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Comment by drcode | Hacker News Reader

One thing that bothers me about this is that they have the concept of "retiree costs" but track those at the time they became due, when instead they should be blaming earlier administrations who promised higher benefits at the time but didn't put money aside to cover these future costs.

Retiree benefits are essentially "loans" and should be (but aren't) included in all the debt graphs.

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> instead they should be blaming earlier administrations

That's one of the main differences between public finances and private finances - administrators who over-promise in private space get audited and corrected, administrators who over-promise in public space get financed and elected.

That's true but for "Too big to fail" business. This century has begun with this new type of pseudo-public economy where the taxpayers support the financial loses of this kind of business.

Also I don't understand why the state or the union help this city. Having a city with so much citicies living in misery is a failure of the entire country. Detroit is in this situation because the laus of the country let it be.

Don't be so sure: see this Google search (which undoubtably turns up some political propaganda in addition to some true scandal): https://encrypted.google.com/search?hl=en&q=bain%20capital%2...

Yes. Both cities and corporations are guilty of this, especially on the Health Care side. I recall attending a recruiting presentation of a Detroit automaker who bragged about how they were purposefully not funding their Health Care liabilities because they thought the cash was better spent elsewhere and the government would eventually pick up the tab.

I just absolutely adore how this comment currently sits right next to one saying that this sort of thing is purely a government problem.

Michigan's constitution requires that pension costs be funded at the time they are incurred. I'm not sure where they breakdown was exactly -- whether Detroit officials lied to state overseers or there were no state overseers to begin with, but there was a breakdown somewhere.

The statute of limitations has probably run, but I wouldn't be surprised if the pension trustees acted contrary to law. Grossly negligent if nothing else.

Pension accounting is tricky because you have to put a number on your fund's ROI, and that number has gigantic implications for the solvency of the fund. Some committees are more optimistic than others, but they're not necessarily wrong.

A good example is California's public retiree system. If CALPERS didn't estimate an 8% ROI the fund would be underwater. I don't know anyone who actually thinks you'll be able to get 8% over the next 20 years from pension-quality investments. On the other hand, I'm not ready to say the people in charge are doing anything illegal.

It's not really tricky. The problem is humans aren't capable of predicting economic (nor longevity) conditions 30 years into the future (or even 5 years). There's a reason why you don't see pension like annuities being offered by insurance companies, because it's stupidly expensive to promise someone something like that.

Defined benefit pensions are ripe for corruption. Politicians get to buy votes with taxpayer money that doesn't need to be accounted for while they're in office. So you promise a bunch of unions some benefits, the union leader wins, the politician gets elected, in a few years he moves onto the state senate or wherever, rinse repeat. This is all great and easy to cover up when you have a growing tax base (i.e. large young population), but it starts to fall apart when the balance tilts the other way.

There's a pretty easy way to fix this, and that is to ban governments from making pensions. They should pay their employees in cash only, the employee can then purchase an annuity if they like for the amount of pension they have earned. Of course, they won't be able to, because it's not affordable for anyone unless the government is hiding the costs of pensions in the ridiculously high investment return assumptions.

The only silver lining is that there is a pot of dumb money sloshing around chasing higher and higher returns, so in my field it makes it a little easier to make money (heads I win, tails you [taxpayers] lose).

Nope, not contrary to law -- it turns out the Generally Accepted Accounting Principles for pension accounting are just total bullshit.

The GAAP says to assume a totally unrealistic rate of return; then when it's not met, to depreciate those losses over decades. Neither makes any sense at all.

If there's any gross negligence going on, it's shared by the entire profession and the Governmental Accounting Standards Board.

And there very well may be. Except it's probably beyond 'gross negligence', in the sense that the ridiculous standards served some financial firms and their pocketbooks very well. Not so different than other crazy shit banks and financial firms got away with in the last decade, and nobody's held responsible because, after all, everyone was doing it, so it was 'best practices'!

Some accountants have been sounding the alarm about this for years, and been ignored by 'the establishment' until fairly recently, when issues like Detroit made it impossible to ignore.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ancIi... (lacking a dateline, but based on a phrase in the article about 'drag on into 2004', appears to be from 2003, 10 years ago)

http://dealbook.nytimes.com/2013/07/19/detroit-gap-reveals-i...

http://capoliticalnews.com/2013/09/10/pensions-are-still-mak...

Well at the time those programs were created the tax base was capable of supporting them. Then when the tax base decreased in size significantly the city did not, in turn, change those programs to acknowledge the fact that the money simply would not be there. They were put in place on the assumption that the tax base would increase as it does in a lot of major cities.

My point? I think they should be included because the government failed to take them into account, or ignored the looming problem.

Ahh, the great timing mismatch of public office electoral cycles and union pension/medical expenses. Incentive misalignment at its finest.

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