Detroit’s emergency manager wants to freeze the city’s pension system for public workers in light of mounting evidence that it was operated in an unsound manner for many years, contributing to the city’s financial downfall.
On Thursday, the emergency manager, Kevyn Orr, issued the preliminary results of a three-month investigation that identified diversions of shared money into individual accounts, real-estate investments that lost millions of dollars and “disconcerting administrative protocols” for handling health care and other benefits.
Unfunded pensions and health care are by far the biggest claims in Detroit’s big municipal bankruptcy. Orr said that the purpose of the investigation, still in progress, was “to help identify how the city can address its present financial crisis and, going forward, help determine the basis for and what, if any, actions that must be taken.”
In a letter sent with their report, the auditor general, Mark Lockridge, and inspector general, James Heath, said they had focused on real-estate investments first because federal law enforcement agents already had been looking at allegations of fraud in that area. They said they planned to look at other types of investmentslater.
Details of the pension freeze were outlined separately in a memo provided by Tina Bassett, a spokesman for the trustees of Detroit’s General Retirement System. The memo said that the city’s current defined-benefit pension plan would be closed to new members as of Dec. 31. Further benefit accruals would be halted on that date for city workers already vested in the pension plan, but they would keep the pensions that they had earned up until then. That type of pension freeze is legal and fairly common in the private sector. But public employees’ unions in many states say it would be illegal for their members because of statutes and constitutionalprovisions that apply to governmental workers.
The Detroit pension freeze also would halt payments of other nonpension benefits that have been made for many years, including distributions to active workers. Retirees would no longer receive yearly cost-of-living adjustments. Current city workers would be shifted into new defined-contribution plans, similar to 401(k) plans, which would comply with the requirements of the Internal Revenue Code, according to the memo.
Information for this article was contributed by Corey Williams of The Associated Press.
Front Section, Pages 2 on 09/28/2013