In re City of Detroit
| Docket Number | 13-53846 |
| Decision Date | 26 June 2023 |
| Parties | In re: CITY OF DETROIT, MICHIGAN, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
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In re: CITY OF DETROIT, MICHIGAN, Debtor.
No. 13-53846
United States Bankruptcy Court, E.D. Michigan, Southern Division
June 26, 2023
Chapter 9
OPINION REGARDING THE CITY OF DETROIT'S MOTION TO ENFORCE PLAN OF ADJUSTMENT AGAINST THE POLICE AND FIRE RETIREMENT SYSTEM PENSION PLAN (DOCKET # 13602)
Thomas J. Tucker, United States Bankruptcy Judge
I. Introduction
The Motion now before the Court in this Chapter 9 case requires the Court to resolve a dispute between the City of Detroit (the "City") and one of its pension plans, the Police and Fire Retirement System of the City of Detroit, Michigan (the "PFRS"). The City's motion is entitled "City of Detroit's Motion to Enforce Plan of Adjustment and Require 30-Year Amortization of the UAAL in the Police and Fire Retirement System Pension Plan" (Docket # 13602, the "Motion"). The PFRS objects to the City's Motion. After two rounds of extensive briefing by the parties, and the filing of numerous exhibits, the Court held a telephonic hearing on the Motion on March 15, 2023, and then took the Motion under advisement.
In 2014, the City obtained confirmation of its plan of adjustment (the "POA").[1] One of the City's many obligations under the POA is to pay a certain unfunded liability to the PFRS for retirement benefits, known as the unfunded actuarial accrued liability ("UAAL"), existing as of June 30, 2023. More specifically, beginning with the year starting on July 1, 2023, the City must
begin making annual payments to the PFRS in order to reduce, and ultimately eliminate, the UAAL.
The City contends that one of the terms under the POA is that these payments are to be made over a period of 30 years, based on a 30-year amortization of the UAAL existing as of June 30, 2023. The PFRS disputes that such a 30-year amortization is part of the POA. Rather, the PFRS contends that no particular amortization is part of the POA.
The PFRS argues that it has the authority to decide the amortization term used to compute the City's annual contribution to the UAAL existing as of June 30, 2023. The PFRS argues that "under the terms of the Plan, the PFRS does not need to allow the City to amortize any of the post-2023 pension payments - let alone for 30 years[.]"[2]
The PFRS has recently decided that the City must make the payments over a period of only 20 years, based on a 20-year amortization. The PFRS's 20-year amortization would significantly accelerate the City's payments, compared to a 30-year amortization. The parties agree that if the City is required to pay based on a 20-year amortization, the City's payments will be roughly $12 million more per year in each of years 1-20 than the payments would be in those years if the City pays based on a 30-year amortization.
The City's Motion seeks declaratory and injunctive relief against the PFRS, precluding the PFRS from shortening the 30-year amortization period.
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. The Court will grant the City's Motion.
11. Background and facts
A. The City's confirmed plan of adjustment
The plan of adjustment in this Chapter 9 bankruptcy case was confirmed on November 12, 2014. The confirmed plan includes the document entitled "Eighth Amended Plan for the Adjustment of Debts for the City of Detroit," filed October 22, 2014 (the "Plan") and all of its many exhibits,[3] and it also includes the Order entitled "Order Confirming Eighth Amended Plan for the Adjustment of Debts for the City of Detroit," filed November 12, 2014 (the "Confirmation Order").[4] (The Plan and the Confirmation Order are collectively referred to as the "POA.") The POA became effective on December 10, 2014.[5]
Significantly, and as discussed below, the Confirmation Order expressly incorporated the Court's written opinion regarding confirmation, which is entitled "Supplemental Opinion Regarding Plan Confirmation, Approving Settlements, and Approving Exit Financing," filed December 31, 2014 (the "Confirmation Opinion").[6]
B. The PFRS UAAL
1. Background
The following background facts about the PFRS pension plan, recounted in the City's Motion, are undisputed:
The City historically had two defined benefit pension plans for employees and retirees. The Police and Fire Retirement System ("PFRS") managed the plan for public safety employees and retirees. The General Retirement System ("GRS") managed the plan for all other City employees and retirees. Both plans were frozen in bankruptcy and, under the POA, covered only City retirees and employees who performed services for the City prior to July 1, 2014
Both plans were replaced going forward with hybrid plans that combined elements of both defined benefit and defined contribution plans. In the POA, the new hybrid plans are known as Component I plans, and the frozen plans are known as Component II plans.
