Detroit eyes freezing pensions, probes city's dysfunction

Reuters

By Joseph Lichterman and Deepa Seetharaman

DETROIT, Sept 26 (Reuters) - Detroit's emergency managerproposed freezing pension benefits for some current city workersstarting in 2014 and will launch a two-month probe into thecity's dysfunctional and error-prone handling of employeebenefits.

A copy of Kevyn Orr's proposal was released by one ofDetroit's two pension boards on Thursday, the same day thecity's auditors posted a report that shed light on how Detroitoverpaid benefits, including unemployment compensation foralmost two years to 58 people who never worked for the city.

The report also raised the question of whether there wasfraud in doling out some unemployment claims. The auditors'review of nearly two years of unemployment compensation claimsfound that 13 percent were likely fraudulent and another 36percent were highly questionable and required investigation.

In his pension proposal, Orr, who was tapped by the state ofMichigan in March to run its biggest city, would close thegeneral retirement fund, which represents non-uniform cityworkers, to all future city workers and freeze it for currentworkers as of Dec. 31. The city would replace the pensions with401(a) and 457(b) retirement plans.

Tackling the city's pension overhang is a critical task forOrr, who is trying to restructure Detroit's $18.5 billion indebt and long-term liabilities after the city filed for thelargest municipal bankruptcy in U.S. history on July 18.

The city's financial problems have eroded residents' qualityof life. In a court order Thursday, U.S. Bankruptcy Judge StevenRhodes wrote that he has heard "truly disturbing accounts of theconsequences of the City's inability to provide basic services."

Detroit's two retirement funds are underfunded by $3.5billion, with $2 billion of the liabilities coming from theGeneral Retirement System, according to the actuarial firmMilliman, which has been hired by Orr.

The fund, which disagrees with Milliman's calculations, wasnot consulted on the proposed changes to retirement benefits,fund spokeswoman Tina Bassett said in a statement,

"We believe it is unseemly and disingenuous to present aproposal involving a new benefit structure that will affect thepensions of our members, beneficiaries and city employees notyet vested, without seeking our input, suggestions, knowledgeand expertise," Bassett said.

The two retirement funds are the city's largest creditorsand have filed objections to Detroit's bankruptcy filing. Thecity is still in the process of proving it is eligible to filethe Chapter 9 bankruptcy petition, and Rhodes will beginhearings on the issue next month.

Part of Orr's strategy to address the city's problems is tooverhaul the outdated method by which Detroit tracks and managesunemployment, pension and medical payments. Thursday's auditors'report offered an early look at those missteps, which will beexamined further in the second report.

The initial probe found that the pension plans were overlyinvested in real estate while policies on what constitutedovertime varied department by department. Managing healthcarebenefits involved keeping track of more than 10,000 deductioncodes.

The seven-person budget office was overwhelmed by the taskof administering healthcare benefits for more than 30,000 activeand retired city workers.

"It was found to be an extremely labor intensive processthat lacks good documentation, uniformity of processes and it isprone to errors," the report said.

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