Edna Love's 58 years as a nurse for Detroit's health departmentearned her a $2,000-a-month pension when she retired in 2011. Thatpales next to the $1 million she got from a separate city-sponsoredsavings plan where she put 5 percent of her pay year afteryear.

The annuity savings program within the Detroit GeneralRetirement System created a class of privileged retirees in a citywhere pensions average about $19,000 a year, according to municipalrecords. The accounts got $756.2 million from the pension fundduring 1985 through 2007 as extra interest, atop a guaranteed 7.9percent backed by public money.

“Where else could you earn that kind of money today?” Love, 83,said in a telephone interview from a retirement home in Saline,Michigan. “At the time the city was doing well, we weren't worriedabout bankruptcy. It was a good place to work.”

The use of money from the $2.6 billion pension to bolster thesavings accounts has drawn scrutiny from Kevyn Orr, thestate-appointed emergency manager, whose plan to reduce Detroitpensions through the largest U.S. municipal bankruptcy stirsoutrage among 20,000 retirees. Orr may recoup what the fund paid tothe savings program, said his spokesman, Bill Nowling.

“There has to be a reckoning of what was legitimate interest forthose annuity funds, and what was largess added by the pensionboard,” Nowling said. “There is some argument that that moneybelongs to the city, and creditors could try to claim it.”

Orr has said Detroit's general retirement plan and its pensionfor police and firefighters are underfunded by a combined $3.5billion, a figure system officials and unions call inflated.Michigan allows an emergency manager to take over a municipalpension less than 80 percent funded.

Many of the 25 largest U.S. cities maintain pensions that areunder stress, according to a Nov. 12 study by Chicago-basedMorningstar Inc., an investment-research firm. Yet Detroit's use ofpublic-pension funds to pad employee savings plans is unusual, saidKeith Brainard, Georgetown, Texas-based research director for theNational Association of State Retirement Administrators.

“I've never heard of that happening,” Brainard said in a phoneinterview. “I'm not aware of a guaranteed return on adefined-contribution plan.”

Sharing Wealth

Detroit's general pension is run by a board representingretirees and the city. The savings program, called a 401(a) afterthe section of federal law that authorizes it, was meant to boostretirement incomes and was supplemented whenever the generalpension exceeded its investment target, said fund spokeswoman TinaBassett.

The annuity plan in its current form dates to 1973, according toMichael VanOverbeke, attorney for the fund.

Employees contributed as much as 7 percent of their pay and from1999 to 2011 received a guaranteed annual base return of 7.9percent.

The program has paid new retirees or those who left the citywide-ranging amounts, depending on how long and how much theyinvested. In November 2005, the plan paid $852,707 to one worker,but only $2,700 to another, according to pension board minutes.People could take savings in a lump sum or monthly payments.

Money for pensions and the annuity plan was commingled. If thepension's return fell below 7.9 percent, enough was credited to theannuity fund to meet the guaranteed rate, according to Orr'srestructuring adviser Charles Moore.

The bonus interest applied to employee savings was “effectivelyrobbing the general retirement system of precious funds” to sustaintraditional pensions, Moore wrote in the city's July 18 bankruptcyfiling. He said that though the pension fund lost 24 percent of itsvalue in 2009, it still guaranteed the savings plan's 7.9 percentreturn.

The transfers and extra interest were authorized by the pensionboard and city council, and were discontinued last year, Bassettsaid.

“These were revenue from those investments, and we thought wewould be able to share them,” she said.

In 2006 and 2007, the pension paid the savings plan a total of$176.1 million by adding 13.5 percent and 15 percent interest,respectively, on top of the base rate. That raised the total returnthose years to 21.4 percent and 22.9 percent. No extra interest waspaid from 2000 to 2004, or from 2008 to 2013.

No Skulduggery

Besides pumping up the savings accounts, the general pensionpaid $195 million to retirees with “13th checks,” year-end stipendsin addition to their monthly benefit. In all, the 13th checks andpayments to the savings program cost the general pension $1.9billion, including forgone interest, according to a 2011 report tothe Detroit City Council.

The pension did what was allowed under city rules andcollective-bargaining agreements, said VanOverbeke, the attorney.Employees agreed to smaller pensions in return for larger savingsaccounts, VanOverbeke said.

In 2011, the city banned the 13th checks and ceased to guaranteeminimum interest rates for the savings, basing them instead onprivate annuity-market returns, VanOverbeke said. This year, thesavings plan earned no interest, he said.

“Things are being done appropriately and in accordance with theplan document,” VanOverbeke said. “They're really making sure duediligence is done.”

Orr wants to freeze the savings program and pensions and shiftemployees to a new defined-contribution plan such as a 401(k),Nowling said. Only vested police and fire fighters could keep theirpension plan.

Orr's proposed changes are in mediation with retirees andemployee unions.

Retiree Mike Mulholland said he received $250,000 from hissavings, along with a $1,650 monthly pension from his $41,400 finalsalary. As senior operator at Detroit's sewage plant, he said hewishes he'd put more in savings during his 29 years.

“Everybody knew about this; it wasn't hidden,” Mulholland said.A good retirement plan compensated for lower pay at the waterdepartment compared with similar jobs in the private sector,Mulholland said. He considers his retirement benefits deferredincome.

“I didn't make the rules,” he said. “I did as best I couldworking a job at a sewage plant, which not a lot of people wouldwant to work.”

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