Detroit reached a tentative settlement with bond holders representing $388 million this week to take 74 cents on the dollar. The $50 million in savings that would result from the settlement would go to lower income retirees, who still face a 26% cut, compared with cuts of 6% for police and fire fighters.
Though it could be a sign of things to come, the city is still facing $18 billion of debt and hoping to emerge from bankruptcy in October. The deal, which still needs to be approved by the bankruptcy judge, also depends on the over $800 million pledged by foundations and the state of Michigan so that the city will not have to sell its art collection. One entity offered the city a $2 billion loan using the art as collateral.
Meanwhile, Chicago Mayor Rahm Emmanuel (D) is trying to deal with the city’s pension deficit by reducing benefits, raising property taxes, increasing worker contributions and lowering COLAs. Chicago’s pension deficit is the largest in the country, at $20 billion and only 34% funded.
Both Emmanuel, who is facing reelection next year, and Illinois Gov. Pat Quinn (D), who faces reelection this year and has proposed his own pension reforms, face a tough road ahead with public employee unions — though we are beginning to see signs that unions may cooperate. Other cities facing similar crises include Philadelphia (a $5.3 billion pension deficit and 48% funded), Jacksonville ($1.65 billion) and New York City.
Meanwhile, one study estimated that 34 state pensions are less than 80% funded. The total amount in state and local pension plans was $5.6 trillion at the end of 2013, according to the ICI.
The biggest reason cited for the problem is the failure of public entities to adequately fund pension plans, as politicians kick the can down the road and may not have the most sophisticated people overseeing the investments. The Geneva Association, an international insurance economic think tank, believes that the solution is reform, not just more funding. A study from the group recommends a four-part approach:
• a universal public system such as Social Security;
• an occupational pensions system supported by employers under government financial supervision;
• private savings using financial intermediaries; and
• continued employment through the removal of barriers to partial employment of retirees.
“[A solution] must come from real reform that at least lowers or eliminates bankruptcy costs and establishes better governance,” says the study’s author Krzysztof Ostaszewski, the actuarial program director at Illinois State University.
