Detroit’s emergency manager, Kevyn Orr, has issued a bold order to freeze the pensions of non-uniform city employees, the Detroit News reports.
Orr’s decision — signed without announcement on Dec. 30 — applies to current and future Detroit city employees, and scraps the city’s General Retirement System, which faces a $3.5 billion shortfall.
The plan eliminates the pension “escalator,” which provides cost-of-living adjustments for pensioners within the General Retirement System. New employees won’t be able to enroll in the city’s pension plan, and city contributions to an Annuity Savings Fund will also be cut.
City employees will now be enrolled in a 401(k)-style defined-contribution plan. The city’s police and fire departments, which have separate retirement plans in place, are not effected by the change.
Orr’s plan is seen as a necessary move for the cash-strapped city. Upon his appointment last March to the office of emergency manager, Orr led Detroit into Chapter 9 bankruptcy protection. The city listed its debt at nearly $20 billion, making Detroit’s the largest ever municipal bankruptcy in U.S. history.
Funding for city services, including the sanitation department and animal control, have been curtailed to save money. Various money-saving proposals such as selling off pieces of art from Detroit Art Museum have also been considered.
As of 2011, 39 percent of Detroit’s retirement plan participants were active workers. The remaining 61 percent were drawing benefits from the plan. That was a stark shift from 2004 when 51 percent of plan participants were active workers, compared to the remaining 49 percent who were retirees.
A spokeswoman for the General Retirement System told the Detroit News that Orr’s plan was “an outrageous and over-zealous action.”
“Again the EM’s office demonstrates a lack of integrity and willingness to make a good faith effort when negotiating with our pension system,” said spokeswoman Tina Bassett in a statement. “Currently we are in the midst of mediations that we thought were going rather well. We can only wonder, why take this action now and for what purpose?”
Earlier this year, Orr commissioned an investigation into the city’s pension plan. The investigation found many inefficiencies, including that the pension made excessively risky real estate investments and wrongly gave bonuses to plan beneficiaries.
A report on the city’s pension plan given to the Detroit city council two years ago showed that the General Retirement Fund doled out $1.9 billion in overpayments to pensioners between 1987 and 2008. Those overpayments were generated by lofty assumptions made about the rates-of-return that the city’s retirement plan would earn.
The Daily Caller News Foundation’s request for comment to Orr’s office was not returned.
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