Derivative Losses, Bad Bets, And Aggressive Assumptions Leave Detroit's Pensions Massively Underfunded

Tyler Durden's picture

Late last week, Detroit's emergency manager Kevyn Orr, outlined his plan to stop a disaster becoming a catastrophe in the slumping city. The initial suspension of payment on pension obligation bonds is just the start as Orr warns unsecured creditors may only receive up to 10 cents on the dollar as about $2.5 billion in general unsecured debt won't be recovered. Rather incredibly, the city's General and Police and Fire retirement systems have a combined underfunding of $3.5 billion made worse by "aggressive actuarial assumptions," and "investing in risky development projects around the city and loans that will never be repaid." Under more realistic assumptions the funding status of the two pensions drops from 83% and 100% to 65% and 78% and he notes that "if these pension funds' assets had just been invested in a conservative way," as opposed to the political and reach-for-yield driven extravagance, "they probably would be fully funded now." The bottom line is not just creditor haircuts but,"significant cuts in accrued, vested pension amounts for both active and currently retired persons."

Via Pensions and Investments Online,



Unsecured creditors may only receive up to 10 cents on the dollar under Mr. Orr's plan; his team said about $2.5 billion in general unsecured debt won't be recovered.


Detroit's liabilities total $17 billion, including $1.4 billion related to COPs and an additional $344 million in marked-to-market swaps related to the COPs, according to Mr. Orr's creditor plan.




Mr. Orr's pension fund analysis found that previous “aggressive actuarial assumptions” resulted in “substantially understated” funded status for each city pension plan. The funded status of the General Retirement System was 83%, while that of the police and fire fund was 100%, according to June 30, 2011, independent valuations.


Recalculations based on “more reasonable assumptions” substantially lowered the funded status of the General Retirement System to 65%, and the police and fire system to 78%, according to Mr. Orr's creditor plan.




“Because the amounts realized on the underfunding claims (the COPs and swaps unsecured debt) will be substantially less than the underfunding amount, there must be significant cuts in accrued, vested pension amounts for both active and currently retired persons,” the creditor proposal said.




“As discussed in the creditors' meeting today, if these pension funds' assets had just been invested in a conservative way, instead of investing in risky development projects around the city and loans that will never be repaid, they probably would be fully funded now,”

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MillionDollarBonus_'s picture

This pension disaster is a typical example of how CORPRO-CAPITALISM destroys a country. How many more disasters do we have to endure before people wake up and opt for a fairer and more equal society where the poor and sick are taken care of and the billionares pay their fair share?

Manthong's picture

Government employee pensions might be reduced but will be saved.. influential union pensions, too.

Anybody else.. SOL.

It is the way the system will attempt to preserve itself (at the expense of freedom and justice).


Some people got some book-learning to do..

It's Corpro-Statism that is the problem and it allows the concept of capitalism to be bastardized.

By MDB’s definition, the Nazis were capitalists..

Joe Davola's picture

I entered "investments" into google translate Politica -> English and it returned "fuck the taxpayer while lining my supporters pockets"

flacon's picture

BrotherJohnF has a good exposition about the Detroit Pension Ponzi. Turns out the ponzi goes deeper and affects other pension ponzi's too. This should come as no surprise. 


Pension Ponzi

Never One Roach's picture

<<loans that will never be repaid>>


So, who got those 'loans?'


BTW, excellent video by Brother John above, esp his "Cascading Defaults" illustrations. Scary.

youngman's picture

The loans were given by the city to someone who said they were going to bebuild a building or start a business...but ended up just stealing the happens in all big cities....Denver has a minority area...5 points..where mayors give loans to minority develpoers that never get repaid...there is a hotel there that has been remodeled/restored 5 times since I have lived there...always suposed to be a big jobs tourist attraction.....alls it is is a payoff for getting out the vote...millions jobs....its a joke...but its political...liberal politics at its worst...

smlbizman's picture

i do love the flavor they try to pass off we're all in this together....and i go on record as i will no longer hold the sheep dog depends on me to do him right, so no peanut butter...just because the sheep like peanut butter they still trusted their masters,

Midasking's picture

exactly why there will be no taper.... democratic mob will rule! Everyone will get their check.. it just won't buy much..

EscapeKey's picture

Socialists love the word "fair", because it's completely meaningless.

But obviously, in their interpretation it means that "someone else" has to pay my expenses. Because that's fair to me.

Popo's picture

And what makes the argument for socialism particularly outrageous in this case is that Big Labor is exactly what destroyed Detroit.



EscapeKey's picture

In 1913, Argentina were the 3rd richest nation on earth.

Then, they elected a socialist.

