Emergency Manager Seeks Rationale for Pension Seizures in Detroit

a Detroit demonstration at WSU Law School June 10, 2013, a photo by Pan-African News Wire File Photos on Flickr.

PANW Editor's Note: This Detroit Free Press article and other stories are about providing a justification for the seizure of the municipal workers' pensions and healthcare benefits. The workers and retirees must stand up for their benefits in order to prevent Kevyn Orr from robbing their funds and gambling the money off on Wall Street.

This is a political struggle whose outcome will be precedent-setting for the entire country. While the federal bankruptcy courts will determine the legal parameters of what the banks can steal from the public trust, people must be in the streets demanding that the financial institution pay for the crisis they created.

All debt-service and principal loan payments must be cancelled for the cities. The people bailed out the banks and workers and oppressed must maintain their jobs, full pensions and healthcare benefits.

Abayomi Azikiwe
Editor, Pan-African News Wire
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Kevyn Orr orders probe of worker benefits; unions vow court fight in plan to freeze pensions

6:09 PM, June 20, 2013

Kevyn Orr must reach agreements with all of Detroit's creditors, including the city's two pension funds, to avoid filing for bankruptcy. /

Detroit Free Press

The high-stakes battle between Detroit Emergency Manager Kevyn Orr and the city’s pension funds ramped up Thursday, as Orr called for a corruption and fraud investigation of the funds on the same day his consultants privately delivered more sobering news to about 200 union and pension officials that retiree benefits are in serious jeopardy.

The growing animosity between Orr and Detroit’s workers and retirees only increases the likelihood Detroit will file for bankruptcy.

Orr will have no other legal option if retirees do not agree to the cuts Orr is seeking as part of a massive restructuring plan he announced last week to resolve the insolvent city’s debts and liabilities of up to $20 billion.

Union officials who met with Orr’s team on Thursday to discuss pension cuts already are prepared for a legal fight.

“We’ll fight you in court,” said Henry Gaffney, president of the Amalgamated Transit Union Local 26, which represents more than 600 city bus drivers.

“We’ll probably stand a better chance, because one thing about a bankruptcy judge, he’s not going to feed into all this nonsense stuff,” he said. “If you’re going to come, you’re going to have to come correct in bankruptcy court.”

While negotiations to avoid bankruptcy will be ongoing for weeks, Orr’s probe of the pension funds will look into whether they lost tens of millions of dollars through questionable and possibly corrupt investment deals.

The pension funds, which also are under federal investigation, are the main focus of Orr’s investigation. But all Detroit employee benefits programs, including health care for workers and dependents, will be examined, Orr spokesman Bill Nowling said.

Orr has found several irregularities in his ongoing analysis of the pension funds’ health, Nowling said during an impromptu media briefing Thursday at city hall.

Nowling said a preliminary look at the funds shows the city’s General Retirement System could be underfunded by 30% to 40%, and the Police and Fire Retirement System by more than 20%. If those figures hold, Orr will have the power to remove pension trustees.

The probe also comes only weeks after the Free Press reported that four members of the city’s pension boards flew to Hawaii for an all-expenses-paid trip — costing the pension funds $22,000 —to attend an educational conference at a Hilton resort on Waikiki. Orr reacted angrily to the news, given Detroit’s dire financial condition, saying it was a tone-deaf move even if trustees went there to learn about pension fund management.

Nowling said Thursday that the Hawaii trip is an example of mismanagement.

“We think that spending $20,000 to fly a quarter way around the globe to attend something that they could get online is not a good use of public funds — especially pension funds,” he said. “And we want to ask the question ‘what other bad decisions have been made.’”

The city’s auditor general and inspector general will conduct the investigation and report back to Orr in 60 days. Evidence of criminal wrongdoing will be passed on to proper state and federal authorities, Nowling said.

Matt Gnatek, chairman of the Detroit Police and Fire Retirement System, questioned the need for Orr’s probe but pledged to cooperate fully.

“If anybody’s been investigated more than us, I don’t know who that is,” Gnatek said. “We’ve been thoroughly investigated by several different federal entities. We’re an open book.”

In a joint statement, the two retirement systems questioned Orr’s authority under the state’s emergency manager law to order the investigation.

“We are disappointed that the EM has not held any substantive meetings with the pension funds before making the decision to launch an investigation,” the statement said. “We intend to cooperate fully.”

