Friday, September 27, 2013

Bank Agents Will Try to Freeze Detroit Pension Fund

September 26, 2013 at 4:18 pm

Orr will try to freeze Detroit pension fund

Robert Snell and Christine Ferretti
The Detroit News

Detroit — Emergency Manager Kevyn Orr signaled Wednesday he wants to freeze the city’s General Pension fund Dec. 31 and replace active employee pensions with a plan similar to a 401(k).

Orr’s legal team at Jones Day sent a proposal to the General Fund board Wednesday outlining a plan to freeze future retirement benefits. Orr told The News in June he is considering switching employees to a defined contribution plan.

Retirees would still collect pensions but the move would freeze benefits for current employees and end certain cost-of-living adjustments, according to a copy of the proposal obtained by The News on Thursday.

Any such move would have to be approved by state Treasurer Andy Dillon, who could not immediately be reached for comment.

“No one from the (General pension fund) had any input into this proposal,” fund spokeswoman Tina Bassett said in a statement Thursday. “We 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.”

The pension fund does not understand why Orr’s legal team would make the proposal before U.S. Bankruptcy Judge Steven Rhodes holds a trial next month that will determine whether the city is eligible for Chapter 9 bankruptcy protection, Bassett said.

The proposal was met with disgust by an official with the city’s largest union, the American Federation of State, County and Municipal Employees.

Ending cost of living adjustments would violate state constitutional pension protections, said Steven Kreisberg, AFSCME’s director of collective bargaining.

“That aspect is clearly legally questionable,” Kreisberg said. “The rest of the proposal is morally questionable. To undertake something like this at the beginning of the bankruptcy process, where the parties are having serious negotiations is evident Kevyn Orr has no intention of working with Detroit, or the people of Detroit.

“It is arrogant, it is high-handed and, ultimately, counter-productive,” he added.

The proposal surfaced Thursday just ahead of the release of audits of the city’s retirement system that could provide justification to take over at least one of the city’s two pension funds.

That long-awaited 39-page audit, commissioned by Orr, found city pension funds lost more than $73 million on real estate deals and gave employees questionable bonus payments.

Meanwhile, Orr’s team spelled out his plan to freeze pensions in a six-page proposal to the general retirement system.

The proposal by law firm Jones Day suggests a pension freeze date of Dec. 31, 2013. At that time, the General Retirement System would be closed to all new employees and all future member benefits accrued would be frozen, based on years of benefit service and average final compensation. Active members who are not vested as of the freeze date will not be entitled to benefits, the proposal said.

The proposal outlines two retirement plans: a qualified defined contribution plan and an eligible deferred compensation plan. The plans would be effective Jan. 1 or following outsourcing of the city’s payroll, it says.

The defined contribution proposal, known as a 401(a) plan, calls for mandatory employer contributions equal to five percent of the employee’s pay. The employer will not make contributions to the deferred compensation or 457(b) plan, the proposal says.

Elective employee contributions are allowed under the deferred plan. There will be no elective or mandatory employee contributions for the defined plan, it says.

The proposal also seeks the formation of a joint, five-member committee to oversee the administration and investment of the assets of both plans. All matters before the committee will be decided by a majority vote and the members shall serve without separate compensation, it says.

In another move on Wednesday, Orr ordered 21 pension officials — including City Council President Saunteel Jenkins — to turn over records relating to more than $1.9 billion in excess earnings paid to city retirees and employees.

Orr wants various documents and records relating to the pension fund’s practice of issuing bonus checks to retirees and a savings plan for current employees. The excess earnings totaled $1.92 billion since the mid 1980s.

The order came almost three weeks after The News reported on a city restructuring expert’s report claiming that pension trustees weakened the city’s retirement fund by using hundreds of millions of dollars on savings plans for active workers and doling out annual bonus checks.

The practice — in effect since at least the mid-1980s — was “effectively robbing” the city’s pension funds and contributed to a “significant underfunding” of the city’s pension funds, according to a report from restructuring firm Conway MacKenzie.

Orr could terminate the savings plans if he takes control of the pension fund. The bonus checks — a so-called 13th monthly pension payout for retirees when the funds made more money than expected — ended two years ago.

Orr has said he would need “overwhelming” evidence of alleged waste and investment mismanagement within city pension funds before he would consider taking control of a retirement system worth more than $5 billion.

The pension funds are the city’s largest creditors and among its biggest adversaries in the historic bankruptcy case.

Both pension funds are challenging the city’s eligibility to receive Chapter 9 bankruptcy relief and contend Orr inflates their level of underfunding by $2 billion as a way to extract deep cuts from 23,500 pensioners. Orr estimates that the pension funds are underfunded by $3.5 billion — a claim disputed by the retirement system.

The 2012 emergency manager law empowers Dillon to authorize Orr to remove trustees of the pension boards if Orr can prove the pension funds are less than 80 percent funded.

In recent years, Detroit’s two pension funds have been embroiled in a federal criminal probe, while having to fend off complaints about lousy real estate investments and lavish travel for trustees.

Some of the most salacious accusations involving the pension fund are listed in a federal indictment against six former city and pension fund officials, including former Mayor Kwame Kilpatrick’s fraternity brother, former city Treasurer Jeffrey Beasley.

The indictment alleges a bribery and kickback scandal involving pension officials and businessmen. The scandal led to the pension funds losing more than $84 million on allegedly corrupt investments during Kilpatrick’s tenure, according to the indictment.

One former Detroit Police & Fire pension trustee, Paul Stewart, allegedly received a $5,000 casino chip bribe, a Christmas basket stuffed with cash, $2,500 during a trip to New York City and $2,500 during a trip to Florida and trips to the Bahamas and Naples, Fla., with his mistress, all from people doing business with the pension fund, according to the indictment.

The Police & Fire Retirement System’s actuary said as of last year the fund was 96 percent funded with a $147 million shortfall.

Orr has threatened to stick the police and firefighters with their numbers, potentially diminishing the amount of money the pension system could claim in the city’s proposed debt settlement in bankruptcy.

The Detroit General Retirement System has acknowledged being 77 percent funded, with an $829 million unfunded liability. Orr’s consultants at the Seattle firm Milliman estimate the fund is actually $2 billion short of what’s needed to pay retirees and 65 percent funded.
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