PT's picture


No, cheap foreign labour destroyed Detroit.  Or over-priced real-estate destroyed Detroit.  I too could work for 2 dollars per week if my mortgage was only 5 cents per week.  But if I only earn 2 dollars per week then don't expect me to buy a car for 25 grand...  WTF doesn't anyone think these things through? 

Things that go bump's picture

It took a long time for Henry Ford to actually grasp this concept and he was dragged to it kicking and screaming before he finally raised the salaries of his employees enough so that they could afford to purchase his product. He had a miserly nature, as many of those successful early industrialists did, but his self interest finally won out. It must have been an epic battle. A whole new generation of industrialists who have forgotten the lessons of the past will need to learn this for themselves. It is so tedius that as a species we repeat the same mistakes over and over again.

youngman's picture

Looks like the APPLE industrialists have this figured

scatterbrains's picture

you have no voice what so ever in the war that will erupt between the banks (that were bailed out via fed's printing and onshoring of trillions of worthless paper) and the union workers who's pensions will get dick for a bailout.  Fair is fair and maybe HMS might want to consider doubling their ammo stash when that day comes.

LawsofPhysics's picture

I agree, someone collected fees and got a bonus for selling all those financial "products".  Line those people up and execute every last one of them.  Nice work MDB, I second your call to roll the motherfucking guillotines.

imbtween's picture

In this case it is no surprise that they've cut the police force in half - if I were among the kleptocrats who destroyed the city and stole the cops' pensions, I'd want less of them walking around heavily armed.

PT's picture

imbtween:  If the population halved then it makes sense to halve the police force.  Or did I miss something?  (Perhaps the high crime rate ...)

Never One Roach's picture

My Dad says there is a retired cop from Detroit who just bought a $924,000 house down the way...paid don't think I'll ever see that  kind of bread.

Things that go bump's picture

I saw one on House Hunters a while back who lived in an enormous house outside Seatle with panoramic and unobstructed ocean views. He was looking for a vacation home in the Caribbean. I didn't think honest cops saw that kind of money.

MisterMousePotato's picture

"I didn't think honest cops saw that kind of money."

Then you are delusional.

Urban Redneck's picture

And then there are the pension trustees who also got bonuses for purchasing financial "products" and marking their values to whatever would keep the monkeys happy... so they could go to their next posh "investing" conference on their investor's dime.

Are you sure you aren't taking your rage against the guy who lifted your wife's jewelry out on the pawnshop owner who served as a willing fence?  

Umh's picture

Let us not forget the stupid politicians and bureaucrats that bought the products.

Hippocratic Oaf's picture

If they would have just invested conservatively.........


sluggo's picture

I think it's "Pigs get fat, Hogs get slaughtered". But you made your point!

Gold Eyed Cat's picture

Detroit. Democrats. Corruption. Unions. Epic Fiscal Failures.

But MillionDollarBonus' go-to move is to blame capitalism.  And in all caps, like a total jackwagon.  Doc No is right, MDB has become a real bore.  He should relocate to France with that crap and live the life of his wet socialist dreams.

Everyone with 3 brain cells understands 100% asset confiscation from all billionairs still can't get us out of the hole we are currently in.  It would only guarentee Atlas would shrug and any remaining business would hit the exits.

That fair share crap is a tool for Nazis and communists.  What better way to control the game... than to control what is fair.  


Freddie's picture

MDB is troll and he posts his crap as a joke to get us to laugh.  It is a joke but that one was pretty weak.   We used to have more entertaining trolls here.  Most are a joke to get a laugh and they are not serious.  

Kirk2NCC1701's picture

1. MDB, "Fair Share" of taxes is only one part of the bigger problem, which is (a) Fraudulent monetary system (privately-issued fiat + FRB), and (b) perpetuated by crooked politicians and casino capitalists.

2.  MDB, define "fair share".  I'll take a shot at it...

   2.a. Use Excel and graph this:  Use X-axis for Taxes between 0 and 100% (0.0-1.0)

   2.b. On Primary Y-Axis, use Taxable Income.  On Secondary Y-axis, use Log(Income).

   2.c. Decide Min and Max tax points of X-axis, that correspond to Income.  E.g., 5% for $5000/yr, 45% for $1M/yr

   2.d. Draw a straight line on the Log(income) scale between Min and Max points.  You now have a LOG-based taxation system.  BTW, Nature just loves the log (exponential) scale!  Learn to understand it, and to stop fighting the Laws of Nature.

   2.e. Treat Earned Income same as Investment Income.  Still OK for investors, but not so 'OK' for an FRB Ponzi system that needs to keep growing.

   2.f. If you want to get really creative, you can have a Surtax for the > $1M/yr (above the 45%) crowd, but they get a say on where the money is going.  There are, say, 4 buckets for collection of Surtax: 1. Federal, 2. State, 3. Local (City/County), 4. Charity. 

