CNBC reports that the City of Detroit has reached agreement with its retired police and firefighters on revised pension terms. The City apparently went in, asking for 6% cuts in annual payouts and an end to cost-of-living increases. The retirees apparently went in, asking for no concessions. With the assistance of mediators, they seem to have settled at: no cuts, but "reduced" cost of living increases, and "As part of the deal, Detroit has reportedly agreed to increase the projected return on its pension funds to 6.75 percent, up from 6.25 percent and 6.5 percent, according to USAToday."
Now that is definitely not a solution anyone has ever thought of before in relation to pension shortfalls -- assume investment performance will compensate for the gap between what the employer pays in and what the retirees are promised to receive. This is really an approach that everyone should be able take to a difficult financial situation. For example, why didn't GM or Chrysler think of it?
Banker: "I am worried that your cash flow is not going to be enough to enable us to meet our obligations to creditors on time."
CEO: " Yeah, I can see how our forecasts might lead you to think that. Let's fix that by just assuming we sell more cars at higher prices."
Banker: "Oh, wow! I never thought of that. I can see why you deserve to be CEO."
And then the banker can employ this solution with regulators, too.