Relevant Document:
Detroit Reply Brief
The city of Detroit’s 2014
plan of adjustment requires a 30-year amortization of the unfunded actuarial accrued liability, or UAAL, related to the Detroit Police and Fire Retirement System, or PFRS, and the bankruptcy court’s confirmation order binds the city and all claimholders, including the PRFS, to its terms, the city reiterated in a reply brief filed this week with the U.S. Bankruptcy Court for the Eastern District of Michigan.
In August, Detroit
asked the bankruptcy court to enforce the plan and require the 30-year amortization of UAAL after the PFRS decided in November 2021 to switch to a 20-year UAAL amortization as of June 30, 2023. The city said the change would require it to pay “additional hundreds of millions of dollars in front-loaded funding over the amounts that would be due under 30-year amortization,” and could add $10 million in annual pension contributions over the 20-year period.
In its
opposition response, PFRS asserted that the state contribution agreement, or SGA, incorporated into the plan grants the PFRS “exclusive authority to decide its own funding policies, specifically including ‘amortization periods’ for any unfunded liability that is the city’s responsibility to pay.” PFRS said such governance changes, which included the creation of pension investment committees, were a condition of the state providing about $195 million of support under the plan, noting that prior to its bankruptcy filing, Detroit would “ignore its pension obligations and divert the cash to meet other needs - which was a recipe for disaster pre-bankruptcy.”
PFRS’s argument that it has “unfettered discretion” over the pension amortization fund “would have been laughed out of this bankruptcy court had it been asserted,” according to the city’s reply brief filed on Monday, Oct. 31.
The city says PFRS’s claim of authority over how the fund is amortized would have made the plan “unconfirmable” because it would have granted the PFRS and the city’s other public employee pension system, the Detroit General Retirement System, or GRS, “the sole right to accelerate hundreds of millions of dollars as they saw fit - and thereby unilaterally destroy the [plan’s] feasibility and the City’s finances.”
The city’s reply asserts that court rulings requiring 30-year amortization were “integral” to the court’s determination regarding the feasibility of the plan. Ernst and Young financial projections that provide the plan’s foundation “expressly require 30-year amortization,” and expert witness Martha “Marti” Kopacz’s finding that the POA was feasible was “expressly based on 30-year amortization,” according to the city. The court has therefore already ruled that the legacy plans’ UAAL as of June 20, 2023, would be amortized over 30 years, which was integral to the court’s finding of feasibility and confirmation of the plan, and these rulings requiring 30-year amortization “bind PFRS,” the reply adds.
The city contends that PFRS’ position ignores the court’s rulings and offers no explanation about why it is not bound by them. The city also defends its use of the E&Y projections and says the SCA incorporated into the plan “provides no support” to PFRS. Instead, according to the city, the provision PFRS relies on in its response empowers the pension fund’s investment committee to determine the “correctness” of “calculations, actuarial assumptions and/or assessments” and “annual funding levels and the amortization thereof.”
“‘Correctness’ means checking the calculations. Nothing in the language even purports to give PFRS authority over the amortization term,” the reply brief states.
The city also notes that the plan provided PFRS authority over the amortization term for the hybrid pension plan created under the plan and not the legacy plan because the hybrid plan had no UAAL. The legacy plans were granted no such authority because “both the settlement with FRS/PFRS and, the [plan], require thirty-year amortization,” according to the brief.
The city also calls “disingenuous and completely misplaced” PFRS’s purported reliance in its response on “out-of-context snippets of discovery testimony,” going so far as to call PFRS’ characterization of Detroit’s pre-bankruptcy defaults “shameful.”
PFRS’s position is “legally unsound” and both PFRS’ actuary and the city’s expert actuary “agree that there is no need for acceleration to protect pension beneficiaries,” the reply brief concludes.
The state of Michigan and its counsel have received notice of the city’s motion to enforce the 30-year amortization and have submitted no opposition, Detroit adds.