Morningstar Is Disputing A Key Number In Detroit's Bankruptcy Filing
The firm's report was first spotted by Bond Buyer and reported by the Detroit Free Press' John Gallagher
Orr has pegged the size of the shortfall in the General Retirement System and Police and Fire Retirement System at $3.5 billion.
He arrived at that figure in part by estimating the funds' expected annual return on assets at 7%.
The city's actuary, meanwhile, says the size of the gap is actually $977 million, based in part on an expected annual return of 8%.
Morningstar's Jeff Westergaard, Elizabeth Foos, and Rachel Barkley write that both of those are actually within the norm for the rest of the country.
Barkely told us that based on data from the National Association of State Retirement Administrators, the 10 year return on state plans was 7.5%, and 8.9% for 25 years.
As you can see, the lower the expected return estimate, the larger the funding gap is today.
Orr's contention that a 30-year amortization period exacerbates the hole is also off base, they say.
The discrepancy helps explain why the two funds sued to prevent the bankruptcy filing in the first place — they contended they were not in danger of defaulting.
The figure also has implications for how much money unsecured debt holders can expect to get back. Orr has signaled entities holding unsecured notes may only see pennies on the dollar.
So the question is, what other assumptions is Orr using to arrive at a figure more than twice the size the of the city's?
Where Detroit is outside accepted practices is in the seven-year period they use for smoothing out returns, Morningstar said. That is a bit long, they note, especially given wild fluctuations in investment returns in recent years. Last year brought in -0.4%, while 2011 saw a +18.7% gain.
And Gallagher notes recent research has shown funds must go above-and-beyond industry norms to remain fiscally sound, and that Orr would likely use such findings in court.
Freep reported Friday the city now hopes to submit a restructuring plan by the end of the year.