Detroit’s administration is vowing court action over a pension payment plan officials say will force the city to pay millions more each year for legacy debt and threaten service delivery in years to come.
City leaders have socked away hundreds of millions to ease into massive payments that begin in 2024 for its two pension funds. But the board for one of those funds decided to do away with the 30-year payment schedule contemplated by city finance officials in favor of a 20-year plan.
Mayor Mike Duggan and Chief Financial Officer Jay Rising claim the move by the Police and Fire Retirement System’s board and investment committee will grow the city’s required payment each year by $20 million to $25 million, unraveling some of Detroit’s preparations to manage the hefty costs and potentially derailing future service improvements.
Related: Pensions, continued balanced budget top priorities for Mayor Duggan
“Clearly, if we have to contribute faster, the services we provide the residents will be compromised,” Rising told BridgeDetroit.
Police and Fire Retirement System Board Chairman Ron Thomas defended the board’s action, arguing in a statement this month that the fund has an obligation to ensure 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,” added Thomas, noting actuaries and financial advisors for the board have run multiple funding scenarios and “the 20-year model is clearly in the best interest of retirees.”
Rising said “it’s not us versus you” when it comes to the city, the pension boards and their investment committees. The CFO said the administration wants to be in the best position to make the payments.
“We had an agreement on how to do it,” he said of spreading out the payments over the 30-year span. “It was balanced between the needs of the city to grow and the needs of the pensioners to be secure.”
Duggan voiced his concerns and shared plans to wage a legal challenge to the pension board’s vote during his annual budget presentation to Detroit City Council this month. The board and investment committee for the city’s other pension fund, the General Retirement System, have not adopted a policy that would deviate from the 30-year payment schedule.
The city, through a bankruptcy funding package coined the “grand bargain,” was able to shield its arts collection from creditors and direct $816 million from foundations, the state and Detroit Institute of Arts toward softening retiree pension cuts.
The deal relieved Detroit of much of its pension payments through 2023. But in 2024, the city will resume funding the contributions to the two closed pension systems from its general fund.
With the public safety pension board’s adoption of the 20-year payment plan, the city’s first contribution is expected to be about $130 million. That’s up from the $117 million projected if both pension funds had maintained the original payment timetable of 30 years, Rising said.
But even more worrisome to the city, Rising said, the annual payments aren’t set in stone. They could shift dramatically based on fluctuating mortality data and investment returns.
Detroit established a dedicated Retiree Protection Fund in 2017 to set money aside to reduce the strain on the general fund for the payments. The mayor is proposing another $90 million in his 2022-23 fiscal spending plan. If that allocation is adopted, it will bring the overall pot to $460 million, he said.
“While we may not agree with all aspects of future proposed city funding, there is a good spirit of cooperation with the administration of Mayor Duggan,” Thomas added in his statement, “we are encouraged by the city’s funding of the Retiree Protection Fund to help bolster payments to the pension system in 2024 and beyond.”
Rising said the payment schedule could be raised in bankruptcy court in the coming months. If the court declines to undo the pension board’s 20-year plan, the city would have to adjust its budget and “draw down the protection fund faster,” he said.
The city’s bankruptcy plan assumed a 6.75% rate of return on investments for the pension funds. But that rate hasn’t been consistent. Some years have come in below the assumed rate while others, including last year, exceeded expectations. The rate of return was 25% for the police and fire retirement fund last year and 28% for the General Retirement System, city finance officials said.
Thomas said the police and fire pension fund has done well, too. It has maintained a nearly $3 billion funding level since the city’s bankruptcy, even without city contributions and while paying out about $350 million per year in benefits. That, he said, is based on the “prudent work” of the board and its investment committee.
Duggan told the new council members this month that he and Detroit’s past council created the Retiree Protection Fund to prepare for the looming obligations because “we’re responsible and we care about our retirees.”
To shorten the payment period to 20 years, Duggan said, is “flat-out wrong” and “I’m pretty angry about it.”
The mayor also said he’s concerned with the makeup of the pension investment committees, which were put in place by former Gov. Rick Snyder. He raised the prospect of asking the state to allow the city to have a say in who sits on the boards, asking “shouldn’t people here have a say in who is running the investments?”
Rising said Detroit’s debt-cutting plan was carefully constructed to relieve the city of the pension obligations for nearly a decade. The bankruptcy exit plan also carved out $1.7 billion for service upgrades over the same span.
“The court said ‘you have to build yourself up to be an economically and fiscally stable city,’” Rising said.
The city’s four-year financial plan has a cushion of less than $10 million per fiscal year, Rising said. If the pension payments had started this year, he added, “that would be $20 million that I’d have to come up with.”
The city’s $827 million in federal COVID-19 relief aid can’t be used toward pension obligations.
Those dollars are meant to be one-time infusions to help the city recover from losses it has endured during the pandemic and they won’t be in play down the road.
In recent days, S&P Global Ratings and Moody’s boosted ratings for Detroit, citing its improved economic outlook and fiscal management practices.
S&P upped the city’s general obligation debt to a BB rating. Before that, Moody’s upgraded its rating for Detroit to a Ba2 from a Ba3, also with a positive outlook.
“People are more secure. There’s less blight, abandoned homes have been taken down,” Rising said. “…we’ve created opportunities for higher income jobs, training, all the things we need to do to grow wealth in the city which translates into what rating agencies look for.”
But the pension payments and the speed in which the city will pay them is an issue rating agencies will closely watch, he said.
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