First, the pension fund returns are mediocre (see above), plus they are plagued with corruption, and THAT, more than the amount of payouts, is the real story here. But no one will take on Wall Street money (mis)managers. No one wants to withdraw money from Wall Street brokerage houses and invest it elsewhere, least of all Comptrollers and Treasurers who want jobs there later.
Second, a Public Bank might be a much better, and counter-cyclical, investment, which would invest in the city/state. The Bank of North Dakota's Return on Equity (ROE) has averaged 20+% for over ten years, and it has returned $300 million in dividends, while other states and cities -- like Detroit -- are paying interest on credit they could generate themselves if they deposited their money into a public bank. A public bank can be set up in a municipality; it does not have to be done at the state level. Even if the ROI was comparable, there would still be the added benefits of:
1. Not paying high management fees (see below)
2. Not paying high interest rates on bonds for money already raised in taxes
3. Investing in the local community (hopefully in a more responsible way if such loans are made by independent, conservative, bankers working for the state, as North Dakota's State Bank has done since 1919)
4. Supporting local community banks and lending institutions (like Credit Unions). North Dakota has the highest per capita bank to person ratio in the country
5. Support for local small businesses, which are credit-starved in Detroit
6. Job creation both in the banks supported and from the activities of the public bank
7. Revenue creation (see dividend payouts, above)
8. Performing their fiduciary duty by protecting taxpayer money in the event of a major bank bail-in (a forced deposit for equity swap proposed by the FDIC and the Bank of England in a joint 2012 report).
Third, there is the matter of how much in fees Detroit pays (page 178). This turns out to be hard to find. There is this nebulous category of "Investment Expense" totaling $31m for the pension fund as of June 30, 2012 when the report closed (BTW, how have things changed in the year since then? Where is the 2013 report?). But is that for the fees for fund management or something else? In any case, the management of a public bank would be far, far less. The president of the Bank of North Dakota, for example, earned under $300 thousand last year.
I especially like this line:
Amount Due to Broker for Securities Lending $137,864,912 $336,556,836