Detroit Mayor Mike Duggan’s proposal to set aside money ahead of a 2024 pension balloon payment a credit positive, says Moody’s.

DALLAS -- Detroit's plan to create a fund to address a pension hole left behind after its historic bankruptcy got a thumbs up from Moody's Investors Service.

Moody's said on Monday that the plan is a credit positive for the city because it bolsters Detroit's ability to meet an increase in pension payments of nearly $100 million more than initial post-bankruptcy estimates beginning in fiscal 2024.

"This credit positive action will improve the city's capacity to meet the upcoming pension contribution hike," said Moody's. "Before crafting the plan, the city had not publicized a roadmap to set aside material funding needed for the looming cost increase."

On March 10 the city council appropriated an increase in the discretionary pension funding that puts into action the so-called retiree protection fund announced last month by Mayor Mike Duggan.

Detroit is planning annual deposits to the RPF over the next six years. The city will then draw on the fund to support annual pension contributions beginning in fiscal 2024.

Duggan asked the city council to set aside an additional $50 million from a general fund surplus and another $10 million into the trust fund this year. The city expects to have $90 million in the trust at the end of fiscal 2017.

In fiscal 2018 the city is proposing to add another $15 million to the fund, $20 million in 2019, $45 million in 2020, $50 million in 2021, $55 million in 2022 and $60 million for 2023.

"All total, we propose that the city would deposit $335 million into the trust fund through the end of FY23," said Finance Director John Naglick. "With interest, the fund is projected to grow to $377 million."

Setting aside a growing amount of funding every year until 2024 will allow Detroit to gradually create greater capacity in the annual budget to take on much higher costs in the future, said Moody's.

However Moody's warned that because deposits to the fund are not legally mandated, there is a risk that a lack of revenue growth for the city could challenge Detroit's capacity to make growing deposits to the fund.

Duggan claimed during his 2016 State of the City speech that consultants who advised the city through bankruptcy had miscalculated the pension deficit by $490 million.

When the city exited bankruptcy at the end of 2014, actuarial estimates in the city's Plan of Adjustment projected a payment of $111 million in 2024.

In November 2015, the system's actuary raised the figure to $194.4 million. Duggan said that the payment was "concealed" from him by former emergency manager Kevyn Orr during the bankruptcy. Orr's team used overly-optimistic assumptions that made Detroit's future pension payouts look artificially low, Duggan said.

The city has since started to tackle the large future payment.

In fiscal 2016, Detroit set aside $20 million and another $10 million to start the trust fund. The payment comes on top of the $20 million contribution to the legacy plans the city is required to make under the plan of adjustment.

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