Set limit for Min and Max on each, so that all get something, but the rich taxpayer gets a direct say on who gets more (a lot) and who gets less (little).  The rich taxpayer thus gets a direct tax-vote for supporting whatever level of Gov that he likes/dislikes and show his 'benevolence' via contributions to Charities. 

The various levels of Gov and Charity are now competing for Surtax on a meritorious basis (no pork-barrel amendments!), showing a track record of Performance vs. Cost.  The rich also get public recognition for their charitable contribution, which their egos love anyway.  If not, then they are psychos or sociopaths (giving nothing back?), who do not deserve the public's sympathy or support, and can also be publicly 'acknowledged'.  People may then choose to not favor their products or services, if so inclined.  Free Markets, baby!

There, ya go.  No arbitrary/capricious component to it.  Taxes become REALLY simple, a 5th grader could do it.  On the 'down side', it would down-size the IRS and a lot of CPA jobs.  Sorry.  And if this 5th grade math is too complicated for you, learn to live with whatever decisions the "6th Graders & Beyond" make for you.

p.s. IF (and that's a big 'IF') you had a "fair" system, I remain highly skeptical that things would be "fixed" for good -- because the need of the FRB and its owners is now curtailed, and they could no longer support (select!) their preferred (chosen!) political candidate, since these candidates are now also handicapped with how much they can spend.  Even the MIC would now have to live within its means, and therefore gunboat diplomacy and the NWO (global Manifest Destiny) is now 'shot'.  Do you think that this will happen?  I think not!


DaddyO's picture

Just wait until the pensioners quit receiving their checks and the real end game will come into view.

More government bailout...


ejmoosa's picture

Is it too late to declare Detroit a Gun Free Zone?


LawsofPhysics's picture

LOL, indeed.  would probably have better luck declaring gravity illegal.

Groundhog Day's picture

The retired police officers and firefighters milked the system by doing all the overtime in the last 3 years of their 25 year term to get a huge bump in their pay for life lottery ticket.  I can't wait till the funds run out so i can see the working cops go after the retired cops for fucking up the system (at least partly- they'll have to go after the bankers for some of the fraud as well) Fun times straight ahead

waterhorse's picture

As I've always said, there is NOT ONE of these government workers that is worth a 100K+ pension.  NOT ONE.

SilverRhino's picture

I have a beautiful and cruel idea. Let the city start paying out the retirees pensions with the 'market value' of foreclosed / tax liened properties in Detroit.  

Got a pension worth $250K?   Here are 5 city lots and one derelict building.   PS: Now you can start paying taxes on these places.   

Assign the lots randomly as well,  no playing favorites.

Oh, and cap the pensions at $500K or so ... after all, it's only being "fair" ... 

TJ00's picture

Just wait until retired SWAT members quit receiving their checks and the real end game will come into view. FTFY

Dr. No's picture

However, the Fund managers all received their promised bonuses throughout the years.   The fundamental objective of the managed funds was satisified.

EscapeKey's picture

Well, yes, but otherwise they might have lost all the "talent".

fonzannoon's picture

"if these pension funds' assets had just been invested in a conservative way," as opposed to the political and reach-for-yield driven extravagance, "they probably would be fully funded now."

They should have bought 5 year treasuries paying .5%?

Fucking hysterical. ZIRP crushed the whole thing and yet a few days worth of POMO sprayed in their direction could make the whole thing go away.

EscapeKey's picture

Add leverage.

Lots and lots of leverage.

After all, we all know risk has been eliminated.

Hippocratic Oaf's picture



Im sure when they started, probably averaged 4 to 5% treas.

When the bonds get called they have to buy riskier product that makes $$$$ only for the banks writing the debt.

Bernank helped ZIRP Detroit faster down the toilet 

MarsInScorpio's picture

Watch Bernanke go invisible when he finally quits. IF - and that's a very big IF - the muppets ever figure this all out, they will make Brazil look peaceful.


Of course, that will only come IF the ghetto dwellers lose thier welfare, meds, and most importanlt of all . . . CABLE TV!!


patb's picture

ZIRP is crushing a lot of pension systems,  the 5 years of zero fixed income return is causing a lot of plans to go underfunded.



ExpendableOne's picture

"pomo sprayed in their direction" == "I fart in your general direction!", snort!  Histerical....


Real life zombie movies coming to your town soon.

hampsterwheel's picture

They'll all be bailed out - have no fear - no defaults are allowed - none - niente - nada

El Viejo's picture


I wonder how the Madoff victims made out?? Or the Corzined?? How many nickels on the dollar??

In the case of Madoff some were totally reimbursed:


peter4805's picture

Things not looking good in Debtroit. I can't understand how a city with such a high percentage of liberals and blacks is doing so poorly.

Big Corked Boots's picture

Clearly, their policies were inadequately implemented.

They should be given the opportunity to go "all-in."