When Kevyn Orr was appointed as Detroit’s interim financial manager back in March, he launched an investigation into just how deep the city’s financial hole really was. He should have waited until September when, after months of digging through records hidden from public view, the Detroit Free Press issued its own 6,000-word report.
Orr found catastrophe after catastrophe: computer systems that were woefully inadequate, accounting standards that were being violated and ignored, pension plans which greatly overestimated their expected returns, half of taxpayers owing real estate taxes who weren't paying them, street lights not working, ambulances not running, unemployment approaching 20 percent — his list went on.
Unfortunately, Orr’s list wasn't complete. When the Detroit Free Press exposed the pension-plan shenanigans, even the New York Times took notice: The trustees of the two pension plans covering city workers had for nearly 25 years been illegally paying out “13th month” checks and other disbursements because they could do it with impunity. Those illegal checks, when added up over the years, along with the interest those funds could have earned had they remained in the plans where they belonged, amount today to more than $2 billion. While amounting to a fraction of the $18 billion shortfall Detroit is facing, such behavior is illustrative of the self-dealing, corruption, and denial of basic principles of fair play that have plagued Detroit for nearly six decades.
Here’s how the game was played: A pension plan is designed around a number of vitally important assumptions — how much is contributed, how much those sums will earn until they are disbursed, and how long the beneficiaries will live. It’s that “interest rate” assumption that lies near the root of Detroit’s pension problems: The trustees chose to ignore reality and kept the assumption too high, thereby reducing the required contributions from the city and its current workers. When the plans’ investments performed better than expected, the plans’ trustees considered that a “windfall” event and, instead of leaving those funds invested against the inevitable day when those investments underperformed, gave the money away. It issued 13th month checks to its present retirees, usually at the end of the year, as well as giving this “free money” to its present workers.
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Photo of Detroit skyline from Detroit River