The Police and Fire Pensions Board decided to adopt a 20-year payment schedule because it felt this was the best way to ensure the solvency of pension funds – simply put, to ensure the security of benefits for retired civil servants. They approved it over objections from city-aligned members, including city chief financial officer John Naglick and deputy mayor Conrad Mallett.
Rolling 30-year amortization is like “having a huge credit card bill and making the minimum payment every month,” said Joe Bogdahn, chairman of the Police and Fire Retirement System Investment Committee. , or PFRS, at Crain’s last year.
“The (Police & Fire Retirement System) has a fiduciary duty to ensure that benefits are paid to retired police officers, firefighters and their beneficiaries,” Chairman Ron Thomas said in a news release Tuesday. “Furthermore, it is our duty as a board to ensure that system funds are properly invested and managed to ensure future funding. Trustees have heard from our actuaries and other financial advisors who have performed numerous what-if scenarios based on multiple funding models including 30-year, 20-year and others with respect to repayment of the unfunded portion of future pension obligations The 20-year model is clearly in the best interest of retirees .
But much like taking 10 years off a 30-year mortgage, the chosen plan will significantly increase the city’s upfront costs.
The city agreed in its bankruptcy filing to a 30-year amortization with the pension systems “in the room,” Duggan said Monday.
“They accepted that,” he said. “Now we have an investment committee that was basically appointed by (former Governor Rick Snyder) who doesn’t report to anyone, who voted to shorten the amortization to 20 years.”
Detroit finance officials estimate pension contributions will total between $130 million and $200 million a year, depending on the schedule, which equates to 20% of the annual budget.
While the police and firefighters pension commission has decided on a 20-year amortization, the general pension scheme for other city employees, separate from the police and firefighters, is still assumed to be 30 years in city documents.
A request for comment from the general pension system was not returned on Tuesday.
In a June 2020 report, actuaries at Gabriel Roeder Smith & Co. warned that a 30-year dollar amortization would cause the funding level of the general pension system to drop dramatically to just 12% by 2045, as benefits paid to retirees exceed city deposits. and investment gains. That’s not good because if asset levels get low enough over the next few years, to the point of insolvency, benefits are paid out of the city’s already stressed budget from year to year, David Draine, a senior public sector pension system investigator for The Pew Charitable Trusts, Crain said last year.