June 21, 2013

Detroit's Future Vs Employees Pension

Whether Detroit has a bright future may get down to if its employees and retirees refuse to take cuts in their pension contracts. When an entity like Detroit goes through reorganization because of poor financial condition the pain must be fairly distributed. If it is not, Detroit will continue to sputter along and never return to greatness. In this case the major parties include the creditors, labor, the City's citizens, retirees and business. All must be treated fairly. If they are not, the city will collapse under its own weight and continue to whither.

Per a report issued by the city of Detroit on June 14, 2013, Detroit's pension plans have unfunded liabilities of approximately $2,8 billion. Either the city has to find funds or lower the benefits going to retirees. If the employees refuse, other areas of the city will need to sacrifice or assets must be sold. Selling assets does not solve the problem, it just defers it.

Per the above report, "During the year 2012, more than 38% of the City's annual revenue was consumed servicing legacy liabilities (pensions and benefits to retirees)." If the city is to operate in a healthy fashion while providing basic services to its citizens and businesses, this is not sustainable. Too much of the revenue generated by the city is going towards retirees and not enough is going towards providing competitive services to its citizens. If this does not change, citizens and businesses will continue to vacate the city and the retirees will lose out anyway.

In summary, there are two issues with the City's legacy cost. The present amount owed to retirees is underfunded and secondly the annual amount needed to contribute to future benefits owed must be reduced. If not, the city will continue to experience a reduction of population due to poor service.

Through the sale of assets, the City needs to properly fund its existing liabilities to its present retirees and the portion of  retirement costs already accrued to its current employees. It then must calculate what future retirement benefits it can pay its existing employees and amend their retirement contracts accordingly, including any healthcare costs.

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