This article was first published at The McAlvany Intelligence Advisor on Friday, September 27th, 2013:
When Kevyn Orr was named Detroit’s interim financial manager by Michigan Governor Rick Snyder back in March, he was picked because he had experience in resurrecting other cities that found themselves in trouble. But it’s doubtful that Orr had any idea of the width, the breadth, and the depth of the corruption and deceit that awaited him when he began.
By June he had a better idea. In announcing that he was going to seek bankruptcy protection he said the city was not going to make an interest payment of some $40 million because it would have used up 90 percent of the city’s cash. That interest payment was for the $1.4 billion the city borrowed ten years earlier to make its payments to its two pension plans which were already dreadfully underfunded.
Orr said that the city was in such bad shape that 9-1-1 call responses were taking nearly an hour, half the owners of real estate weren’t paying their taxes, the street lights weren’t working, the ambulances weren’t operating, the computer systems were offline, accounting standards were being ignored, the interest assumptions made by the pension plan trustees greatly overestimated future earnings, tax revenues were continuing their inexorable decline – his list seemed endless.
And yet it wasn’t until two weeks ago that he learned something else: the union-controlled pension plans’ trustees had been making extra monthly payments to retired city employees as well as to current workers for nearly 25 years. Called “13-month” checks, they had become part of the culture. One Detroit auditor said these checks were like dandelions – you just got used to them.
The Detroit Free Press (DFP) had sent a cadre of reporters and researchers into the field to find out what really happened to Detroit that turned it from a first class, highly successful and world-renowned city into an unkempt, crime ridden empty hulk whose population had dropped from almost 2 million to fewer than 700,000 – nearly a third of whom now live in poverty.
It took months for the DFP to learn what they needed to know. The documents were scattered across the city, buried deep in the public library, and some didn’t even exist anymore. Records of payments made before 1985 simply disappeared. And one of the two pension plans – the one covering uniformed city workers – refused to come clean with just how much they had illegally paid out over the years.
What Orr discovered was that the corruption – which Governor Snyder correctly noted – had begun more than 60 years earlier. When Coleman Young took over, he was like President Obama: he just continued and accelerated the corruption which had already infested the place.
There were attempts to rein in the checks but they failed. When Dennis Archer took over as mayor after Coleman’s corruption-ridden regime ended in January 1994, one of the first things he learned about was that “13th month” check scam and he tried to stop it. He mounted a campaign to change the city’s charter so that the city council would be empowered to override the pension plans’ trustees. He actually got his plan passed by the voters but the unions and the beneficiaries who were so used to receiving the checks lined up against the measure, took Archer to court, and Archer (and the taxpayers) lost.
Archer tried again, this time with Proposal T, which would have accomplished the same thing. He needn’t have bothered: same result. And the illegal checks continued to be sent out unimpeded.
But the inevitability of the math started catching up and the plans’ funding needs increased. In 2005 the city borrowed $1.4 billion to make up for the shortfall in funding, but all that did was buy time. When you send extra $500 checks every year to 19,000 people, the sums add up. And when those funds which should have stayed in the plans where they belonged went missing, the amount of the shortfall was calculated to be nearly $2 billion.
But it was all justified by the trustees. Some of their comments are worthy of note in understanding just how they were able to do it all with clear consciences. Sandra Studzinski, who served on Detroit’s General Retirement System (GRS) board from 1996 to 2004, told the DFP:
Things were always bad for the employees. [Giving out these illegal checks] was a way to make up for lots of years when there were no pension increases.
A spokesman for the GRS was equally candid: “People were having a hard time, living hand-to-mouth, and we thought we would give them some extra.” After all, she said, it was “appropriate” for retirees to “benefit from market upturns” because it was their money that had been paid into the plan in the first place, and so those contributions had helped make those extra gains possible.
John Riehl, who currently serves as the vice chairman of the GRS, justified the illegal actions because
Many retirees relied on that check to pay their increased utility bills during the winter. Also remember that the money would go directly into the local economy.
Ignorance isn’t a crime, but stealing is. Charles Moore is one of the pension analysts helping Orr sort things out and when he discovered this scam, he wrote:
[Board members took] GRS assets attributable to city contributions to fund [these] pensions … and reallocated those assets … thus effectively robbing GPS of precious funds….
Hundreds of millions of dollars of plan assets intended to support the city’s … pension arrangements were converted by GRS trustees to provide a windfall….
It’s helpful to remember that a pension plan is built around three basic assumptions: how much money needs to be contributed, how much those sums will earn over the years, and how much money will be needed to pay out as the plan’s beneficiaries retire. The trustees greatly overstated the amount those sums would earn, thus reducing the contributions required by the city and its employees. The shortfall was inevitable. All it took was time.
When the performance of the invested sums exceeded those assumptions, the trustees considered them as “windfall” profits and “free money” and so they felt free to disburse them without concern. But the plans’ assumptions recognize that in some years investment performance will be less than assumed while in other years that performance will exceed the assumptions. Averaged together, it is assumed – hoped – that the necessary funds will be there when needed as the workers retire.
The disconnect from reality expressed by those quoted is almost unfathomable. Riehl’s comment that the funds disbursed would flow into the economy (giving it, one supposes, some sort of “boost”) completely ignores the fact that those funds were first taken out of the economy!
It’s the Robin Hood mentality: take it from one, give it to another, and call it charity. That is perhaps, in one single phrase, the best summary of the corruption inherent in the progressive ideology: if there’s a need, the theft is justified.
It’s taken six decades for this cancer of collectivism to eat its way into the very marrow of Detroit, once one of the great cities of the world. Kevyn Orr is only now discovering just how deep the black hole is that he is charged with filling. It’ll take a lot more than defaults and bankruptcy proceedings. It will take a cultural shift back to moral behavior before Detroit finds its way home.
The New York Times: Undisclosed Pension Extras Cost Detroit Billions
The Detroit Free Press: Nearly $1 billion in bonuses paid from ailing Detroit pension fund