CHICAGO — Detroit emergency manager Kevyn Orr said last week he wants to freeze the city's two pension funds by the end of the year and shift employees into 401(k)-style plans.
The announcement came a few days before the public release of an unflattering three-month investigation into the city's two employee retirement systems. The Detroit auditor general and inspector general jointly wrote the report, which is preliminary and will be followed by a fuller investigation over the next several months.
The investigators said the pension systems overpaid workers up to $2 billion over the past 23 years with bonuses, and that they made a series of bad investments that led to steep losses. Soured real estate investments led to at least $74 million of losses, the audit said.
The report also found examples of inefficient and unclear methods for handling employee health care and unemployment benefits. Nearly half of the city's compensation claims, for example, were found to be either fraudulent or highly questionable.
A freeze on the pensions would mean that the systems would be closed to new members as of Dec. 31. Employees currently in the pension plans would be entitled to the benefits, but the benefits would no longer grow.
The pension funds said Orr's proposal may be illegal because the state's constitution prohibits any impairment of the retirement benefit.
"We believe it 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 experience," a spokesman for the general employees' retirement system said in a statement.
Orr also ordered the city's pension trustees to produce detailed documents outlining how the systems operated over the last 28 years by Oct. 1.
The investigators said they began with the pension's real estate investments because those are already under federal review, and that it plans to investigate other investment areas over the next several months.
The pensions systems and Orr disagree about the size of the city's unfunded pension liability. The pension systems put the obligation at under $700 million, while Orr says the true estimate is closer to $3.5 billion.
