Detroit Spent Billions Extra on Pensions

Mary Williams Walsh, New York Times, September 25, 2013

Detroit’s municipal pension fund made payments for decades to retirees, active workers and others above and beyond normal benefits, costing the struggling city billions of dollars and helping push it into bankruptcy, according to people who have reviewed the payments.

The payments, which were not publicly disclosed, included bonuses to retirees, supplements to workers not yet retired and cash to the families of workers who died before becoming eligible to collect a pension, according to reports by an outside actuary and other people with knowledge of the matter.

How much each person received is not known. But available records suggest that the trustees approving the payments did not discriminate; nearly everybody in the plan received them. Most of the trustees on Detroit’s two pension boards represent organized labor, and for years they could outvote anyone who challenged the payments.

Since June, Detroit’s auditor general and inspector general have been examining the pension system for possible fraud or misfeasance, and their report is expected to be released on Thursday. Among the findings is likely to be how much damage was done by the extra payments.

“It was like dandelions,” said Joseph Harris, who served as Detroit’s independent auditor general from 1995 to 2005. “You just accept them. They were there, something you’ve seen all your life.”

When asked on what legal authority the trustees made the payments, Mr. Harris said, “My understanding was, it had to be approved by City Council, and council was under the belief that the money was there—that the pension funds were earning the money—with the consideration that in bad times the city would be making up the difference. I hate to say that. Ultimately the fund has to be funded by the taxpayers.”

A spokeswoman for Detroit’s pension trustees, Tina Bassett, said she thought the outside actuary’s analysis, which concluded that the extra payments had cost the city nearly $2 billion over 23 years, was “not being fully straight with what happened.”

She said that the trustees were administering benefits that had been negotiated by the city and its various unions and that they had established an internal account to set aside “excess earnings” that would cover the cost. She said it was appropriate for retirees to benefit from market upturns because they had paid into the pension fund, so their own contributions had generated part of the investment gains.

“People were having a hard time, living hand-to-mouth, and we thought we would give them some extra,” Ms. Bassett said.

Of all the nonpension payments, she said, 54 percent went to active workers, 14 percent went to retirees and 32 percent went to the city, which used its share to lower its annual contributions to the fund. {snip}



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