Detroit Pensioners on the Block

When Detroit filed bankruptcy this week, one of the first questions asked by thousands of city employees was: how will this affect my pension? The short answer is: not well. City pensioners will almost certainly be asked to accept less than their full benefits because the gap between pension assets and obligations in $700 million according to a June 20th statement. The underfunding could be as large as $3.5 billion. Secured creditors are being asked to accept just 20 cents on the dollar. The pensions funds suffered from an unrealistic investment return projection of 8% which caused the city to borrow $1.4 billion from Wall Street. Financial fees make a significant line item in the city's list of debts. Bad investment decisions in real estate also played a role in the pensions' inability to meet pension obligations. Real estate made up 17% of the police and fire pension and 15% of the general employee fund. Some pension board members point the finger at former Mayor Kwame Kilpatrick who did prison time for perjury and is now awaiting sentencing for federal racketeering and corruption charges.  Detroit has lost 61% of its population since 1950.

credit: Detroit News

The city's General Retirement System lost $16 million in fiscal 2011 when it wrote off a housing development near Sarasota, Florida that collapsed when the real estate bubble burst. The Police and Fire Retirement System lost $15million on vacant land east of Dallas that was to be sold to homebuilders. The funds also lost large amounts on other investments including a telecommunications company started by a Detroit businessman and a cargo airline. By far the biggest lost was the purchase of collateralized debt obligations sold to the city by financiers. Detroit lost $70 million on those derivative securities alone. Losses on derivative securities played a prominent role in the second largest municipal bankruptcy on record, that of Jefferson County, Alabama. The $1.4 billion in financing from the sale of debt to Wall Street fostered speculation by Detroit officials said one fire chief still on his fund's board. Some of the investment deals involved alleged kickbacks and gifts to city insiders, or were promoted by individuals with a good sales pitch and local high school athletic honors, but little financial acumen. City employees will now pay for the mismanagement of their pension contributions.