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 and inspector general, Mark Lockridge and James Heath, said they had focused on real estate investments first because federal law enforcement agents had already been looking at allegations of fraud in that area. They said they planned to look at other types of investments later.
Details of the pension freeze were outlined separately in a memo provided by Tina Bassett, a spokeswoman 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 constitutional provisions that apply to governmental workers.
The Detroit pension freeze would also 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.
The city’s current approach, in which money is diverted from a pooled pension trust fund to a system of individual accounts, appears not to comply, risking the pension system’s tax-qualified status. Pension funds are rarely stripped of their qualified status by the Internal Revenue Service because the result is so harsh for the participants. All the contributions and investment earnings of the plan in such a case would immediately become taxable.
Bassett said the trustees did not support the proposed pension freeze and saw it as a sign of bad faith on the part of the city and the law firm that is advising it in its municipal bankruptcy case, Jones Day.
“We believe it is unseemly and disingenuous to present a proposal involving a new benefit structure that will affect the pensions of our members, beneficiaries and city employees not yet vested, without seeking our input, suggestions, knowledge and expertise,” she said in a written statement.