Cate Long wrote an important piece at her Reuters blog today on the possibility that Detroit’s emergency manager has over-inflated the city’s pension liabilities. As Long notes (and as I describe in the post below), Orr changed the way the city measures its pension liabilities without disclosing the methodology used. This change triggered a nearly five-fold jump in stated liabilities, producing a $3.5 billion figure that has now become taken for granted in news coverage of the bankruptcy. Without knowing the methodology, it’s impossible to know how accurate that figure is.
Long’s post is about some new information that has come to light in a Pensions & Investments article, which describes the methodology used based on a copy of the report from Milliman, the new actuary. According to the article, Milliman got to the $3.5 billion figure in part by adding the value of the city’s outstanding pension bonds to its existing remaining unfunded liabilities. To call this “unorthodox” as one actuary did in the P&I article would be a big understatement – the bond liabilities are not part of the pension itself, but are owed by the city.
If Orr is taking this approach, then there are some serious problems with the numbers he has cited about the city’s indebtedness Here is the rundown of the city’s on- and off-balance-sheet debts from Orr’s June presentation to creditors (all figures in billions):
The liabilities for the pensions and the bonds in that report were listed and summed separately as part of the $18 billion total. If Orr did in fact incorporate the bonds into the pension liabilities, then he is double-counting the bonds.
There is an argument to be made that regardless of where they fall on the balance sheet, both the bonds and the unfunded liabilities are obligations related to the pensions that the city can’t pay. But that’s not the argument Orr has been making in the press – he has been consistent in citing the $3.5 billion figure as belonging to the pensions themselves, along with the $18 billion figure as the city’s total debt.
As to why Orr would do this, the incentives are obvious. Inflating the liability numbers contributes to a Thatcher-esque TINA environment around the entire bankruptcy that helps make big concessions from creditors seem inevitable. This is doubly true of the pensions, which have been the focus of much of the reporting on Detroit.
Orr’s own statements have also made it increasingly difficult to give him the benefit of the doubt. In an NPR interview yesterday, Orr was asked about the fairness of reneging on obligations to city employees who had held up their end of the labor contract. His first response was to say that the employees, like everyone else in the city, had been let down by their leaders. The interviewer then asked him whether that wasn’t arguing for punishing the retirees for the behavior of the city government. Orr’s response:
ORR: Well, you know, the workers, in a sense, you’re right, you know, they’re sort of caught with that reality, but also they voted for the leadership of some of their pensions. I mean, Robert, you’ve done stories on Detroit before and you’ve heard about numerous members and sometimes the attorneys representing them ended up going to jail for graft.
So these were indicators that even the most casual observer, but certainly someone who is interested in the pension process, you know, probably should’ve looked at it a little bit harder and wondered how they were being managed and then, unfortunately, birds have come home to roost now.
First of all, it’s unusual for public sector union members to elect anywhere near a majority of the boards that oversee their pensions, so Orr is blaming the victims for something they had little control over. Second, I have no doubt some members were “wondering how they were being managed” – what exactly were they able to do? Orr didn’t say, but the implication that the members were somehow at fault was glaring enough that the interviewer pushed Orr on it, at which point he completely changed gears and fell back on his mantra:
It doesn’t matter what I say. It doesn’t matter what we look back on. There’s just no money.
That statement would be a lot easier to accept if he would release the actuarial report. Simply declaring mathematical inevitability when your numbers don’t add up is not the way to an equitable solution. Especially when your instinct is to blame the retirees for failures they had no control over.