Detroit returns to bankruptcy court for pension funding dispute

Detroit is asking the bankruptcy court to require that its police and firefighters retirement system stick with a 30-year amortization period agreed to in the city’s plan of adjustment that paved the way for its Chapter 9 exit in 2014.

The city’s Police and Fire Retirement System threw a wrench in the city’s post-bankruptcy COVID-19 recovery efforts in November when it changed the amortization schedule to pay down the city’s legacy unfunded liabilities to 20 years from 30 years.

Mayor Mike Duggan told City Council members earlier this year the city couldn’t afford the change without having to cut services and said he planned to ask the court to intervene.

Detroit firefighters on a 2013 call. The city is squabbling with its Police and Fire Retirement System over the fund’s amortization schedule.

Bloomberg News

Shifting to the 20-year amortization schedule forces the city to dig more deeply into a special account set up to help cover payments when they resume in 2024 after a 10-year pension holiday, which would exhaust the account more quickly and strain the general fund.

“The additional hundreds of millions of dollars of front-loaded payments under 20-year amortization would be devastating to the city’s ability to fund critical programs needed to improve city services, attract employment opportunities, and otherwise continue to successfully implement the POA,” reads the motion filed Aug. 3 in the U.S. Bankruptcy Court Eastern District of Michigan, Southern Division.

The city argues that the bankruptcy confirmation order explicitly required the unfunded accrued actuarial liability be amortized over 30 years and the system’s move to a 20-year term “is a violation of the confirmation order.”

Miller Canfield attorneys Marc Swanson and Charles Raimi are representing the city.

Supporters of the shorter amortization period believe it’s needed to stabilize the fund’s health and to keep funding ratios from dwindling in the coming years should investment returns falter.

The PFRS’ “fiduciary obligation is to ensure that benefits are paid to retired police, firefighters and their beneficiaries. Further it is our job as a board to ensure the system’s funds are properly invested and managed to provide for future funding,” board Chairman Dean Pincheck said in a statement affirming the fund’s commitment to the 20-year cycle. “The 30-year model may be better for city budgets but is not in the best interest of retirees.”

Duggan told council members in March during a budget presentation that he believed the bankruptcy court would side with the city and, if not, the city might look to legislative intervention.

Pension fund stakeholders agreed to the 30-year amortization schedule during negotiations mediated by now retired U.S. District Court Chief Judge Gerald Rosen, Duggan said. The bankruptcy was overseen by now retired U.S. Bankruptcy Judge Steven Rhodes.

Pensions pose a daunting challenge to the city’s future fiscal health. Most contributions were put on hold until 2024 as part of the city’s confirmation plan.

The new filing tells the court that the city established the special account after learning shortly after the plan of adjustment’s confirmation that the unfunded liabilities had been underreported by $500 million. The city considered a lawsuit as a reason was never provided from actuary Gabriel Roeder Smith & Company or any other actuaries or experts who worked on the POA, the filing reads.

To help manage the future impact on the general fund, the city established the Retiree Protection Fund and expects it will hold $460 million by the end of fiscal 2023.

The need to build up the fund has “deprived” the city of much of the originally intended benefit of the 10-year pension holiday that was supposed to allow the city to devote more fiscal resources to address blight, public safety, and job creation, the motion says. “It has instead irrevocably been set aside for the retirees’ pension security.”

By fiscal 2040, all or most of the estimated $148 million city pension payment for both its legacy funds would come from the general fund. The schedule is based on current actuarial estimates with the police and fire fund on a 20-year amortization term and maintenance of the General Retirement System remaining on a 30-year term.

The city received some breathing room earlier this year as an actuarial determined contribution of $186 million expected as recently as last year was lowered to about $135.4 million due to healthy fiscal 2021 investment returns as well as revised mortality tables. But the resumption of payments in 2024 will be based on a valuation as of June 30, 2022, which is expected to reflect the hit markets took in the first half of this year.

Detroit Mayor Mike Duggan made good on a threat to return to the bankruptcy court to challenge the city public safety pension fund’s decision to amortize unfunded liabilities more quickly.

