June 21 (Bloomberg) -- Detroit workers not already vested in a city pension would be excluded and many retirees would be moved to federal health-care programs under cost cuts emergency manager Kevyn Orr outlined for union leaders yesterday.
For those covered by a plan, benefits would be frozen and some would be switched to 401(k)-like defined-contribution savings accounts, under Orr’s proposal. He hasn’t determined how much to take from future or current retirees, pending an actuarial analysis. Automatic cost-of-living raises would be eliminated, and worker contributions into the system would rise.
“This is insulting, I feel violated,” Catherine Phillips, 55, a water and sewer department retiree, said after hearing Orr’s plan. “I didn’t put in 30 years with the city to have a benefit I deserve stripped from me.”
The proposal, laid out at two sessions led by Orr’s advisers on municipal restructuring, provoked angry responses from some union leaders who said Orr was dictating unpalatable benefit cuts for workers to help erase deficits and avoid filing the largest U.S. municipal bankruptcy. Orr’s plan would pay pennies on the dollar to some debt holders; others may get more.
“People are angry because it’s the same old horse crap -- it’s their way or the highway,” said Ed McNeil, assistant to Al Garrett, president of the American Federation of State, County and Municipal Employees Council 25. The local represents about 2,000 Detroit workers. McNeil said Orr’s plan is a prelude to the imposition of new contract terms for city unions.
Officials representing police and firefighters said they would study and respond to Orr’s proposal, which would affect about 30,000 current and former city workers.
“We have to go back and deliberate and come back with some form of unified response,” said Dan McNamara, president of the Detroit Fire Fighters Association. “This is reality, we’re trying to find the best way, if possible, to work together and come to a solution for the city.”
Orr may keep non-vested police and firefighters on their current pension plans, said Bill Nowling, a spokesman. Michigan law gives Orr, a bankruptcy lawyer from Washington appointed by Republican Governor Rick Snyder, the authority to rewrite city contracts. He has called Detroit’s $5.7 billion in health and pension liabilities an unsustainable burden for a city that has lost a quarter of its residents since 2000.
Detroit’s two municipal pension systems have set aside a combined $5 million to fight in court any changes sought by Orr.
The sessions with about 125 union leaders followed Orr’s June 14 meeting with more than 100 creditors and his suspension of payments on some Detroit debt. Orr proposed a financial overhaul that would provide no more than 10 cents on the dollar for $2 billion of unsecured debt, including more than $1 billion tied to pensions, as well as reducing obligations to retirees.
Bankruptcy might be a better deal for city workers and retirees, said Henry Gaffney, president of Amalgamated Transit Union Local 26, which represents bus drivers. The worst part of the plan would be the denial of pensions to employees with less than 10 years of service, he said.
Orr’s proposals are meant to spur more talks with unions, Nowling said.
“There’s always room for negotiation,” Nowling said. “We’re open to any alternate proposals that reach the same objectives.”
Orr ordered an investigation into employee-benefit programs yesterday, including the insurance and pension systems. He told the inspector general and auditor general offices, which both have subpoena power, to deliver their reports within 60 days.
The documents should cover “next steps, and any corrective, prospective, legal, additional investigatory or other action designed to address any waste, abuse, fraud or corruption uncovered,” according to the order.
Wages, benefits and pensions took 41 percent of city revenue this fiscal year, according to a report from Orr. It showed that benefit and pension costs per employee had increased to $24,000 from $18,000 in 2000. Skipping payments to the funds and borrowing has kept the city afloat, according to the report.
Orr wants to examine questionable investments by the pensions, such as real-estate ventures, Nowling said. He said both funds may have less money than needed to pay promised benefits. The General Retirement System may have just 60 percent of assets needed to meet future obligations, he said. State law lets Orr assume control of the funds under certain conditions.
The investigation also will probe possible abuse of disability aid, Nowling said. The agencies will consider claims that 200 of the city transportation department’s 900 employees received such benefits, he said.
Matt Gnatek, chairman of Detroit’s Police and Fire Retirement System board, said he welcomes an investigation.
“We have nothing to hide,” Gnatek said by telephone. “We will cooperate with any investigation. We look forward to it.”
In a joint statement, the two funds said Orr hadn’t held “substantive meetings’ with pension overseers before calling for the probes. “We have reservations about the EM’s authority to conduct an investigation,” the pensions said in the statement sent by Bruce Babiarz, a spokesman for the police and fire plan. “We will fully cooperate with any reasonable requests for information.”
In March, Ronald Zajac, general counsel of the funds, and Paul Stewart, a former Police and Fire pension trustee, were charged with participating in a bribery and kickback conspiracy involving more than $200 million in investments, according to a U.S. Justice Department statement.
Zajac and Stewart were added to an indictment that charged Jeffrey Beasley, the former city treasurer, in February 2012 with taking bribes and kickbacks in return for approving pension investments, according to the statement. Losses tied to the conspiracy exceeded $84 million, the Justice Department said.
Former Mayor Kwame Kilpatrick and Beasley also were sued in May 2012 by the U.S. Securities and Exchange Commission, which accused them of steering pension business to a firm that provided them with $125,000 in gifts.
Chauncey C. Mayfield, a Detroit investment adviser, this month agreed to pay $3.1 million to settle SEC claims that he stole money from the police fund to finance the purchase of two California strip malls.
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