By David Eggert
Associated Press
MACKINAC ISLAND (AP) — The federal judge who oversaw Detroit’s historic bankruptcy case said last Thursday he is “deeply concerned” about unfunded pension liabilities in other Michigan municipalities and they should consider transitioning to 401(k) retirement plans for employees.
Steven Rhodes, who retired in February, told a crowd at the Detroit Regional Chamber’s Mackinac Policy Conference that the city is not the only one trying to figure out how to make good on promised pension payments to current and future retirees.
He said it is crucial that local governments make their pension plan contributions, which he said seems “obvious” but was not happening in Detroit before it filed for bankruptcy. Cities also tend to understate how much they will owe by assuming “too high” investment returns, he said.
“Isn’t it time for us to be thinking about moving to defined contribution (plans) just like the private sector in this country has? The policy justification for doing that is that municipalities that are having trouble making their pension payments and who otherwise are under extreme financial pressure can’t afford to take the risk that the market places on them,” Rhodes said.
Detroit emerged from Chapter 9 in December, erasing or restricting billions in debt — much of it because the city did not have enough tax revenue to cover pensions and retiree health insurance. The restructuring allows Detroit to not fund the system for nine years, after which the payments will “kick in hard and heavy” and the “city must keep its eye on and that and be prepared to make those payments when they come due so this never happens again,” Rhodes said.
He participated in a panel discussion about post-bankruptcy Detroit with U.S. District Chief Judge Gerald Rosen, who served as lead mediator in the case, former emergency manager Kevyn Orr, and Ford Foundation President Darren Walker. The Ford Foundation contributed $125 million toward a deal to prevent the sale of world-class art at the Detroit Institute of Arts and keep pension cuts from being worse.
Rosen advised cities in Michigan and around the U.S. to avoid taking on more debt without “restructuring the foundation. It’s a road to oblivion.”
“Lance the wound very quickly. Be honest. Do it,” Orr said, hinting at problems in Detroit’s home county, Wayne, where the pension system’s funding ratio of 95 percent in 2004 is now 44
percent. “It’s never going to meet its obligations at 44 percent. It can’t. It’s simple math. It can’t happen. So as long as you take that out (of the budget), you cripple the city.”
Rosen said that while there is an “aura of good feeling” about Detroit’s bankruptcy, some issues remain.
Detroit and three counties are still negotiating the spinoff of the city’s water department into a regional agency, the Great Lakes Water Authority, under the bankruptcy exit. The authority would operate and control the Detroit Water and Sewerage Department in exchange for annual lease payments from Wayne, Oakland and Macomb counties.
“The lease has to be finalized within the next couple weeks,” Rosen said. “I would encourage the parties that are hard at work on negotiating it to keep working at it. It’s critically important that that get concluded not just for Detroit but for the region and for the state.”
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