Detroit may ask bankruptcy court to overrule pension fund action

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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 were discontinued as part of the city’s restructuring plan that lifted the city out of bankruptcy in December 2014.

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

“Why does the city of Detroit have no role in selecting the investment committee that makes decisions about our retirees’ pensions?” said Mayor Mike Duggan.

Bloomberg News

The city’s police and fire department pension fund upended planning last year when it changed the amortization schedule from 30 years to 20 years for unfunded legacy liabilities. The move to 20-year amortization forces the city to dig deeper into the RPF, wearing it out faster.

“We will definitely go back to bankruptcy court,” Detroit Mayor Mike Duggan told council members when the issue was raised during Monday’s presentation of his proposed $2.45 billion budget for the financial year 2023.

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

“I think we have a good chance of getting the bankruptcy court to overturn this, but my biggest question is why the city of Detroit has no role in selecting the investment committee that takes decisions about pensions for our retirees,” Duggan mentioned. “If we don’t get help in bankruptcy court, we can go to the legislature and say it’s not right.”

Without change, the city would end up ‘considering budget cuts’, which Duggan said he considers unfair given the city acted on its own initiative to set aside funds to handle payments pension.

Based on a 30-year amortization of bonds inherited from its two funds, the city would expect to make a payment of $117.2 million in fiscal year 2024, with the final payment dependent on investment returns. and other actuarial parameters.

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

Proponents of reducing the amortization period believe it is necessary to stabilize the health of the fund and prevent funding ratios from declining in future years if investment returns falter. The police/fire department did not immediately respond to a request for comment.

The figures proved difficult to estimate due to the influence of actuarial factors. The bankruptcy adjustment plan called for a payment of $111 million, while the projections for fiscal year 2014 called for a contribution of $171 million, and for fiscal year 2020 that rose to $186 million. dollars.

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

The city would draw $58 million from the Retiree Protection Fund to supplement the $73 million from the general fund for the fiscal year 2024 contribution of about $131 million. The use of RPF would decline until FY2039.

By FY2040, all or most of the estimated $148 million payout would come from the general fund. The timeline is based on current actuarial estimates and moving the police and fire fund to a 20-year amortization and maintaining the general employee fund at 30 years.

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

Grand Bargain contributions to the RPF end in fiscal year 2035.

The city is on track to surpass pre-pandemic revenue levels based on projections made at a revenue estimation conference in February.

Duggan’s proposed $2.45 billion budget includes $2.3 billion in recurring revenue streams. The general fund represents $1.215 billion of the budget, of which $1.146 billion is recurrent. The recurring portion of the general fund budget is up $91 million from fiscal 2021. It does not include any relief from the American Rescue Plan Act, as the City Council separately approved plans for the portion of $826 million from the city last year.

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

The four-year plans and balanced budgets were among the financial measures required as part of the city’s recovery from bankruptcy and spelled out in state laws to rid itself of oversight by the Detroit Financial Review Commission. The commission waived direct oversight for the fourth consecutive year in June.

Deficit spending or any other violation would trigger a return to direct oversight. The city must meet its targets for another 10 years after the end of active surveillance to operate completely independently of surveillance. A balanced budget for 2023 would mark a half-way point to “make the state disappear for good,” Duggan said.

Detroit would use part of a remaining fund balance of $130 million to bolster its rainy day fund and the RPF. The city is proposing to increase the planned deposit in the Retiree Protection Fund from $30 million to $90 million, bringing the account 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 bolster the rainy day fund in future years with a $15 million deposit for fiscal year 2024 and a $5 million deposit for fiscal year 2025. The deposits put the city on the on track to achieve 12% of city spending from the current required target of 10% of budget. Duggan says the future goal is to hit 15% to help regain investment grades.

The city’s finance team warned of variables that threaten the projections, including the trajectory of tax revenue from casinos and new internet games and ongoing income tax losses from nonresidents. working in city jobs who continue to work remotely.

“Risks remain to the four-year financial plan due to continued remote working, lingering effects of the pandemic and legacy pension liabilities,” said Jay Rising, the city’s chief financial officer. “This fiscally responsible budget proposal manages these risks with reserve contributions and spending restrictions.”

Revenues could rise if Gov. Gretchen Whitmer’s proposal to increase local revenue sharing passes, but could also face downside risks if the state passes Republican-proposed income tax cuts that control the legislature but are opposed by the governor, a Democrat.

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

The city has earned a series of upgrades since its Chapter 9 release, but its ratings remain speculative. Prior to the $175 million sale of GO, S&P downgraded its outlook from BB-minus to stable from negative. Moody’s Investors Service rates the city Ba3 with a positive outlook.

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