Shortfalls in Detroit's Pension Funds Among the Most Difficult Problems Facing the City

Detroit emergency manager launches pension corruption probe

June 20, 2013

Reuters - Detroit Emergency Manager Kevyn Orr is ordering a joint investigation into the city's two pension funds, in search of evidence of suspected fraud, corruption, waste and other possible malfeasance.

Orr, a restructuring attorney appointed to reduce the city's runaway debt, signed an order on Thursday that calls for the city's auditor general and inspector general to investigate the funds, which handle pension benefits for more than 20,000 retirees.

"There have been many questionable investments that have been made by the fund boards, and some of those investments were made without the advice of their financial adviser," Orr's spokesman, Bill Nowling, said on Thursday. "We want to find out what happened."

Orr called for a preliminary report to be issued within the next 60 days.

"The EM believes that any such waste, fraud, abuse, or corruption in the administration operation or implementation of Benefit Programs harms the City and its residents, and that identifying and correcting such waste, abuse, fraud, or corruption is necessary and appropriate to carry out the purposes" of the state law that created the emergency manager position, Orr wrote in the order.

The investigation takes place at a time when Orr is meeting with creditors, union leaders and others with an eye toward seeking financial concessions. Orr has said Detroit will end up in bankruptcy court if creditors do not accept considerable reductions in what the city owes.

The order comes on the same day unions are meeting with Orr's restructuring team to discuss the emergency manager's plan to shift retirees from city-operated healthcare to Medicare or the Affordable Care Act.

Shortfalls in the city's pension funds are among the most difficult problems facing Detroit, and pension payments to retirees are among issues being discussed in some of the meetings Orr and his staff are holding as he seeks to stave off a Chapter 9 bankruptcy filing.

This is not the first time corruption has been suspected in Detroit's pension systems. Earlier this month, Detroit-based investment adviser Chauncey Mayfield agreed to give back $3.1 million that U.S. regulators allege he stole from a pension fund for the city's police and firefighters.

The city's former treasurer, Jeffrey Beasley, also has been charged with taking bribes in exchange for steering business to Mayfield.

The government has taken action against others allegedly involved in pension-related corruption during the administration of former Detroit Mayor Kwame Kilpatrick. In March, two former Detroit city pension officials were indicted, a week after Kilpatrick was convicted for similar offenses.