Among the explanations for decades of decay in Detroit, public corruption ranks high on the list. Such was evident in a courtroom on December 8, where a federal jury convicted three persons, including Paul Stewart, formerly vice president of the Detroit Police Officers Association and a trustee of the city’s Police and Fire Retirement System, on conspiracy to commit honest services fraud through bribes and kickbacks. The cash and other gifts Stewart received weren’t enormous – they amounted to a little under $50,000 – but they were enough to induce him and other convicted co-defendants to steer pension plans toward highly risky investments that wound up losing $97 million. The case, part of a broad federal probe, is another legacy of Kwame Kilpatrick, the former Detroit mayor now serving a lengthy federal prison term on corruption charges.
The decline of Detroit is a familiar story, often accompanied by photos of abandoned or burnt-out buildings and vacant lots. The catalyst was a riot by the city’s blacks over several days in July 1967, which cost 43 lives, accelerated white flight (as well it should), and paved the way for the election in 1973 of the city’s first black mayor, Coleman Young. Serving five terms over two decades, Young proved unable, and possibly (as many critics had alleged) unwilling, to take steps to counteract the growing welfare-dependent and crime-prone black underclass. His successors, dealt a bad hand, have found reversing the situation to be highly challenging. Yet progress, if in fits and starts, is real. Due to a group of far-sighted local business leaders, most notably Quicken Loans founder-chairman Dan Gilbert, several redevelopment projects are either underway or on the boards. And the City of Detroit in December exited Chapter 9 bankruptcy less than 18 months after entering it. Back in March 2013, Michigan Republican Governor Rick Snyder had appointed Kevyn Orr as emergency manager of the city’s finances. Four months later, in July, the City, its back to the wall, declared bankruptcy, unable to pay an estimated $18 billion in outstanding debt. But the City developed a fiscal reorganization plan that was approved last November by U.S. Bankruptcy Court Judge Steven W. Rhodes. And the following month, the City made its exit official, its budget plan laying out how to shave off $7 billion in debt.
The legacy of official corruption and fiscal mismanagement, however, has continued to haunt the city. Put another way, the era of Mayor Kwame Kilpatrick (2002-08) is the gift that keeps on giving. Son of ethically-challenged U.S. Rep. Carolyn Cheeks-Kilpatrick, D-Mich., Kwame Kilpatrick ran for mayor in 2001 vowing accountability. He was elected that November. Yet his tenure in office was marked by one scandal after another. He resigned in September 2008, having pled guilty to state charges of perjury, obstruction of justice and assault related to a civil case. He received concurrent jail sentences of 120 days. But the worst was yet to come. In December 2010 Kilpatrick was indicted on a wide range of federal corruption charges. After a wrenching jury trial, he was convicted in March 2013 on a host of felonies, including wire fraud, extortion and racketeering. He’s now serving a 28-year sentence.
The fallout from those years has continued. Graft was a game a lot of people could play. One of those players was Paul Stewart. A more than 30-year veteran of the Detroit police force, he also served as vice president of his union, the Detroit Police Officers Association. And he was a trustee on the board of the Police and Fire Retirement System, which sponsors the pension plan for City cops and firefighters. Stewart, along with longtime Detroit public employee pension manager Ronald Zajac, former Detroit city treasurer-pension fund trustee Jeffrey Beasley, and several other persons, concocted a play-for-pay bribery scheme that led to the routing of public employee pension funds toward risky ventures that eventually backfired. Like Stewart, Zajac and Beasley were convicted by federal trial jury on December 8.
According to the 13-count superseding indictment handed down in March 2013, Zajac and Stewart during January 2006-April 2009 conspired with other several other persons to defraud current and retired Detroit city employees of their right to receive honest services. Zajac, now 70, general counsel for the City of Detroit’s Police and Fire Retirement System and General Retirement System, bribed Stewart and Beasley on various occasions with cash and noncash benefits in return for their votes as pension board members on issues whose outcomes would benefit Zajac and his friends. Stewart alone received more than $48,000 in cash and other things of value.
In one area, Zajac got plenty in return for his influence-peddling: personal income. Pension trustees voted him substantial raises that raised his annual compensation to more than $400,000. He didn’t do so well in another, larger area. And neither did a lot of other people. Stewart and Beasley used their clout as pension board members to steer more than $200 million toward risky investments that wound up losing a combined $97 million. This was more than a reflection of the severe nationwide financial downturn of 2007-09. According to reports filed with the Michigan state treasurer, the value of real estate held by Detroit’s General Retirement System plummeted by 47 percent, or $293.2 million, during July 1, 2008-June 30, 2012. And the real estate portfolio of the City’s Police and Fire Retirement System tanked by 33 percent, or $228.3 million, over that four-year period. By contrast, the Property Index of the National Council of Real Estate Investment Fiduciaries registered a 3.6 percent gain. City pension investments outside the real estate sector also suffered. Losses included more than $20 million on a telecom company founded by a Detroit businessman, $30 million on a cargo airline, and almost $70 million on collateralized debt obligations. Zajac may have lost money, but what mattered most is that his bribes helped bring down others with him.
In the end, Stewart and Zajac were convicted of conspiracy to commit honest services fraud via bribes and kickbacks; Beasley was convicted of conspiracy, extortion and bribery, but acquitted on three other counts of extortion. Three other defendants already had pleaded guilty. Atlanta businessman Roy Dixon pleaded guilty to bribery at the start of the trial, admitting that he provided Beasley with a luxury Caribbean vacation and $2,000 in cash in exchange for favorable treatment by the pension boards. Another defendant, investment adviser Chauncey Mayfield, cut a deal with prosecutors in 2013, admitting he bribed Beasley in exchange for pension business opportunities. And George Stanton, former chief of staff to ex-Detroit City Councilwoman Alberta Tinsley-Talabi, pleaded guilty in 2013 to having received $15,000 in cash bribes in exchange for favored pension board treatment.
All this was part of a wide-ranging federal investigation into corruption in Detroit city government. The Stewart, Zajac and Beasley verdicts, in fact, bring to 38 the number of persons convicted in the probe. Current Democratic Mayor Mike Duggan, who took office at the start of 2014, recently asserted that Detroit is “on the road to recovery.” This isn’t false optimism. Things really are looking better. The City is now on the verge of achieving a balanced budget, its first since 2002. And as public corruption has been exposed and punished, violent crime, at least in one category, is on the downswing. According to a year-end report from the U.S. Attorney’s Office for the Eastern District of Michigan, carjackings in Detroit in 2014 were down 32 percent from the previous year. Public employees have good reason to believe that their streets, like their retirement plans, are getting safer.