

It’s a serious hit to Detroit’s budget, an increase of $83.4 million that represents about 8% of the city’s annual $1-billion general fund budget. Naglick and Hill say it could mean diverting money that was supposed to be spent on reinvesting in critical city services.

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The shortfall, first reported by the Free Press, came from the firm Gabriel, Roeder, Smith & Co., which discovered that bankruptcy advisers used outdated life-expectancy tables — estimates on how long retirees will live to collect their pensions — in projecting the city’s total pension obligation.

The revised estimate still counts on the pension funds’ assets earning 6.75% a year on its investments agreed to by the city’s emergency manager and pension officials in bankruptcy mediation talks.

Flawed Assumptions

It’s hard to know where to begin with this nonsense.

Not only were the actuarial assumptions off to the tune of 8% of the entire city budget, the reported shortfall “still counts on the pension funds’ assets earning 6.75% a year on its investments“.

That’s a position I find highly unlikely at best.

Here’s the kicker.

The Police and Fire Board of Trustees and Investment Committee have adopted a new investment policy and are working diligently to ensure the best returns possible under the circumstances of today’s economy,” said Police and Fire Retirement System, spokesman Bruce Babiarz.

It sure sounds like the committee plans on over-weighting equities over bonds at precisely the worst possible time.

One Big Worldwide Bubble

After all is said and done, Detroit will not be close to the top of the list of the largest municipal bankruptcies in US history.

Absurd pension promises are the reason.

I side with Milton Berg, founder and CEO of MB advisors says“One Big Worldwide Bubble”: Cusp of 30-Year Bear Market in Stocks and Bonds.

Mike “Mish” Shedlock