Detroit Breakdown

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J Geils Detroit Breakdown

The New York Times today is reporting that

Detroit is eligible to shed billions in debt in the largest public bankruptcy ever in the United States, a federal judge ruled Tuesday, while also finding that the public pensions could be reduced during reorganization despite a provision in Michigan’s Constitution.

and that

Under the ruling, the vastly diminished city… will be allowed to search for a way to pay off some portion of its debts and to restore essential services to tolerable levels under court supervision. The goal, according to Kevyn Orr, an emergency manager appointed by the state of Michigan, is to emerge from court protection next year with a formal plan for starting over.

Beth Healy of the Boston Globe covered a report and a new web tool that we created this summer.  The tool, MassPensions, allows you to view the performance and a treasure trove of data on the performance of over 100 public pension systems int he Commonwealth.

“As a rule of thumb, a pension fund which is 90 percent or more funded is considered in a good condition,’’ said Iliya Atanasov, Pioneer’s senior fellow on finance. “Someone who is 50 or 60 percent funded is considered really bad. Less than that is dismal.”

Springfield is ranked lowest, its pension 29 percent funded, down from a high of 57 percent in 2000. The city has a pension liability of $925.6 million and assets set aside so far of $258.7 million. It has 2,900 retirees and 4,800 active workers.

The conventional wisdom in Massachusetts is that we have nothing to worry about — nothing compared to Detroit.  But what percentage of its operating budget would Springfield have to put into payments to its public pensions if it were to take the funding question seriously?  Seriously means not assuming an 8 percent rate of return — and seriously does not mean anything south of 80 percent funded.

There are other entities in trouble as well.  A recent Pioneer report demonstrates that the financial condition of the MBTA Retirement Fund (MBTARF) has worsened significantly in recent years, and the T has a $2 billion retiree healthcare liability completely unfunded. Annual pension costs have skyrocketed from 2001 to 2013 (skyrocketed = tripled) and, to make matters worse, since fiscal 2008 the T has effectively borrowed more than $80 million from MBTARP, the MBTA Police Association Plan and the Deferred Compensation Plan by underfunding them.  The result? The T’s net pension obligation has almost quintupled, from $21 million to nearly $103 million, between fiscal 2008 and fiscal 2013.

What’s a growing net pension obligation mean?  In short, it means that a pension plan is not on track to meet its deadline for full funding; interest is charged annually on the outstanding amount.

This is a real issue in Massachusetts — as J. Geils might put it that old Detroit Breakdown, Motor City Shakedown could happen here.  Much more coming from Pioneer.

Follow me on twitter at @jimstergios, visit Pioneer’s website, or check out our education posts at the Rock The Schoolhouse blog.