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Finance - Investments Sub-forum: Non-Actuarial Personal Finance/Investing

 
 
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Old 05-23-2016, 03:13 PM
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Mary Pat Campbell
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(yes, this is a copy of the entry in the public plans thread)

PENSIONS
ASSUMPTIONS
VALUATION

http://www.freep.com/story/news/loca...fall/84337476/

Quote:
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.

John Naglick, the city's deputy chief financial officer and finance director, told the Free Press that a committee of top officials in the Duggan administration reduced a pool of proposals to three and recently recommended one firm to the city's CFO, John Hill, who approved the suggestion.

.....
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The city now says that actuarial assumptions used in the bankruptcy were inaccurate and outdated.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.

.....
Experts have long warned that the City of Detroit could be felled again if it failed to address its pension obligations, even as the city was set to emerge from bankruptcy free of $7 billion in long-term obligations.

"Making higher contributions to the pension plans is the primary option to address the shortfall," said Matt Butler, vice president and senior analyst on the local governments team for Moody’s Investors Service. "Doing so would likely require revenue collections that outpace the city’s post-bankruptcy projections. The city has indicated that strong revenue collections may enable it to make a higher-than-budgeted pension payment this year."

....
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 lower pension obligation estimate for the city used in the bankruptcy plan was based on other outdated information, including a number that failed to anticipate that the city would be hiring employees after filing for bankruptcy who would need to become part of the pension system.

The old calculations were also based on pension cuts taking effect in June 2014, instead of nine months later in March, which underestimated the liability for the pension system, officials from the firm told its Detroit pension fund clients.

....
Actuaries advising the pension funds have insisted there is a significant risk of keeping to the original payment schedule and not adding more money: "Every potential action" should be pursued, Gabriel, Roeder, Smith said in an October report, to provide additional funding into the funds well before 2024.

​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.

But the pension funds have struggled recently. A lower average rate of return over the next several years could further inflate the city’s pension fund obligations starting in 2024 and beyond.

....
Those numbers are not expected to be set until the new consultant hired by the city has a chance to test the assumptions made by Gabriel, Roeder, Smith in its reports last fall. Gabriel, Roeder, Smith is also expected to provide the pension funds a new valuation report by next month that comes up with an updated estimate of the city’s unfunded pension liability.

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