Detroit will set aside money ahead of time for a 2024 pension balloon payment, said Mayor Mike Duggan.

DALLAS -- Detroit Mayor Mike Duggan announced a plan he says will help the city meet a 2024 balloon payment on its pension obligation.

The city expects the fund will more than adequately address the future payment of more than $100 million owed beginning in 2024 and said the plan should keep it on track for exiting state oversight by the end of the year.

"What the mayor is proposing is that we take money now and put into a pension protection fund and then use that money in 2024 and beyond to help make some of those payments," said Detroit Chief Financial Officer John Hill. "So part of the money would come from the budget and the other would come from the fund."

The plan for paying down the pension obligation in the city's legacy plans was part of the $1 billion general fund budget for the 2017-18 fiscal year Duggan presented to city council Thursday.

Hill said that the payment plan would give the city budget longer to catch up to the $132 million it would have to pay going forward.

"It's really a way for us to proactively address the future pension obligation payment and not wait to deal with it down the road," Hill said.

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.  

Duggan wants the city 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."

Naglick said that the city expects that the general fund would be required to contribute a total of $143.2 million beginning in fiscal 2024. "We propose to make that payment by pulling $78.5 million out of the trust and appropriating $64.7 million from the general fund that year," said Naglick.   

Hill said that by addressing the 2024 obligation payment with the plan the city will remain on track to exit state oversight as projected.

"We believe that after we have executed three balanced budgets and met a number of other requirements that the Detroit Review Commission could vote to waive their oversight," said Hill. "We believe that one of the factors that they are going to want to see to support that waiver is that we have proactively dealt with the pension obligations in 2024."

The review commission, a nine-member group established under the so-called "Grand Bargain" legislation that drove the bankruptcy exit plan, is charged with ensuring that Detroit stays on course by reviewing borrowing, some contracts, and long-term fiscal plans.

The pension funding proposal is still subject to both City Council and DRC approvals.

Duggan said on Thursday that the city may decide to sue Orr's firm, Jones Day if it finds that Orr had an obligation to keep the city informed on the pension payments. Duggan first warned of a possible lawsuit against the city's bankruptcy consultants during his 2016 State of the City speech.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.