Detroit Pensions Agree to Smaller Benefit Reductions

According to a news report from the Detroit Free Press, police and fire retirees would see no cuts to monthly pension checks under the preliminary agreement, but they would absorb a reduction in cost-of-living adjustment (COLA) increases, down to 1% from 2.25%. Other retirees would see a 4.5% reduction to their monthly pension checks and the elimination of COLA increases.

This announcement comes two weeks after Detroit submitted an amended plan of adjustment for a benefit reduction of 6% and elimination of COLAs for the Police and Fire Retirement System. For General Retirement System participants, the previous offer was for a 26% pension benefit reduction and elimination of cost of living adjustments (see “Detroit Announces Planned Pension Benefit Reductions”).

One source familiar with the deal told the Detroit Free Press that the proposed pension cuts are lower than Orr’s initial offer in part because the stock market’s surge in the last 18 months improved the financial health of the pension funds, while the higher investment rate of return also lowered the unfunded liability. In his initial proposal, Orr estimated that the city’s unfunded pension liabilities totaled $3.5 billion. But that figure is expected to drop drastically when he delivers his final restructuring documents.

According to the news report, the deal comes after the city of Detroit agreed to a concession with retirees—raising the expected rate of annual investment returns for pension funds to 6.75%, which correspondingly improves their funding outlook. The city also agreed to allow the pension cuts to be reduced over time if the pension funds outperform their expected rate of return.

The two pension fund boards would stay intact under the recent deal, but an independent investment advisory committee would be established to vet all the investments the boards would make.

Board trustees for the two pension funds must still sign off on the agreement. The deal—not as good for general city retirees because, for years, their pension fund was less well-managed than the police and fire fund—could expedite Detroit’s trip through bankruptcy, the news report says.

By agreeing to support this deal, Detroit’s pension boards are expected to recommend a “yes” vote to retirees. They are also expected to drop their legal battle with the city and give up the right to sue the state over pension cuts. The state of Michigan must still agree to contribute $350 million over 20 years to the pension funds as part of the preliminary agreement.

The police and fire retiree association also agreed to support the establishment of a Voluntary Employee Beneficiary Association (VEBA) to manage retiree health care, which is expected to deliver significantly reduced benefits to retirees. A separate VEBA will be set up for general retirees.