The announcement of the investigation came as Orr’s restructuring team met with employee, retiree and labor groups Thursday to present proposals including moving workers to health care exchanges, freezing employee pensions for current workers and moving new workers and those who are not vested in pensions — workers who’ve been on the job less than 10 years — into 401(k)-style retirement plans instead.

The proposed changes would affect about 30,000 workers and retirees. Retirees outnumber workers by a 2-to-1 ratio.

Ed McNeil, special assistant to the president of AFSCME Council 25, said Orr has a long road ahead to get unions on board because his plans are not detailed.

“This is not a bargaining session. We’re not bargaining with them at this point,” McNeil said after the meeting. “They really didn’t have a legitimate proposal.”

Thursday’s meetings with union and pension groups provided a more in-depth look at some of the proposals first unveiled last week during a private meeting with all the city’s creditors. The city’s unfunded health care liabilities alone are said to be about $5.8 billion, and Orr’s proposal to creditors last week said the city’s pension funds may be unfunded by another $3.5 billion.

Orr’s restructuring plan includes a proposal to pay some unsecured creditors pennies on the dollar for debt they are owed. Orr also decided to halt some debt service payments, including a $40 million bill due last Friday for principal and interest pension fund payments, to help free up cash for city services.

The overview on Thursday for 8,280 police and fire retirees and 3,816 active workers outlined a potentially sweeter deal than non-uniformed workers.

Because the funds for police and fire workers are said to be better funded and the legacy costs lower, Orr’s team is proposing restructuring in a way that saves pensions not only for current workers with vested plans, but also for those who have been part of the plan for less than the 10 years it takes to be vested.

That is different than the stance for the 11,109 non-uniformed retirees and 6,888 active workers whose fund Orr says is only 70% funded and projected to decline annually.

The city says it needs to freeze their plans and the non-vested workers would be out of luck.

Following the meeting for uniformed employees, Dan McNamara, president of the Detroit Firefighters Association, said he “appreciates accurate facts for the first time.”

McNamara said time will be spent analyzing all the data. “We will have a unified response for all police and fire,” he said, but would not put a timeframe on how long that would take.

Orr was not present for Thursday’s meetings. His consultants held two sessions – a morning meeting for nonuniformed workers, and an afternoon session for police and fire representatives.

The consultants’ message was that cuts to health care and pensions are likely, said Chet Kulesza, labor representative for the Police Officers Labor Council, which represents detention facilities officers and other workers.

“‘Significant cuts are a reality’ – that’s how they started the meeting,” Kulesza said. “Nothing in there is bright and cheery.”

Kulesza said the consultants urged the union officials to ask retirees if the unions could represent them in negotiations with Orr over cuts to pension benefits.

The consultants didn’t seem to understand that union officials do not represent retirees, Kulesza said.

“We know where the retirees are, but we don’t represent them and we’re not – for (Orr’s) benefit – going to herd more sheep to the slaughter,” he said. “If you want to do them dirty, just go do them dirty.”

Denise Banks, 50, a district clerk for the city’s Department of Public Works and a member of the Association of City of Detroit Supervisors who attended a meeting this morning for unions not including those representing public safety workers, said bluntly: “That was the biggest crock of crap I’ve ever heard in my life. They’re talking about freezing our pensions. I just feel like crying.”

The state’s emergency manager law gives Orr broad powers to restructure the city, including voiding contracts and tossing out labor agreements.

Union officials have vigorously disputed Orr’s contention about pension underfunding, calling it a move to grab a major asset of city workers.

A final analysis of the retirement systems’ funding level is due within weeks, and if the report by the Milliman actuarial firm shows the systems are less than 80% funded, Orr could remove one or more pension trustees.

Nowling said the pension underfunded amount cited in Orr’s report last week is still believed to be on the conservative side, but no new numbers were presented today from last week’s presentation. The figures may change before a meeting next week with representatives of the two pension funds.

Nowling said the investigation should not affect the pension figures but will help explain how they were derived.

“Clarity is a rare commodity in Detroit,” he said.

State Treasurer Andy Dillon could appoint Orr as sole trustee of the funds if they fall below the 80% threshold.

As sole trustee, Orr, with Dillon’s approval, could transfer the Detroit pension funds to another system, such as the Municipal Employees’ Retirement System of Michigan, which manages pension assets for more than 700 municipalities.

END OF UPDATED STORY; ONLINE VERSION IS BELOW!!

Detroit emergency manager Kevyn Orr today ordered a probe into waste, fraud, abuse and corruption in the city’s pension funds and all other municipal employee benefits programs, signing an order this morning authorizing the city’s inspector general and auditor general to begin a 60-day investigation.

