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Detroit — A rift over an executive's pay raise is risking an annual infusion of $18 million for the city's retirement system, an attorney for the oversight board of a city pension fund says.

In a confidential memorandum obtained by The Detroit News, Sean P. Gallagher, special counsel for the investment committee over Detroit's Police and Fire Retirement System, argued pension trustees' refusal to sign off on a pay boost for the system's deputy investment officer could amount to "potential defaults" in the terms of the so-called "grand bargain" funding commitment crafted in the city's bankruptcy to pump up its pension system.

The retirement system's failure to adjust the pay rate of deputy investment officer Kevin Kenneally could amount to a lack of compliance with the "grand bargain," making it impossible for the investment committee or its chair to execute year-end certifications required for the annual funding, the memo notes.

The funding comes from the nonprofit Foundation for Detroit's Future, which was created under the "grand bargain" to transfer funding from a dozen private foundations  to shore up city pensions.

"This could trigger the default provisions of the contribution agreement," the memo from Gallagher says.

The claim doesn't sit well with some pension board members, who argue the oversight board is using the threat as leverage after trustees deemed the investment committee's proposed 38% pay bump "grossly excessive" and declined to act on it. 

"It's a quid pro quo," said Jeffrey Pegg, a trustee for the police and fire pension board who also sits on its investment committee. "You say 'it's OK that we set the salary and rate for the employee and we approve the state contribution agreement.' It's sad, it's terrible."

The compliance worry over the board's "failure to meet compensation adjustments" is the latest development in what's become a long-running disagreement over the raise for Kenneally and comes as the city approaches the five-year anniversary of its exit from bankruptcy.

If the grant dollars don't come through, Detroit's general fund would be forced to take on the cost, said John Naglick, Detroit's finance director and deputy CFO. 

"This is very important. Time is of the essence," said Naglick, who serves on both pension fund boards. "Withholding this certification potentially puts the city at risk for an $18.3 million grant." 

The committee is one of two established under Detroit's debt-cutting plan to make investment policy decisions for the city's pension funds — the police and fire system and the general retirement system.

The two sides disagree over whether the committee has the authority to set the deputy's pay. A provision of the plan does give the committee authority to select, remove and set the pay of the system's chief investment officer.

The committee voted to hike the salary of Chief Investment Officer Ryan Bigelow twice since last winter, amounting to a 30% increase. It first adopted a proposal in December that boosted his annual $242,000 pay to $264,000. And in March, it voted it up again to $315,000.

It later recommended the increase for Kenneally in the spring, which would have taken his annual pay of $162,781 to $224,000. 

Kenneally declined to comment on the ongoing disagreement over his pay.

The salary adjustments for Bigelow and Kenneally came after the retirement system commissioned a competitive pay analysis that recommended higher pay ranges for the pair.

Both Bigelow and Kenneally's pay would surpass the salary of the Detroit Mayor Mike Duggan, who earns $175,000 annually, and even with newly approved incremental pay increases, will top out at $189,000. Bigelow's earnings alone are nearly double that of Gov. Gretchen Whitmer, who earns $159,300.

The committee and pension fund trustees have been at odds for months amid the oversight board's position that it has the power to hire support personnel and pay them with assets of the retirement system. 

But the police and fire pension fund's board of trustees has argued Kenneally's pay is off-limits to the oversight board because he's classified as a city employee. Detroit's City Council has discretion over salary and compensation ranges for city job classifications. 

Laura Bartell, a Wayne State University bankruptcy professor who closely followed the city’s Chapter 9 bankruptcy, said it's clear the wage battle has escalated, but she doesn't expect it will rise to a level that would hurt funding.

“I cannot imagine them following through on that threat because it would be so catastrophic,” she said. “It’s just not something you do. It would be irrational to do that.”

Gallagher, in the Nov. 14 memo, wrote that declining to make the pay adjustment "is arguably a breach of the contribution agreement's grant of authority to the committee" by the pension board. 

Gallagher, who was retained by the investment committee to assist with the pay disagreement, declined to comment on his legal memorandum, citing confidentiality.

The assertion of the breach comes ahead of a Dec. 31 deadline for the investment committees of the city's two pension systems to provide certificates of compliance with the terms of the bankruptcy settlement to the Foundation for Detroit's Future.

Investment Committee Chairman Bob Smith, during a meeting last week, noted the pay debate has been ongoing for "almost a year" and referred to the privileged legal memo that "says we're not in a good place."

After a closed session discussion, the committee voted to postpone action on the year-end certifications and set a special meeting for Dec. 17 to take them up. 

Smith said he felt the motion to vote on the documents at the Nov. 18 meeting "came out of nowhere" and "seemed a bit rushed."

He declined to discuss Gallagher's memo but told The News that "I'm very optimistic about where we're headed."

"I'm pretty confident things will resolve themselves," he said. "The cards are on the table, they are face up and I think we're working all towards the same issues and doing the good work on behalf of the system."

But during a Nov. 21 discussion of the police and fire pension board, its legal counsel, Ron King, said he saw no reason to delay action on the certifications — one to obtain funding from the foundations, and the other a semi-annual certification to the state treasurer to confirm that the system is operating in accordance with the terms of the bankruptcy settlement. 

The use of those certifications as leverage, he said, "makes for a pretty bad practice."

"I don't see any basis for not executing the certifications," said King, adding he didn't see the compensation issue with Kenneally to be a "material breach" of the governing documents. "I'm not aware of any non-compliance issues."

Trustee Dean Pincheck, a fire department captain, questioned whether the investment committee was "doing it out of spite because we're going against them (on the pay raise)."

"It sounds like high school crap," he said. "It's crazy, like little kids."

Matt Gnatek, a member of the investment committee who also chairs the police and fire pension board, suggested during last week's investment committee meeting that the two sides ask the U.S. Bankruptcy Court to settle the wage dispute. 

"Go the bankruptcy court, plead your case. We'll plead our case. Let them say what it is, and let's move on," he said.

"This is absolutely ridiculous this late in the game that there's even any contemplation of not certifying this so that we can get this $18.3 million into the system."

cferretti@detroitnews.com 

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