Detroit — Moody’s Investors Service is taking note of the city’s plan for a dedicated fund to cover its future pension costs, a move the administration hopes will lead to an improved credit rating.
Moody’s, in a report released Monday, said Mayor Mike Duggan’s plan for a Retiree Protection Fund to address a significant pension contribution hike in the 2024 fiscal year is a “credit positive action.”
“Before crafting the plan, the city had not publicized a road map to set aside material funding needed for the looming cost increase,” Moody’s wrote.
Detroit Chief Financial Officer John Hill said the fund shows the city is serious about dealing with the issue head-on, and it removes one of the city’s biggest question marks. The city’s ability to meet its future pension obligations, he said, has been a top concern among rating agencies.
“That was something that was hanging over the city’s creditworthiness or future financial picture,” Hill said. “In creating this kind of structure, it shows the city’s seriousness in wanting to deal with the issue head on and also that the city is willing to put money aside to protect its obligations to its pensioners.”
Detroit’s council still must approve the administration’s plan to move $50 million in surplus to the fund this fiscal year as well as approve the creation of the trust itself that would hold and invest the funds.
Hill expects the council will take the items up before the city’s Financial Review Commission votes on the 2017-18 fiscal budget next month.
Detroit has maintained a balanced budget and has projected continued surpluses in the upcoming years, and Hill said he’s hopeful the Moody’s assessment signals the city’s credit standing could soon be upgraded.
Under the terms of its debt-cutting plan, Detroit must pay $20 million annually through the 2019 fiscal year to its two pension funds. Contributions increase significantly beginning in 2024.
Duggan, during his annual budget presentation to council last month, detailed the protection fund his administration projects would pull together $377 million in the coming years to address the shortfall. The plan sets aside cash beyond required contributions laid out in the bankruptcy plan and the fund would gather interest and investment earnings.
Future payments to the pensions were first contemplated at $113.9 million. But officials later said the estimates were off because they were based in part on outdated mortality tables.
If earnings meet the bankruptcy plan’s assumed return rate of 6.75 percent, the city’s contribution in 2024 would be $167 million. If there are no earnings, it could soar to $344 million, or more. Contributions to the pensions would be annual, not one time, and could continue for 20 to 30 years.
Duggan in recent weeks said he’s considering a lawsuit against the city’s lead bankruptcy firm Jones Day on claims Detroit’s ex-emergency manager, Kevyn Orr, and his team “concealed” assumptions used to determine the pension payments. Jones Day has denied the assertion.
Moody’s in its Monday report wrote creation of the fund follows the city’s “improved financial position,” and Detroit is on track to record its second consecutive general fund operating surplus of at least $40 million in fiscal 2017.
“Still, the sheer size of legacy liabilities could financially stress the city,” the report adds. “Once Detroit depletes the (Retiree Protection Fund), which it estimates will occur in 2033, it will be required to fund annual pension payments directly from its budget.”
The city’s general fund, Moody’s writes, will also have to absorb almost the entire $168 million cost after charitable foundation support arranged under the bankruptcy agreement stops in 2034. Lack of revenue in the forthcoming years could also challenge the city’s capacity to make growing deposits into the fund, it adds.
Hill agreed “no one knows the future,” but he stressed the fund is a “very serious effort to acknowledge the issues and deal with them over time in a very structured way.”