The move wasn’t unexpected. Orr has indicated that he might order an investigation into the loss of tens of millions of dollars in pension funds, in particular, through questionable and possibly corrupt investment deals.

While the probe will encompass all employee benefits programs, including health care, Orr spokesman Bill Nowling said this afternoon that pension funds are the main focus of the investigation. Orr’s order, his eighth since taking office in March, says the city’s auditor general and inspector general “shall complete a preliminary report to the EM within 60 days” of today. The order says the probe will look into an “administrative misfeasance or other impropriety with respect to the administration, operation or implementation of benefit programs” for the city’s 20,000 retirees.

The announcement of the investigation came as Orr’s restructuring team met with employee, retiree and labor groups this morning to present proposals including moving workers to health care exchanges, freezing employee pensions for current workers and moving new workers and those who are not vested in pensions — workers who’ve been on the job less than 10 years — into 401(k)-style retirement plans instead.

Union representatives reacted angrily after the meeting, with Henry Gaffney, president of the Amalgamated Transit Union Local 26, which represents more than 600 city bus drivers, predicting unions will not agree to a deal outside of a Chapter 9 municipal bankruptcy.

“We’ll fight you in court,” Gaffney said. “We’ll probably stand a better chance, because one thing about a bankruptcy judge, he’s not going to feed into all this nonsense stuff. If you’re going to come, you’re going to have to come correct in bankruptcy court.”

Denise Banks, 50, a district clerk for the city’s Department of Public Works and a member of the Association of City of Detroit Supervisors who attended a meeting this morning for unions not including those representing public safety workers, said bluntly: “That was the biggest crock of crap I’ve ever heard in my life. They’re talking about freezing our pensions. I just feel like crying.”

Of the probe, Nowling said during an impromptu media briefing today that Orr has found several irregularities in his ongoing analysis of the pension funds’ health, Nowling said a preliminary look at the funds shows the city’s General Retirement System could be underfunded by 30% to 40%, and the Police and Fire Retirement System by more than 20%.

The probe also comes only weeks after the Free Press reported that four members of the city’s pension board flew to Hawaii for an all-expenses-paid trip — costing the pension funds $22,000 — for four pension trustees to attend a conference at a Hilton resort on Waikiki. Orr reacted angrily to the news, given Detroit’s dire financial condition, saying it was a tone-deaf move even if trustees went there to learn about pension fund management.

Nowling said today that the Hawaii trip is an example of mismanagement.

“We think that spending $20,000 to fly a quarter way around the globe to attend something that they could get online is not a good use of public funds — especially pension funds,” he said. “And we want to ask the question ‘what other bad decisions have been made.’ ”

The state’s emergency manager law gives Orr broad powers to restructure the city, including voiding contracts and tossing out labor agreements. This week, he met with major creditors in an opening round of talks to get those to whom Detroit owes up to $20 billion in debts and obligations — including bondholders, city workers, retirees and others — to accept in some cases less than 10 cents on the dollar on unfunded liabilities.

Orr’s move comes as his restructuring team was meeting this morning with city unions and retiree representatives to begin what are expected to be contentious discussions about cutting pension and health care benefits for city workers and retirees. The city’s unfunded health care liabilities alone are said to be about $5.8 billion, and Orr’s proposal to creditors this week said the city’s pension funds may be unfunded by another $3.5 billion.

“There’s many questionable investments that have been made by the fund boards,” Nowling said. “And some of those investments have been made without the advice of their hired financial adviser whose job it is to give them sound financial advice on the investment they’re making, and we want to find out why that happened.”

Evidence of criminal wrongdoing will be passed on to proper state and federal authorities, Nowling said.

Federal law enforcement has already turned up some irregularities over the years.

Several former city officials and businesspeople have either pleaded guilty or been charged with corruption in connection with the city’s General Retirement System and the Police and Fire Retirement System.

A Florida businessman earlier this month agreed to pay nearly $3.1 million to settle claims that he secretly stole millions of dollars from a Detroit pension fund to buy two shopping malls in California.

The U.S. Securities and Exchange Commission announced the settlement on June 10, the same day it filed a civil lawsuit against Chauncey Mayfield and several others, alleging that in 2008, Mayfield stole $3.1 million in pension funds. Mayfield, of Ft. Lauderdale, Fla., is a former investment adviser to the two Detroit pension funds.

