Detroit may ask bankruptcy court to counter pension fund action

Detroit plans to ask the federal bankruptcy court to intervene in pension fund actions that will add to budget strains when post-Chapter 9 contributions resume in 2024.

Legacy pension contributions came to a halt as part of the city’s restructuring plan that allowed the city to exit bankruptcy in December 2014.

The fiscal 2024 resumption of annual contributions looms large over Detroit’s post-COVID-19 recovery and the city has socked away funds in a special account called the Retiree Protection Fund to help cushion the impact on its general fund.

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The city’s police and fire pension fund threw a wrench in planning last year when it changed the amortization schedule to 20 years from 30 years for legacy unfunded liabilities. Shifting to the 20-year amortization forces the city to dig more deeply into the RPF, exhausting it more quickly.

“We definitely will go back to bankruptcy court,” Detroit Mayor Mike Duggan told council members when the issue came up during the presentation Monday of his proposed $2.45 billion budget for fiscal 2023.

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.

“I think we have a good chance of getting the bankruptcy court to set that aside, but my bigger question is why does the city of Detroit have no role in picking the investment committee that is making the decisions on our retirees’ pensions,” Duggan said. “If we don’t get help in the bankruptcy court we may go to the legislature and say this isn’t right.”

In the absence of a change, the city would eventually “be looking at budget cuts,” which Duggan said he considers unfair given that the city has acted of its own accord to set aside funds to manage the pension payments.

Based on a 30-year amortization of legacy obligations for both its funds, the city would expect to make a $117.2 million payment in fiscal 2024 with the final payment depending on investment returns and other actuarial metrics.

If the general retirement system follows police and fire in moving to a 20-year amortization, the 2024 contribution rises to $141.4 million. If the general employee pension fund sticks with the 30-year plan and the police and fire system is allowed to keep the 20-year plan, the payment is $131 million.

Backers of shrinking the 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 police/fire fund did not immediately respond to a request for comment.

The numbers have proven difficult to estimate due to the influence of actuarial factors. The bankruptcy plan of adjustment anticipated a $111 million payment while fiscal 2014 projections warned of a $171 million contribution and by fiscal 2020 that had risen to $186 million.

Going forward, the projections could range from $130 million to $200 million.

The city would tap $58 million from the Retiree Protection Fund to supplement $73 million coming from the general fund for the fiscal 2024 contribution of roughly $131 million. Use of the RPF would taper off through fiscal 2039.

By fiscal 2040, all or most of the estimated $148 million payment would come from the general fund. The schedule is based on current actuarial estimates and the police and fire fund’s move to a 20-year amortization and maintenance of the general employee fund at 30 years.

Pensions were a key factor in a so-called "Grand Bargain" during bankruptcy in which the art collection of the city-owned Detroit Institute of Arts museum was transferred to a private trust and more than $800 million, much of it from private foundations and some from state government, went to protect most city employee pension benefits.

Grand Bargain contributions to the RPF end in fiscal 2035.

The city is on track to exceed pre-pandemic revenue levels based on projections set at a revenue estimating conference in February.

Duggan's proposed $2.45 billion budget includes $2.3 billion of recurring revenue sources. The general fund makes up $1.215 billion of the budget of which $1.146 billion is recurring. The recurring piece of the general fund budget is up $91 million from fiscal 2021. It doesn’t include any American Rescue Plan Act relief as the City Council separately approved plans for the city’s $826 million share last year.

“What we are presenting today is a post-crisis budget … it’s really a return to normal budget,” Duggan said. “Now there is no federal money. This is a return to normal budget.”

Four-year plans and balanced budgets were among the financial metrics required as part of the city’s bankruptcy exit and laid out in state statutes to shed oversight by the Detroit Financial Review Commission. The commission waived direct oversight for the fourth consecutive year in June.

Deficit spending or any other violations would trigger a return to direct oversight. The city must meet its targets for an additional 10 years after active oversight ends to operate fully independent of oversight. A balanced 2023 budget would mark a half-way point to “having the state gone for good,” Duggan said.

Detroit would use a piece of a $130 million remaining fund balance to beef up its rainy day fund and the RPF. The city proposes to raise by $30 million to $90 million the scheduled deposit into the Retiree Protection Fund which would bring the account’s balance to $460 million.

Another $30.7 million of the fund balance would go into the rainy day fund bringing it to $138 million.

The city plans to build the rainy day fund further in coming years with a $15 million fiscal 2024 deposit and $5 million deposit in fiscal 2025. The deposits put the city on track to hit 12% city expenses from the current required target of 10% of budget. Duggan says the future goal is to hit 15% in order to help win back investment grade ratings.

The city’s finance team warned of variables that threaten projections including the trajectory of casino and new internet gambling tax revenues and ongoing income tax losses stemming from non-residents with city-based jobs who continue working remotely.

“Risks remain to the four-year financial plan from continued remote work, lingering pandemic effects, and legacy pension liabilities,” said Jay Rising, the city’s chief financial officer. “This fiscally responsible proposed budget manages these risks with contributions to reserves and spending restraint.”

Revenues could grow if Gov. Gretchen Whitmer’s proposal to raise local revenue sharing passes, but also could face downside risks if the state adopts income tax cuts proposed by Republicans who control the legislature but are opposed by the governor, a Democrat.

The council is expected to vote on the budget April 14 and the city will present the fiscal 2023 budget and four-year plan to the DFRC May 7.

The city has won a series of upgrades since emerging from Chapter 9, but its ratings remain speculative grade. Ahead of the $175 million GO sale, S&P returned the outlook on its BB-minus rating to stable from negative. Moody’s Investors Service rates the city Ba3 with a positive outlook.