Bloomberg News

The city had been anticipating a roughly $117 million payment in 2024 before the public safety amortization change. If the general retirement system also moved to a 20-year term, the current projected payment of $135.4 million would rise to $146 million.

Both plans were frozen in bankruptcy and replaced for new hires going forward with hybrid plans that combined elements of both defined benefit and defined contribution plans.

To limit pension cuts in the plan of adjustment, the city struck what was labeled the Grand Bargain: an $816 million fund with contributions from the state, the Detroit Institute of Arts, and various charities. Pension contributions were funded exclusively from the “Grand Bargain” giving the city’s 10-year payment break.

The “Grand Bargain” protected the assets of the city-owned museum from being sold off while limiting public safety retiree cuts to a 55% reduction to the cost-of-living adjustment for public safety. The police and fire class in bankruptcy voted to accept the bankruptcy plan of adjustment by 82% while 73% of the General Retirement System class members approved.

The city argues in the motion that the feasibility of the confirmation plan submitted to the court in November 2014 was based on a 40-year forecast from the city that relied on a 30-year pension amortization period of the legacy unfunded liabilities.

Detroit’s motion quotes Rhodes’ conclusion that the pension settlement was “fair and equitable” and “borders on the miraculous” given that the “Grand Bargain” staved off a potential 27% cut.

Under the plan of adjustment, investment decisions for the General Retirement System and Police and Fire Retirement System were handed over to newly created investment committees. Four public safety representatives and five independent members site on the public safety committee.

The city and mayor are not represented. The funds are then governed by a board of trustees. The city has five appointees among the 17 trustees.

In 2020, the public safety fund’s investment committee began considering a change in the amortization term and in 2021 Gabriel Roeder laid out actuarial reports adopting various amortization scenarios.

The investment committee made the recommendation to shift to a 20-year amortization in October 2021 and the board of trustees ratified it a month later over the objections of the city members.

More is at stake for the city as officials fear if the 20-year term is allowed to stand, the General Retirement System investment committee will follow. “That would roughly double the additional upfront pension funding payments for the city,” the motion warns.

The city counters the public safety fund’s assertions that its weak health requires the higher contribution levels citing its own report from Cheiron that concluded “the differences between a 20-year and 30- year amortization are negligible in terms of ensuring sufficient assets will be available to pay all future benefits under the plan.”

If the 30-year amortization is left in place, the motion reports that Duggan would support adoption of a “trigger” such that if the funded percentage of the plan fell below a certain agreed upon threshold, the city would be required to provide additional funding.

Pension pressures weigh heavily on the city’s ability to maintain balanced operations and keep clear of state oversight. The state government’s Detroit Financial Review Commission, put in place to watch over city finances after its bankruptcy, in May cleared the city for a fifth annual waiver from direct oversight. The city plans a $2.45 billion budget in fiscal 2023.

The city has won a series of upgrades since emerging from Chapter 9, but its ratings remain speculative grade.

Earlier this year, S&P Global Ratings moved the city’s rating further up the speculative grade scale and restored revenue-backed bonds to investment grade. S&P raised the rating on $361 million of unlimited tax GO debt issued in 2018, 2020, and 2021 to BB from BB-minus. Moody’s Investors Service a week earlier had raised the GO rating one notch to Ba2.

S&P raised to BBB-minus from BB-plus $157 million of 2014 income tax bonds issued through the Michigan Finance Authority’s local government loan program and $162 million of utility tax-backed Public Lighting Utility debt sold through the local government loan program. Moody’s does not rate the debt.

The city has a total of $2 billion of debt including $1.5 billion of GOs with enhanced or revenue pledge ratings. The number includes $649 million of GOs issued through the Michigan Finance Authority and linked to the state’s rating because it is supported by the city’s share of distributable state aid. Both S&P and Moody’s assign a positive outlook.

Detroit’s bankruptcy case is No. 13-53846 and is now overseen by Judge Thomas J. Tucker.

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