Former city councilwoman Monica Conyers, who was also General Retirement System trustee, was convicted for conspiracy to take bribes, including ones related to a proposed multimillion-dollar pension fund investment in Wireless Resources. She was released from prison in December after spending more than 30 months behind federal bars in West Virginia.

And Jeffrey Beasley, the city’s former treasurer, is facing criminal charges for allegedly taking bribes in exchange for approving more than $200 million in pension fund investments.

Orr’s announcement came as dozens of Detroit union officials are meeting inside a City Hall auditorium with Orr’s team to discuss expected cuts to health care benefits and pensions.

The officials, whose members already have endured cuts to pay and benefits to help alleviate Detroit’s budget deficit, were not optimistic heading into the meeting.

“We’re making not too much above minimum wage, and we’re still taking cuts,” said Thomas Johnson, 41, who’s president of the American Federation of State, County and Municipal Employees Local 2920, which represents clerical workers at the Detroit Water and Sewerage Department.

Johnson said some retirees from his union already struggle to make ends meet on only $350 to $400 a month in pension benefits, and cuts to their monthly check or additional expenses for health care would be devastating.

Johnson said members of the union still on the job are deeply worried about proposals to reduce pensions and health care.

“They’re feeling like they’re not going to be able to retire,” he said. “And we’ve got people who’ve worked for more than 30 years and retired, and they can’t go back to work.”

Today’s meeting, which is closed to the public, is to focus on Orr’s plan to shift retirees from city-provided health care to Medicare or health exchanges under the Affordable Care Act. Consultants working with Orr are expected to deliver the message. Orr is not expected to be present.

The cuts are part of Orr’s restructuring plan, first unveiled last Friday, to resolve Detroit’s deep financial crisis. The city has up to $20 billion in debt and liabilities and no money to pay its bills.

■ Related story: In Detroit’s financial crisis, a restructuring: Services, groups affected

■ Related story: Q&A with Kevyn Orr: Detroit’s emergency manager talks about city’s future

The report pegged the city’s unfunded employee health care obligations at $5.8 billion.

Orr is asking city workers, retirees, bondholders and other creditors to accept less than what the city owes them. Some unsecured creditors are being asked to accept pennies on the dollar.

Gaffney said there has been no talk so far among city unions about organizing strikes or other work actions to protest Orr’s proposals.

But that could change.

“Sometimes you have to make a stand,” Gaffney said. “You can only talk so long, you can only slap me down so many times. I can’t keep not fighting.”

Gaffney said he has seen little to convince him that Orr’s overall restructuring plan is not “just a master plan to take the city over. It’s about privatizing anything they can and getting rid of the unions.”

Orr must reach agreements with all of Detroit’s creditors, including the city’s two pension funds, to avoid filing for bankruptcy.

Chet Kulesza, who represents the Detroit police officers labor council, said a bankruptcy is inevitable because the pension funds will not agree to cuts.

“That’s what’s going to happen,” he said this morning.

Orr plans to more specifically address cuts he is seeking to pension benefits at another meeting next week.

But today’s announcement of the probe should make that meeting more contentious than expected.

Union officials have vigorously disputed Orr’s contention about pension underfunding, calling it a move to grab a major asset of city workers.

A final analysis of the retirement systems’ funding level is due within weeks, and if the report by the Milliman actuarial firm shows the systems are less than 80% funded, Orr could remove one or more pension trustees.

State Treasurer Andy Dillon could appoint Orr as sole trustee of the funds if they fall below the 80% threshold.

As sole trustee, Orr, with Dillon’s approval, could transfer the Detroit pension funds to another system, such as the Municipal Employees’ Retirement System of Michigan, which manages pension assets for more than 700 municipalities.

Orr was not there to lay out the situation for union leaders today, many of whom liked his straightforward manner when he met with stakeholders last week.

The numbers and proposed plan came from Evan Miller, a partner with Jones Day and cochair of the law firm’s Employee Benefits & Executive Compensation Practice as well as Chuck Moore, senior managing director at Conway MacKenzie, a Birmingham firm, and a representative from Ernst & Young.

About 125 representatives of non-uniformed employees attended the morning session and about half that number are expected to attend an afternoon session.

Nowling said the pension underfunded amount cited in Orr’s report is still believed to be on the conservative side, but no new numbers were presented today from last week’s presentation. The figures may change before a meeting next week with representatives of the two pension funds.

Nowling said the criminal investigation should not affect the pension figures but will help explain how they were derived. “Clarity is a rare commodity in Detroit,” he said.

Contact Joe Guillen: jguillen@freepress.com.