Detroit’s pension problems, in one chart

July 19, 2013

The Detroit Free Press has a long, detailed breakdown of Detroit's pension woes. Here's the key chart:

Detroit currently owes $3.5 billion on its pension funds and writes checks to about 21,000 retired city employees and their widows, most of whom get around $1,600 per month.

As you can see from the chart above, pensions are far from the only problem with Detroit's finances. That $3.5 billion amounts to about one-sixth of Detroit's total debts, and the city's pensioners have argued that they shouldn't have to bear the brunt of the pain from restructuring.

Still, as the Free Press lays out, those pension obligations have become unsustainable, not least since there are now more retirees than workers paying into the system: "The city can’t pay what it owes the funds this year, much less make up its arrearage."

So how did Detroit reach this point? The story is complicated:

There wasn’t any one thing that brought Detroit’s pension funds to this low point. Bad decisions were compounded by bad luck, and sometimes decisions that seemed sound wound up causing more problems than they solved. ...

The city has struggled to meet its pension obligations since the 1950s. Post-war Detroit invested heavily in infrastructure, shortchanging the pension funds to pay for those improvements. Then came the auto industry recession of the late 1950s, leaving city finances in a tailspin, and leading to the first city income tax imposition.

For elected officials, frequent defaults on pension obligations to save operating cash became something close to standard operating procedure. So far, it hasn’t affected pension checks, which are paid out of money that was invested years before. But it blows a hole in the 30-year projections and long-term solvency, and it requires bigger payments from the city than would originally have been necessary. ...

Detroit officials have also made a habit of convincing unions to accept pension sweeteners — shorter terms of employment required, more generous multipliers, or a “13th check,” essentially an annual bonus — rather than pay increases. But that has raised pensions costs and had the unintended effect of shrinking the city’s work force to the point where employee contributions can’t keep pace with the needs of current pension recipients.

By 2005, the city was forced to borrow $1.4 billion to plug a hole in its pension fund, and everything really collapsed with the financial crisis in 2008. So now that the city's has declared bankruptcy, many of those retirees could take a big cut to both their pensions and health benefits.

Here's a list of some of the possible changes coming for Detroit's retirees. And here's a piece by Detroit columnist Susan Tompor talking to many of those retirees. She notes that many firefighters, police officers, and other city employees didn't pay into Social Security while they were working — for many, their pension checks are their main source of income.

Also note that Detroit is hardly the only municipality with unfunded or underfunded pensions. Last year, Moody's estimated that U.S. states and localities had run up $2 trillion in unfunded liabilities here.

Further reading:

--An overview of how Detroit became bankrupt in the first place.

--Here's how Detroit's bankruptcy will actually work.

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