The Brass Tax of Politics

How To Solve Detroit’s Pension System Problem In One Easy Step


The NY Post had a good piece today by William McGurn on the state of the union (pension system) in Detroit, making the case for Detroit to switch to defined contribution plans for their union workers. McGurn is right on the mark that the such a move is critical for the city’s revitalization. Dispensing with this one particularly enormous financial burden which has added greatly to the city’s fiscal insolvency would change the city’s finances for the better going forward. However, he seems skeptical that such a radical change could ever be achieved.

There is a way to implement a change to a defined contribution system. Even though the city of Detroit is billions of dollars in debt, the emergency manager, Kevyn Orr, has the opportunity to make to make it happen.

Orr is currently at odds with the unions over the total amount that union’s two pension system are underfunded. Using the actuarial projections provided by the unions, the funds are only short by $650 million, while Orr’s calculations show that the underfunding is a good $3.5 billion. Who is right? Orr believes he is correct and some independent studies seem to back his assertions. In actuality, it doesn’t necessarily matter who is correct, because the conflict actually provides a solution for the city.

If the unions wish to argue that their pension liability is merely $650 million, the city should wholeheartedly agree to fully fund their request — with one important condition. The unions must either a) agree to a fixed annual contribution to the defined benefit plans going forward, or b) (the better solution) cease using a defined benefit plan and move to a defined contribution plan going forward for all of their employees. In either case they must take full ownership, responsibility, and management, from here on out.

Once the unions pensions are fully paid up with the $650 million from the city, they will be in a position to take over the management of their funds. Let the unions use their expertise and earn the 8% that they maintain should be readily achievable. If they can do it, their members will continue to thrive-as-usual, ultimately collecting the pensions that have been promised to them for work up to this point. If they can only earn 3-4 or 6%, it will be on them to explain to their own members why their numbers are suddenly now off.

Even though $650 million sounds like a large number to pay off and fully fund the union pensions, it is a small amount to pay for the fiduciary freedom that comes with not having to manage an incredibly complex, risky, and fiscally unsound system. Such a move will contribute greatly to the long term health of the city of Detroit.

Comments

  1. Tough Love says:

    Arguing whether the Plans are $650M or $3.5B underfunded is pointless without addressing the BENEFITS … or at least WHO will make up for the asset shortfall if investments don’t pan out.

    Clearly the Unions are saying that with CURRENT Plans assets the underfunding is only $650M. So fine, the city should agree to it as long as the Unions take the assets and assume full responsibility for all future pension payments … with Detroit having zero future risk.

    Of course we all know that that’s not what the Union wants … because in ADDITION to THAT description, they want the city to be the backstop for asset shortfalls that may occur …. which of course take us full circle back to Mr. Orr’s $3.5 best estimate of the unfunded liability.

    The “risk charge” isn’t free, and likely it’s not far from $3.5B-$650MM.

  2. Reality_Cheque says:

    The average pension in Detroit is very low, and these people don’t have social security. To deny them the pensions they earned is to say that they rank below generational welfare deatbeats. These retirees probably wouldn’t even be able to get welfare for two years, and if they could they would be a burden to the people at the federal level. The burden to support these retirements should fall on Detroit, as it was the government of Detroit that approved these benefits, underfunded these benefits, and ran off the taxpayers with unending corruption. The city of Detroit is ethically responsible to act as the backdrop to these pensions, otherwise the federal government will have to – forcing those who were not responsible for the bad decisions (taxpayers outside of Detroit) to pay for their mistakes. There would be those who say ‘let them starve’, and oddly enough that would be the same group that protects illegals, generational welfare recipients, and workman comp/SS disability scammers from the consequences of cheating the rest of us.

    • Tough Love says:

      Earth to “Realit_Checque says:”…. Detroit doesn’t have the money to pay the promised pensions now or ever…….. and the Private Sector Taxpayers have even less.

      Accept it …. you’re ‘screwed.

      I hope you enjoyed those unjust 13-th checks!

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