[Detroit’s] pension system made extra payments for decades to thousands of people, on the thinking that the base pensions were too small. The pension board thought it found the money for the extra payments by skimming off “the excess” when returns on investments exceeded the plan’s target — 7.9 percent in Detroit.But the pension fund also had years when its investments fell short of the target. And with millions of dollars being paid out each year in the extras, the fund missed out on all the investment income that money would have brought in. So the extra payments fundamentally undercut the health of the pension plan.
These “extra” payments have also set up a court battle with implications for the entire legal basis of the blue model. Michigan law, like that of other states, forbids the government to stop the extra payments, which puts the federal judge overseeing Detroit’s bankruptcy case in a bind. New York, Arizona, California, Florida, Illinois, Indiana, Texas, and Mississippi, which also have problems with these payments, are watching closely.All this nonsense could have been avoided if the feds regulated public pensions as strictly as private plans. In a private company, such financial shenanigans would have landed the culprits in jail. Congressional hearings into public pension management are clearly needed, with an eye to legislation improving the operation and oversight of these plans. Strategists on both the right and left should work hard to find ways for public officials in both parties to make this happen.[Remnants of Detroit’s historic Eastown Theatre are seen on September 4, 2013 in Detroit, Michigan. Photo courtesy of Getty Images.]