Detroitâs emergency manager wants to freeze the cityâs pension system for public workers, in light of mounting evidence it was operated in an unsound manner for many years, contributing to the cityâs financial downfall.
The emergency manager, Kevyn Orr, issued on Thursday 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 âdisconcerting administrative protocolsâ for handling health care and other benefits.
Unfunded pensions and health care are by far the biggest claims in Detroitâs big municipal bankruptcy. Mr. Orr said that the purpose of the investigation, still in progress, was âto 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.â
In a letter sent with their report, the auditor general and inspector general, Mark Lockridge and James Heath, said they focused on real estate investments first because federal law enforcement agents have already been looking at allegations of fraud in that area. They said they plan 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 Detroitâs General Retirement System. The memo said that the cityâs 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 employeesâ 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 cityâs 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 systemâs 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, a catastrophic event.
Ms. 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.
âNo one from the G.R.S. had any input into this proposal,â she said in a written statement. âWe 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.â
The statement suggested that city unions will include the pension proposal at an important bankruptcy hearing in October, where they plan to argue that the city is not qualified for bankruptcy court protection because it did not first make good-faith efforts to resolve its problems in negotiations.