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Detroit Pension Funds To Be Investigated For Corruption: Emergency Manager Kevyn Orr

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KEVYN ORR
Kevyn Orr, emergency manager for the City of Detroit, sits for a photograph in his office at the Coleman A. Young Municipal Center in Detroit, Michigan, U.S., on Tuesday, May 7, 2013. Orr signed an order to investigate the city's pension funds on Thursday, June 20, 2013. Photographer: Jeff Kowalsky/Bloomberg via Getty Images | Getty Images

DETROIT — Detroit's state-appointed emergency manager on Thursday ordered an investigation into possible waste, abuse, fraud and corruption in the city's two pension funds and all employee benefit programs.

The order was signed on the same day members of Kevyn Orr's restructuring team met with union leaders on plans to cut into health care and pensions as part of city debt restructuring.

The joint investigation will be led by Detroit's auditor general and inspector general, who will report their findings to Orr within 60 days.

"As we've looked into the various operations into the pensions and other benefits, we found some irregularities that we wanted to look at," Nowling said.

Orr has warned that without millions of dollars in concessions on bond and pension debt the city risks going into municipal bankruptcy. He met last week with about 180 bond insurers, pension trustees, union representatives and other creditors on concessions needed to keep Detroit out of bankruptcy.

His team said Detroit is defaulting on about $2.5 billion in unsecured debt and is asking creditors to take about 10 cents on the dollar of what the city owes them. Underfunded pension claims likely would get less than that.

The cash-strapped city owes about $3.5 billion to Detroit's general retirement pension fund and its police and fire pension fund, according to Orr spokesman Bill Nowling.

Orr, a bankruptcy expert, was hired by the state in March to fix Detroit's finances. The city's budget deficit is approaching $380 million. Orr has said long-term debt could top $17 billion.

Officials with the city's General Retirement System and Police and Fire Retirement System said Thursday in a joint statement that they "will fully cooperate with any reasonable requests for information" as part of the investigation ordered by Orr. However, they have reservations that the emergency manager law gives him authority to conduct an 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," pension officials added.

They said the Police and Fire Retirement System is more than 96 percent funded with $3.1 billion in assets, while the General Retirement System is 77 percent funded and has assets of $2 billion.

Orr's investigation order into the pension systems follows years of mismanagement and allegations of corruption associated with the funds.

An executive overseeing $200 million in real estate investments pleaded guilty earlier this year to conspiring to bribe a city treasurer to get business. The former city treasurer also is under indictment.

Earlier this year, an Alabama businessman agreed to pay $4 million to settle a lawsuit with Detroit's pension funds over a loan to his freight airline. Donald Watkins was sued in 2008 after the pension funds said he missed a loan payment and broke other agreements.

And a federal grand jury in March indicted a former general counsel for Detroit's police and fire pension fund. The government says Ronald Zajac forced people who had business with the pension funds to pay thousands in cash to benefit pension trustees.

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