mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Detroit Pension Slush Fund Cost City Billions

Some people just don’t seem to understand how pensions work. Some of those people appear to have been running Detroit’s pension system for decades.

In a report due today, Detroit’s auditor general and inspector general allege that the city pension has been making excess payments—things like bonuses to retirees and cash to families of workers who died before becoming eligible to collect—that have cost Detroit more than $2 billion over 23 years.

Please excuse the long block-quote, but the details of this case bear reading in full. From the NYT:

Detroit has nearly 12,000 retired general workers, who last year received pensions of $19,213 a year on average — hardly enough to drive a great American city into bankruptcy. But the total excess payments in some years ran to more than $100 million, a crushing expense for a city in steep decline. In some years, the outside actuary found, Detroit poured into the pension fund more than twice the amount it would have had to contribute had it paid only the specified benefits.

And then the city’s contributions were not enough. So much money had been drained from the pension fund that by 2005, Detroit could no longer replenish it from its dwindling tax revenue. Instead, the city turned to the public bond markets, borrowed $1.44 billion and used that to fill the hole.

Even that did not work. In June, Detroit failed to make a $39.7 million interest payment on that borrowing — the first default of what was soon to become the biggest municipal bankruptcy case in American history.

Detroit said at the time that making the interest payment would have consumed more than 90 percent of its available cash. And besides, the hole in its pension fund was growing again, and it needed another $200 million for that.

When Detroit went to the bond market, it acknowledged that it needed cash for its pension fund but did not explain its long history of paying out more than the plan’s legitimate benefits, including the bonuses, known as “13th checks,” which were reported this month by The Detroit Free Press.

Arguing for the defense is Tina Bassett, a spokeswoman for Detroit’s pension trustees:

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.

“Some extra”—the mind reels. Detroit’s pensioners were fed with their own seed corn! One-party rule corrupted even the most basic moral and prudential compass. And ultimately the ones who will probably bear the greatest hardship from these years of near-criminal mismanagement are those who can least bear to do so: Detroit’s current and future pensioners.

Features Icon
show comments
  • Anthony

    “One-party rule corrupted even the most basic moral and prudential compass.” Perhaps, WRM as far as it goes; but financial management that was not up to par – too many said yes to spending interests too often – must figure in your calculus. Such calculation inures to human foible maybe enhanced by occasional one-party rule.

  • lukelea

    That’s why corrupt union officials backed up by (or fronting for) the mob are always wanting to get their hands on the union’s pension fund. It’s a big pot of money nobody’s looking at very closely, just waiting to be stolen. The poor benighted membership of ordinary slobs has no idea of what is going on. Same goes for Detroit’s public employees — or, indeed, the employees of most private corporations.

    The U.S. government seems to be the only trustworthy fiduciary.

    • avery12

      I was with ya up until that last sentence.

  • NCMountainGirl

    Why aren’t the trustees in jail? They didn’t follow the terms of the plan. Then not only did they squander plan assets, they misrepresented the soundness of the plan itself by taking money from the plan and returning it to the city to fund that year’s payment into the plan.

  • michaelj68

    So Detroit’s pension was in one sense a defined benefit if the market under-performed, we need tax payers or suckers to kick more money for the shortfall. But then it became a defined contribution fund paying out more than promised if the fund earned “excess earnings.” What a wonderful way to eat your cake and have it too.

  • Boritz

    Great words of wisdom:
    “lock box”
    -Al Gore

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service