The Detroit Free Press reported Sunday its review of city records showed the money was paid out over two decades to retirees and active employees' retirement accounts instead of being reinvested for the future.
The newspaper said the extra payments stoked Detroit's financial crisis by increasing the amount the city needed to come up with each year to keep the pension fund solvent.
The Free Press said had the General Retirement System reinvested its excess cash, the city might not have borrowed $1.44 billion in 2005 to meet the city's unfunded pension liabilities. Detroit now faces about $3.5 billion in unfunded pension responsibilities, a key factor in its decision to file for chapter 9 bankruptcy in July.
"If it had been reinvested, maybe it's worth a billion and a half today," said Ed Rago, a former city budget director. "It's always been a bug in my ass. Always angry about that."
The newspaper said it was unclear how much may have been distributed in similar fashion by the city's other pension fund that covers police and fire service employees. Officials told the newspaper it was not as prevalent or long-running a practice in that pension fund, and Rago estimates the total at $218 million from 2000-02.
The Detroit City Council outlawed the practice in 2011.
Sandra Studzinski, who served on the General Retirement System board from 1996 to 2004, defends the payments.
"Things were always bad for employees," she said. "It was a way to make up for lots of the years that there were no pension increases."