How big is the hole in the bottom?

Detroit’s Emergency City Manager claims to have found evidence of fraud in the city pension and insurance funds:

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. 

As Karl Denninger has pointed out, this is potentially much bigger than it sounds.  The suspicion is that due to the MERS-related fraud, a lot of the pension “investments” were never perfected, are already in default, and therefore a considerable amount of the money in the already woefully underfunded funds does not exist.  If fraud on a similar scale to that which took place in the housing market is discovered, it could render a number of state and municipal pension plans across the nation unable to continue to pay out benefits.

And the consequences of that would likely be interesting….