Detroit pension fund trustees rip raises for investment executives
Detroit — Trustees for a city pension fund are dismayed over what they consider "grossly excessive" pay raises granted to its investment executives by an oversight committee created as a condition of the city's exit from bankruptcy.
The investment committees were established for Detroit's Police and Fire Retirement System and its General Retirement System under a debt-cutting plan that helped Detroit emerge from bankruptcy in 2014 and shed $7 billion in debt. Under the agreement, the committees make decisions on investment policy for the two pension funds with combined assets of roughly $5 billion.
But another provision of the plan has proved contentious: It gives the committees sole authority to select, remove and set the pay of the system's chief investment officer and its investment managers.
In recent months, the committee responsible for the police and fire pension fund has approved two raises that amount to a 30% hike in the salary for the system's Chief Investment Officer Ryan Bigelow. It first adopted a proposal in December that boosted his annual $242,000 salary to $264,000. And, in March, it voted to up his pay to $315,000.
Meanwhile, the pay of Bigelow's deputy, Kevin Kenneally, has gone up nearly 38%, rising from $162,781 when he was hired in February 2018 to $224,000, under an action taken by the committee last month. Both are to be paid retroactively to Jan. 1, 2019.
Police and Fire Retirement System Chairman Jeffrey Pegg said it doesn't sit well with some pension trustees that the investment committee can hire staff, create salaries and use pension dollars toward paying them, without the trustees having any say.
"We're still a bankrupt city," said Pegg, who also has a seat on the investment committee and voted against the raises. "I can't support something of that amount."
Investment committee Chair Bob Smith, a partner at a Cleveland-based investment advisory firm, said he's not surprised by the pushback but believes the raises are reasonable.
Besides Pegg, Greg Trozak, a retiree and fellow member of the nine-person committee, also voted no, calling the raises "excessive," according to meeting minutes.
"Fundamentally, I believe you pay people competitively," said Smith, who noted he serves on the board of a mutual insurance company, several nonprofits and has experience dealing with executive compensation.
The compensation disagreement marks the first time that a city pension board has been at odds with a decision of either investment committee since the committees were put in place under Detroit's bankruptcy settlement.
The 16-member police and fire pension fund's board of trustees approved a resolution last month challenging the raises. It requested that the investment committee address the concerns of the trustees in writing within 45 days.
Criticism of compensation for investment executives of public pension systems is fairly common across the country, said Randall Miller, a principal at Bloomfield Hills-based Funston Advisory Services.
"That's a typical challenge. That's the optics of the situation that they struggle with," said Miller, of the firm that provides advisory services to public retirement systems. "Typically, you have representative trustees that come from the ranks of the employees and the retirees, and they often feel uncomfortable voting for compensation levels that are a multiple of what their typical colleagues make and what they've made most of their careers.
"It's understandable, and that's human nature," he added. "The reality is, if you want to have people who can do a good job managing the billions of dollars that are often in these funds, you have to be willing to pay closer to the market rate."
Bigelow and Kenneally declined to comment on their pay increases, saying they would leave comment up to the pension boards and investment committees.
Council President Brenda Jones, a trustee who initiated the resolution, issued a statement calling the raises "ridiculous and unacceptable."
Both Bigelow and Kenneally's pay surpass the salary of the Detroit Mayor Mike Duggan, who earns about $175,000. Bigelow's earnings alone are nearly double that of Gov. Gretchen Whitmer, who earns $159,000.
The salary adjustments come after the retirement system commissioned a competitive pay analysis last year that recommended that the pay ranges for Bigelow and Kenneally be higher.
Connecticut-based consulting firm McLagan reviewed the competitiveness of the salaries, compiling data from a sampling of about two dozen other small public pension funds including Dallas, Fort Worth and Phoenix. The study found Detroit's compensation for investment positions is at the bottom.
Bigelow's position had been capped at $242,301 and McLagan recommended an alternative range of $225,000 to $300,000 as well as a range of $170,000 to $210,000 for Kenneally.
While the city's retirement system is smaller than peer funds included in the study, McLagan wrote, it's also more complex — with "two separate and distinct funds as well as unique bankruptcy challenges."
The recommendations also took into account the higher cost of living in comparison with other smaller systems, which are relatively rural, low-cost areas. In its recommendation for Bigelow's salary, McLagan noted the position has an ongoing responsibility for investment results and developing and implementing the system's investment policy and program.
Bigelow was hired in May 2011 at a pay of $120,000, according to the retirement system. He formerly spent a half-dozen years working as an investment officer with Alaska's pension system.
As for Kenneally, a former chief investment officer for DTE Energy Co., McLagan suggested an increase in the pay scale because of the deputy's role in overseeing a team that's responsible for managing external investment managers.
Smith said that the system sought the outside assessment to remove any bias and ensure "we know we have taken the right steps to retain" Bigelow and Kenneally.
"Ryan has performed at a high level and his results have been strong," Smith said. "It's a challenging position having two (pension) boards that each have separate investment committees."
But Pegg said it was troubling when the committee voted to adjust Bigelow's pay again last month after it gave Kenneally a raise, calling it "too much. The fact that it happened within the snap of a finger is what bothers me the most."
The second increase for Bigelow, he added, is justified, since his pay was "so out of line with the market." But he said he understands Pegg's frustration.
"He (Pegg) didn't want it, so now it's putting salt in the wound," Smith said. "Not only once, but we did it twice."
The report gave salary suggestions based on the 25th percentile, but the investment committee decided it wanted to pay at the 50th percentile for both positions, Smith said.
"Even with that, we're right in the middle. We're not on the high side," he said. "We thought that was a fair and reasonable place to be for this system."
Jones reiterated her frustrations over the pay raises during a recent session with media.
"I have not seen a city employee get a raise such as that one in my 14 years," said Jones, adding the committee "is making decisions that we have no way of changing."
The salary for the system's investment officers is currently split equally between the funds. The police and fire retirement system investment committee's approval of the raises has not come before the committee that's in place for the city's General Retirement System, confirmed Michael VanOverbeke, general counsel to the general pension fund and its investment committee.
The committee, he added, is currently completing an evaluation of Bigelow and Kenneally's performance The police and fire committee, in its March approval, agreed that if the general investment board does not approve the pay adjustments it would cover the full cost.
The retirement system staff are on the city's payroll, but the systems equally reimburse Detroit for that cost annually, according to Detroit's chief deputy CFO and Finance Director John Naglick.
Naglick said the city's human resources department is taking the position that the salary ranges for the two posts now exceed Detroit's payroll system. Therefore, the raises will not be processed in the system, even though they would be reimbursed by the pension fund.
The police and fire pension fund would have to pay the increases directly, he said, since the general pension fund and its investment committee have not approved the raises and the city's payroll won't process them.
Investment committee member George Orzech said he supports the increases and the knowledge Bigelow and Kenneally have is a comfort.
"I believe they know what they are doing," said Orzech, who also is a police and fire pension fund trustee. "I have full confidence in Ryan and the team."