Legislation doesn't address pension underfunding
Numerous media reports are misinterpreting the way Detroit's retirement system will operate going forward.
According to the Associated Press, the bills eliminate, "a provision that would have required new hires to have 401(k)-only retirement plans once collective bargaining contracts expire. Instead, the city and unions could negotiate for pension or hybrid plans as long as the city does not contribute more than 7 percent of an employee's salary to retirement."
However, the bill does not limit the city's contributions nor does it address the ability for the city to rack up more unfunded liabilities — an essential reason that Detroit is in bankruptcy court to begin with.
First, the bill only specifies that it would have an option of providing benefits to employees hired after July 1, 2023.
Moreover, it's not clear that the city's contributions would actually be limited to 7 percent of an employee's salary.
The bill states: "The city may offer retirement plans so long as the city does not contribute more than 7 percent of the employee's base pay to an appropriate retirement account."
To determine a city's obligation to fund pension benefits, payments are split into different means. One is the normal cost, that is, the cost it takes to prefund benefits that employees earn in a year. The other is the cost to catch up on any unfunded liabilities, the amortization payment.
The normal costs are calculated for the entire employment class and put in the retirement system so they're not technically made to "an appropriate retirement account." Actuaries do not calculate the value of the pensions earned by each employee individually, but rather as a group. However, this could be roughly translatable to "an appropriate retirement account," and the normal costs could be limited to 7 percent of payroll.
But this would not apparently apply to the amortization payment, which is paid to the system in general. If the pension funds develop an unfunded liability, the payments to amortize this liability would not be limited to 7 percent.