Detroit city audit: More of the same

By Rod Meloni - Reporter, CFP ®

DETROIT - The city of Detroit operates largely as a jobs and benefits program masquerading as a service provider.

Cops often don't come when they are called, same for EMS and we have heard stories of trash pickups happening in the middle of the night if they come at all. It's no secret and only confirmed reading report after endless report regarding how the city's service operations run ... or more clearly stated, don't run. So when they Emergency Manager's office released an audit report looking at the city's business operations today, including its pension funds, it was really just more of the same old song. It is now the very sad and expected norm. Investigators find people clinging to the City's coffers as if they held the last dimes in Michigan.

View: Joint statement on Retirement Systems of the City of Detroit
View: Detroit city audit

Roughly half of all unemployment claims the audit looked at [there were nearly fifteen hundred] were bogus or suspicious. These are people improperly taking cash from taxpayers. Now this kind of theft is fairly common and it's likely you could find it in other major American cities. But Detroit always seems capable of one-upping others with just a little flair. On the Detroit city unemployment books are independent contractors. That's right, people who are not even city employees, just people brought in to do specific tasks and then leave, people who don't qualify for any city employee benefits, are somehow getting unemployment checks now that they've left the job. It's bad enough the City of Detroit allows these kinds of thefts to happen but making it worse is the city neither seems interested in or able to unearth this kind of abuse as a matter of course. It takes an outside audit to discover this kind of flagrant and widespread abuse.

There is another matter pressing. The Detroit City Pension Funds were allowed, especially during the Kilpatrick administration, to lend money and buy property. Now, investing the pensioner's money is the Board's job. But using it as a personal ATM for friends looking to build a new business or buying up land that may or may not pan out as a good business deal is something that's frowned upon in the pension world and by the FBI.

While it is legal, it is that way only to a point. Do too much and you run afoul of the law. We already know there are federal indictments against Kilpatrick cronies who profited from this version of the friends and family plan. But the audit report says the problem is more widespread than we knew. $79 million dollars-worth of questionable real estate deals are going to get a closer look by Kevyn Orr and his team.

The audit also raises questions about the use of overtime and other methods of increasing the income thresholds city employees use to determine their post-retirement benefit checks. The auditor says this does not violate the city charter but questions the advisability of the business practice. Let's remember that Detroit lays claim to the largest ever American municipal bankruptcy for just such issues. To get eighteen billion dollars in debt you need to work hard at running up the credit cards. At every turn, in every report published on the subject, shows the profligate spending is not a coincidence.

Now that the Bankruptcy case has been filed the Emergency Manager Kevyn Orr is looking at how to fix these problems. One of the ways he sees doing it is by freezing the pensions. While ominous sounding, it does not have to be. Orr proposes to allow those city employees with 10 years or more service by the end of the year to remain in the defined benefit pension program. If you have fewer than ten years or are a new employee you will be funneled into a 401k style retirement plan that the city will match with a six per cent annual contribution.

The Detroit Pension Board is highly unimpressed with this idea, and the city's unions have been standing on their collective heads doing everything they can to prevent this kind of benefits change. This is an issue that will likely be decided outside bankruptcy and while there may be some IRS issues with this plan this is a fairly common transition done in business bankruptcies and even other municipal bankruptcies. If it happens it is likely to come at year's end.

The only good news that can be divined from stories like this one is that at least we are getting to the bottom of what is and has gone wrong with Detroit. It seems impossible to be surprised anymore by investigative findings. It's just more of the same. Still, half of President Barack Obama's cabinet will fly to Detroit tomorrow to offer some small amount of help; mostly just greasing the bureaucratic skids that should shake loose a lot of grant money Detroit's own bureaucracy is often incapable of figuring out how to qualify for to receive.

It's a beginning, and it's not anything near the billions required to fix once and for all Detroit's dire economic problems. But it's a start. A start Detroit desperately needs to get that part of its recovery going.

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