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Detroit EM Orders Investigation Into Pension Funds

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DETROIT (WWJ/AP) - Detroit Emergency Manager Kevyn Orr has ordered a fraud and corruption investigation into the police and fire pension fund and general employee pension fund.

Detroit was reportedly at least $50 million behind in payments in its pension funds as of last month. Orr said the funds may be underfunded by 35 to 40 percent.

The review will be looking for potential fraud and the findings, if anything is wrong, will be turned over to state or federal authorities.

A report on the probe is due in 60 days.

[VIEW A COPY OF THE ORDER]

The order was signed on the same day members of 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,” Orr spokesman Bill Nowling said.

Nowling said questions have also arisen regarding the pension funds’ investment strategy.

“If the funds had just been invested in blue chip stocks over the last 10 years, they would not be under-funded at all. (As a) matter of fact, the market has come back since the recession,” Nowling said. “So, if they’d just invested in normal, conservative strategy — and implemented that strategy— there’d be no problem now. So, we’re going to have to ask the question ‘Why didn’t you do that?'”

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 services 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.

His 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.

MORE: Detroit Emergency Manager Proposes Plan To Creditors

(TM and © Copyright 2013 CBS Radio Inc. and its relevant subsidiaries. CBS RADIO and EYE Logo TM and Copyright 2013 CBS Broadcasting Inc. Used under license. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)

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