June 21, 2013 / 2:25 AM / 6 years ago

UPDATE 1-Detroit emergency manager launches pension corruption probe

By Steve Neavling

DETROIT, June 20 (Reuters) - Detroit Emergency Manager Kevyn Orr is ordering a joint probe into the city’s two pension funds to investigate possible fraud, corruption, waste and other 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.”

The city’s Police and Fire Retirement System, with 12,000 active and retired members, and the General Retirement System, with 18,000 members, issued a joint statement expressing disappointment that Orr had not met with officials prior to launching the investigations. “We intend to cooperate fully,” the statement said.

Under the state’s Emergency Manager law, Orr has the right to seize control of the city pension funds if their funding levels fall below 80 percent of obligations. The General Fund is below that level, at 77 percent, with $2 billion in assets, and the Police and Fire fund is 96 percent funded, with $3.1 billion in assets, according to the statement.

Those funding claims are in stark contrast to figures put forward in July by an actuary firm that Orr uses as a consultant, Seattle-based Milliman. The firm said “very rough preliminary guesstimates” show the police and fire pension fund was only 50 percent funded for the fiscal year ended June 30, 2010, and the general services pension fund was funded at only 32 percent.

Orr called for a preliminary report from the auditor and inspector to be issued within the next 60 days. The law requires him to make the report available to the public.

“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.

Mark Diaz, a member of the 16-member board that oversees the police and fire fund, acknowledged past troubles that led to criminal charges against former pension officials. However, he said, the pension funds are well run today.

“We’re running a tight ship right now,” said Diaz, who also is president of the Detroit Police Officers Association, the union that represents 1,923 officers.

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 met with Orr’s restructuring team to discuss plans to reduce the city’s long-term debt to stave off a Chapter 9 bankruptcy. The plan calls for shifting city-operated healthcare to Medicare or the Affordable Care Act and freezing pensions for current employees. Workers with less than 10 years on the job would be enrolled in a 401(k)-style retirement plan.

As expected, union leaders pledged to file suit, saying the state’s constitution protects municipal pensions.

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.

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