New Multi-Billion Health Trusts Planned for Detroit

The bankrupt city has reached a tentative deal to cut pensions and launch two VEBAs for retiree medical funding.

(April 17, 2014) – The City of Detroit has announced its latest restructuring plan, which will establish two new trusts to fund an estimated $3.3 billion in retiree health benefits.

The proposal, submitted April 16, was tentatively accepted by the General Retirement System in a closed-door session the same day, according to Reuters. An association representing the city’s other major pension, the police and fire system, also reached a deal with the city on Tuesday.

The two health funds would be structured as voluntary employee beneficiary associations (VEBA), according to the published scheme. Both would be established “on or as soon as practicable following the effective date” of the accepted plan. Health liabilities amount to $1.61 billion for general system pensioners, the city estimated, and $1.72 billion for retired police and firefighters. Retiree associations have put these figures higher.  

Detroit has a strong recent track record with the benefit vehicle. In 2009, automakers General Motors, Chrysler, and Ford joined forces to create what is now the world’s largest VEBA: the $58 billion UAW Retiree Medical Benefits Trust. Its implementation has been widely recognized in the media as resounding success thus far.  

Compared with Detroit’s prior restructuring plan, published April 1, the city has agreed to honor a much greater portion of its pension liabilities.

General system retirees who accept the offer would face a 4.5% payment cut and the elimination of cost-of-living adjustments. The prior proposal included haircuts of 26%. The city estimated these changes would shave off a quarter of its general system liabilities. 

"It is our responsibility to bring to our members and retirees the best possible deal with the best possible outcome for their consideration," said Tina Bassett, the system's spokesperson, in a statement. "The motion we passed today represents progress that allows us to move forward to continue to negotiate other details toward a final settlement agreement."

Police and fire retirees would come out better than their general system counterparts. The city has offered to honor 55% of their cost of living adjustments, and all of their promised pension payouts.

Detroit’s bankruptcy managers have not wavered on a maximum 6.75% annual return assumption for both retirement systems through 2023. In bankruptcy filings, the city cited “unrealistic” assumed rates of 7.9% and 8% as a major contributor to the pensions’ combined $3.5 billion funding shortfall. The systems’ actuaries have calculated unfunded liabilities of $1.5 billion.  

“The retirement systems' trustees and certain city officials have also engaged in a variety of practices that exacerbated and, in certain cases, masked the extent of the retirement systems' unfunded actuarial liabilities, particularly with respect to the General Retirement System,” the latest plan noted.

Health care liabilities have also contributed to Detroit’s insolvency, according to the document, in part due to “extremely generous benefit features of the programs.” 

The proposed restructuring has yet to be voted on by its scores of creditors, including individual retirement system members.

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