At issue in this case is the PFRS Component II plan that was frozen in bankruptcy and now covers only public safety employees and retirees who provided services prior to July 1, 2014. References in this brief to the PRFS plan are to the PFRS Component II plan that was frozen in bankruptcy. Because the plan was frozen and no new beneficiaries are being added, it is a "closed plan" and will terminate after all beneficiaries have died. . . . .
At the time of the bankruptcy, both the public safety (PFRS) and general retirement (GRS) legacy (Component II) plans were underfunded. Under financial projections prepared for the POA, the plans were likewise projected to be underfunded at the end of the 10-year [period after confirmation]. Actuaries identify the amount of such underfunding as the plan's "unfunded actuarial accrued liability," or "UAAL."[7]
2. The Fourth Amended Plan and the Fourth Amended Disclosure Statement
The relevant history of the POA's treatment of the claims of the PFRS, including the UAAL, can be traced back to the plan and disclosure statement filed by the City on May 5, 2014, when the City filed its Fourth Amended Plan and its Fourth Amended Disclosure Statement.[8]
The Fourth Amended Plan treated the pension claims of the PFRS in Class 10 (the "PFRS Pension Claims"),[9] and the pension claims of the General Retirement System for the City of Detroit (the "GRS") in Class 11 (the "GRS Pension Claims").[10] Under the Fourth Amended Plan, the Class 10 PFRS Pension Claims were to be "allowed in an aggregate amount equal to the sum of approximately $1,250,000,000,"[11] and the Class 11 GRS Pension Claims were to be "allowed in an aggregate amount equal to the sum of approximately $1,879,000,000."[12]
The Fourth Amended Plan provided that from the Plan's Effective Date "through Fiscal Year 2023," the City would not be obligated to make any contributions to fund accrued benefits "under the Prior PFRS Pension Plan."[13] During that time, such annual contributions were to come only from other sources, known as "certain DIA Proceeds and a portion of the State
Contribution."[14] After June 30, 2023, the PFRS would receive "certain additional DIA Proceeds," and the City would be required to contribute certain defined funding to the PFRS, discussed below.[15]
The Court approved the Fourth Amended Disclosure Statement in an Order filed on May 5, 2014.[16] In that Order, the Court found that the disclosure statement "contains 'adequate information'" about the Fourth Amended Plan, "as defined by" 11 U.S.C. § 1125(a)(1).[17]
Part of that "adequate information" about the plan was in the financial projections in the disclosure statement. Section XI of the Fourth Amended Disclosure Statement was captioned "PROJECTED FINANCIAL INFORMATION."[18] Section XI.A, captioned "Projections," stated, in relevant part:
Attached to this Disclosure Statement as Exhibit I, Exhibit J and Exhibit K are certain financial documents (together, the "Projections"), which provide details regarding the City's projected
operations under the Plan, subject to the assumptions set forth below. In particular, the Projections consist of:
• A ten-year summary of restructuring initiatives, attached hereto as Exhibit I
• A ten-year statement of projected cash flows, attached hereto as Exhibit J
• A forty-year statement of projected cash flows, attached hereto as Exhibit K[19]
Exhibit K of the Fourth Amended Disclosure Statement, in turn, was entitled "City of Detroit Plan of Adjustment - 40 year projections."[20] Exhibit K projections included the assumptions under the Fourth Amended Plan that the City would make no payments on the pension claims of the PFRS and the GRS in the first 10 years of the Plan, and that during that time, payments to the PFRS and the GRS would be made by other parties. Then beginning in year 11, the City would make annual payments to the PFRS and GRS on the UAAL existing as of June 30, 2023. Those annual payments would be determined by taking the UAAL existing as of June 30, 2023, and amortizing that amount over 30 years at a discount rate of 6.75%. The projections for the payments to the PFRS included the following:
PFRS Pension Contributions (years 1-10)
Estimated to be $261m from foundations /State settlement
Contributions (years 11-40)
UAAL as of June 30, 2023 estimated to be ~$681m amortized over 30yr, including contributions in second decade from DIA and foundations
Discount rate
6.75%
Targeted funded status as of 2023
78%[21]
Other pages in the 40-year projections detailed the sources of income for the City, the City's expenses, the amounts that would be paid on the pension claims of the PFRS and the GRS and other creditors' claims over forty years, and the sources of the payments...
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