Bonds

Bankruptcy court judge sides with Detroit on pension dispute

A federal bankruptcy court judge sided with Detroit in a ruling Monday that the police and fire pension system lacked authority to bypass the city’s Chapter 9 plan of adjustment and cut 10 years off the amortization of unfunded liabilities.

The Police and Fire Retirement System voted in 2021 to shift to a 20-year amortization of unfunded legacy liabilities from the 30-year term laid out in the city’s plan of adjustment — or POA — that cleared the path for its exit from Chapter 9 in late 2014.

Mayor Mike Duggan warned that such a move would set back city fiscal strides and could drive deep service cuts as the city has long been preparing to resume payments in fiscal 2024, which begins July 1, based on a 30-year amortization. The city asked the U.S. Bankruptcy Court last August to block the action and enforce the POA.

If the court had sided with the fund, the change would have added about $12 million to the annual payments with a further bump upward also expected as the General Retirement System intends to follow the PFRS’ lead.

“For the reasons stated in this opinion, the court concludes that the city is correct, that a 30-year amortization is indeed part of the confirmed POA, and that the PFRS cannot change it,” Judge Thomas J. Tucker said in his opinion granting the city’s motion to for a declaratory judgment blocking any shortening of the amortization term.  

The PFRS is considering its options. 

“The Police and Fire Retirement System is reviewing the ruling with counsel. The board could file a motion to reconsider, an appeal or let the ruling stand. The next scheduled meeting is not until July 20 but a special meeting could be called,” PFRS spokesman Bruce Babiarz said in an email. “Both the PFRS board and investment committee, sworn fiduciaries to the pension system, voted for the 20-year amortization and it is disappointing to have a federal judge weigh-in at the last hour on this important issue.”

Duggan’s office was expected to comment later Monday.

The PFRS had disputed the city’s contention and argued that no particular amortization was required as part of the POA and that it had authority to decide the amortization term used to compute the city’s annual contribution to the UAAL as of June 30, 2023.

PFRS argued that it had authority to set the amortization term and the confirmation order could not incorporate a 30- year amortization because doing so would create a conflict with the plan of adjustment document and its exhibits, namely, the new PFRS plan and the state contribution agreement.

The court rejected the argument that the fund had any rights to set the amortization term and that the state funding agreement provided a conflict. The judge noted the lengthy debate on the amortization during the confirmation plan’s review period and the fact that pension creditors overwhelmingly voted to accept the plan by an 82% margin.

“The 30-year amortization of the PFRS UAAL, existing as of June 30, 2023, is part of the confirmed POA and is binding on the PFRS, by virtue of the confirmation order’s express incorporation of the confirmation opinion. The confirmation opinion clearly shows the 30-year amortization,” the judge wrote. “That confirmed POA must be enforced as written.”

“The PFRS is wrong in arguing that there is any conflict in the plan-related documents. But also the PFRS is wrong in arguing that the plan document and exhibits control if they conflict with the confirmation order. The opposite is true,” the opinion read.

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.

The city has been building up a special fund, known as the Retiree Protection Fund, to help blunt the impact of payments that are set to resume in fiscal 2024 after a bankruptcy court-approved 10-year holiday from paying down legacy liabilities. The city has accumulated $473 million in the fund.

PFRF’s attempt to shift to the 20-year cycle threw a wrench in long-term plans as it would have more quickly drained the fund. The General Retirement Fund planned to wait on a court ruling to set its amortization term.  

The actuarially determined contribution in the fiscal 2024 budget is $149 million based on a PFRS 20-year amortization and GRS 30-year amortization.

“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,” read the motion filed Aug. 3 in the U.S. Bankruptcy Court Eastern District of Michigan, Southern Division.

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.”

The city’s general retirement system carries $909 million of unfunded liabilities and is 62.7% funded while the police and fire fund carries an $820 million unfunded tab and is 74.9% funded.

Both plans were frozen in bankruptcy and replaced for new hires 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 a 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 relief from the higher payments eases pressures weighing on the city’s ability to maintain balanced operations and keep clear of state oversight. The city has balanced its budgets and won rating upgrades that have moved it closer to investment-grade status. The state government’s Detroit Financial Review Commission, put in place to watch over city finances after its bankruptcy, Monday approved a sixth annual waiver from direct oversight just before the opinion posted on the court’s website.

Detroit’s bankruptcy case is No. 13-53846.

Articles You May Like

Biden sets 10-year deadline for cities to replace their lead pipes
Washington, D.C., credit upgraded
Peru has attracted a slew of foreign investors into its credit market. Here’s why
Texas Capital beefs up public finance team with five hires
DP World shelves £1bn UK investment pledge ahead of summit