News about Detroit’s pension plan shortfalls only gets worse. A new report by the New York Times indicates that excess payments of $2.3 billion might have been paid to retirees and active workers over a 23-year period from 1985-2005. Bonuses were paid to retirees; supplemental payments were made to active workers; and cash was paid to families of deceased workers before they were eligible.
Because most of the pension plan trustees represented organized labor, they were able to block moves to curtail the excess payments. By 2005, the city was running out of money and raised $1.44 billion in bonds, which it defaulted on this past June. Bondholders were not informed about these excess payments.
The city’s pension shortfall is estimated to be $3.5 billion, covering 12,000 retirees with annual payments averaging just less than $20,000. The city can sue the pension fund or try to claw back the excessive payments, neither of which seems likely or palatable. Meanwhile, the courts are grappling with the issue of whether bankruptcy courts can override state constitutional prohibitions on cutting back retirement benefits for their workers.
