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The Need for Transparency in Detroit

Kevyn Orr

SOURCE: AP/Paul Sancya

State-appointed Emergency Manager Kevyn Orr speaks during a news conference in Detroit, Michigan, Thursday, July 18, 2013.

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As Detroit’s Emergency Manager Kevyn Orr presses to advance the city’s bankruptcy filing as quickly as possible, a worrying lack of transparency undermines his claims that the city has no choice but to cut deeply into government workers’ retirement benefits. Until Orr makes public the methods he and his actuaries have used to claim that the city’s pension funds are in dire condition, no cutbacks to worker benefits should be allowed to go forward, and no claims of “good faith negotiations” can be taken seriously.

At the heart of the dispute between Orr and city workers is a basic disagreement over just how much long-term debt Detroit’s two city pension funds are facing. Publicly available data indicate only a relatively small problem, while Orr claims the pensions are in dire shape.

Orr is essentially asking the city’s janitors, librarians, and firefighters to give up the retirement benefits that they and their families have been promised for decades because, according to Orr, the benefits are just too expensive. The last official evaluation conducted by the funds’ retained actuaries, however, found that the police and firefighters’ pensions were nearly 100 percent funded and the general retirement system was 83 percent funded—figures that many public pensions across the country would envy. According to the public data, the pension funds had $644 million in combined unfunded liabilities in 2011—a significant but relatively manageable sum.

When Orr was appointed emergency manager of Detroit in March and began evaluating the city’s fiscal health, he understandably chose to look anew at the pension funds’ conditions. Instead of using the city’s retained actuaries, however, he commissioned a private report that placed the new long-term debt figure at $3.5 billion, more than five times the previously reported sum. Orr has since used this figure to help make the case that bankruptcy is the city’s only option and that there is no way around cutting public employees’ retirement benefits, despite the fact that the report he commissioned has never been publicly released.

Properly valuing the assets and liabilities of a pension fund is difficult and always subject to some uncertainty, but any proper analysis must follow accepted guidelines and be subject to public scrutiny.

Unfortunately for many city workers and retirees wondering how a pension system that offers less-generous benefits than many other major cities could so quickly spiral out of control, it is currently impossible to evaluate the merits of the methods used by Orr and his actuaries. Experts, however, generally find that pension liabilities do not explode with so little warning, indicating that the private report’s assumptions should be subject to great scrutiny. Indeed, a recent evaluation by major investment advisor Morningstar asserted that the city’s original assumptions used to derive the $644 million figure were largely in line with standard practice, calling into question the changes that must have been made to arrive at the $3.5 billion figure. Furthermore, multiple sources have reported that the private consultants hired to calculate this new total referred to their own figures as “very rough preliminary guesstimates.”

While Orr has repeatedly criticized previous actuaries’ assumptions as overly optimistic, his failure to disclose the exact assumptions of his own analysis calls into question not only the legitimacy of the alterations made but also the intentions behind them.

It may well be a coincidence that the new estimates bring both pension funds’ funding levels well below 80 percent—which, according to Michigan law, now gives Orr the power to replace their boards of trustees—but without the public release of the methodology used to calculate them, it is impossible to be sure.

More important than arguments over whose actuarial assumptions are more correct, however, is how keeping such information from the public hurts the democratic process. The fact that city workers and retirees are being asked to accept potentially deep cuts to long-promised benefits but are not able to have an open public debate about the validity of the numbers is insulting to a form of governance predicated on the consent of the governed. Crises may necessitate extraordinary measures, but they cannot be used to justify a lack of transparency if democracies are to endure through both good times and bad.

If Orr believes in his numbers, then he should not hesitate to make his actuarial report public. If he is right, Detroit’s workers and residents can surely take the news; they’ve seen far worse in recent years than a single actuarial report could ever surpass. Perhaps significant reforms are necessary; perhaps they are not. But if any such changes are made, they must be done with complete transparency and with the input of a public that deserves to know not only what is being asked of it, but also why they are being asked.

David Madland is Director of the American Worker Project at the Center for American Progress Action Fund. Keith Miller is a Research Assistant with the American Worker Project.

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