Risk And Return Detroit Style

A judge ruled that Detroit can proceed with its bankruptcy, a ruling allows the largest municipal bankruptcy in U.S. history to go forward. And while we don't want to discuss many of the decisions that led to bankruptcy, Detroit's general pension board certainly didn't help. One of the key tenets of finance is that risk are return are related. Detroit had an annuity plan that allowed city employees to contribute as much as 7 percent of their pay and receive a guaranteed annual return of 7.9 percent, a guarantee we would love to receive ourselves! And in 2002 and 2007, the total return paid in these accounts was 21.4 percent and 22.9 percent, respectively. To fund the return, the pension managers took money from the general retirement funds used for pensions to pay the 7.9 percent return, even in 2009 when the annuity account lost 24 percent. In all, the payments from the pension plan cost about $1.9 billion.