Investigations of Detroit's two pension funds due to be released Thursday are likely to show that decades of overpayments to retirees and active employees drained about $2 billion from city coffers, helping to force the city to declare the nation's largest municipal bankruptcy.
The revelations will be laid out in a much-anticipated investigation into "possible waste, abuse, fraud and corruption" at the two funds. State-appointed Emergency Manager Kevyn Orr called for the city's inspector general and auditor to conduct the investigation in June, roughly a month before Detroit's historic bankruptcy filing.
The excess payments were not an example of that fraud or corruption. Instead, officials who oversaw the funds regularly approved extra payments in addition to the promised pension benefits, based on the belief that the funds could be more generous when their investments generated positive returns.
A report given to the City Council two years ago showed that those overpayments cost the city $1.9 billion in the 21 years from 1987 through 2008. An update to those numbers is expected in Thursday's report.
The report should also lay out how much of a gap there is between the funds' assets and the benefits they've promised. A filing in the city's bankruptcy case says an actuarial firm hired by Orr estimates the underfunding at $3.5 billion. As of June 2011, the two pension funds had combined assets of about $5.8 billion, down roughly 30% over a four-year period, according to their most recent financial reports.
Orr has previously said that the financial shortfall in the two funds -- one for police and firefighters and the other for general city workers -- makes benefit cuts for both current workers and retirees inevitable. Still, he has said he would need to see extraordinary evidence of waste and mismanagement before he would consider proposing a takeover of the $5.8 billion pension funds.
The trustees who control the funds are opposing the city's bankruptcy filing and have countered that the funding situation is far less dire than Orr indicates.
No strangers to controversy, the funds are haunted by past allegations of mismanagement, and were even the subject of a federal fraud investigation.
Overall, seven people have been convicted on charges related to a corruption scheme at the pension funds, while four more are facing criminal indictments, according to an FBI document.
According to FBI and court documents, city and pension fund officials allegedly accepted bribes and kickbacks -- ranging from cash payments to lavish trips, entertainment and private plane flights -- in exchange for steering more than $200 million in pension fund investments. At least $84 million in pension fund losses have been tied to the scheme.
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