Detroit’s bankruptcy has captured plenty of headlines lately, with some suggesting that the city’s issues with its pension liabilities are applicable to every defined benefit fund in the country.
That’s simply not true.
Detroit has other issues that contributed to its recent bankruptcy application. It is a fallacy to apply them to all public pension plans, such as the Ohio Public Employees Retirement System.
When Detroit filed for bankruptcy protection, the city’s emergency manager listed pensions among the unsecured debt that could be reduced through bankruptcy. A court battle appears to be looming over whether a municipality can cut benefits to current recipients via a federal bankruptcy, or whether those cuts should be excluded from the process.
We’re concerned over Detroit because some observers have taken the opportunity of the bankruptcy filing to castigate defined benefit plans in general. Detroit’s problems are unique. News reports have indicated that the city is suffering from a severely declining population (down 26 percent since 2000), a loss of tax revenue, an unemployment rate of 18.6 percent, poor investments and urban blight.
Making a direct link between a city seeking bankruptcy protection and the future of all defined benefit plans ignores the value of strong pension systems. Like we said in a recent blog on pension myths, defined benefit plans do not lead to bankruptcies unless there is fiscal mismanagement. The National Association of State Retirement Administrators has reported that, on average, municipalities spend less than 3 percent on pensions.
Last year the Ohio General Assembly passed pension legislation that made gradual changes to our benefit structure. They will complement our investment returns, which have averaged more than 8 percent annually for the past 30 years. The result will be a better system in the long run, as the baby boomer generation retires.
A study by the National Institute on Retirement Security found that defined benefit plans are sustainable if the employers faithfully pay their annual contributions, if employees contribute to the cost, and if measures used to control benefits are approved in the light of day. OPERS has always abided by these guidelines.