Detroit's two pension funds are poised to invest money for the first time since the city emerged from bankruptcy and a public corruption scandal cost retirees more than $97 million.
The pension funds are at a pivotal moment to pick new investments designed to reap returns for participants reeling from pension and benefit cuts that helped Detroit exit the largest municipal bankruptcy in U.S. history almost one year ago.
The pending investments follow a lengthy review of the pension funds' investment portfolios and changes made in asset allocation.
The post-bankruptcy landscape includes pension fund babysitters and new investment rules aimed at preventing the sort of bribery and kickback scandals that saw five former pension fund officials and businessmen convicted of federal crimes this fall.
By the end of November, the $3.3 billion Police & Fire Retirement System could hire two firms to manage a $150 million investment in global low-volatility stocks, said Ryan Bigelow, the pension funds' investment officer.
“Low-volatility stocks don't always lead to the highest return, but it does provide a little protection when the markets are really frothy or when there is significant downward pressure,” Mr. Bigelow said. The stock strategy also could help the pension fund reach its assumed annual investment return of 6.75%, he added. The return target was set by the two pension funds during the city's bankruptcy case.
The city's $2 billion General Retirement System, meanwhile, could hire multiple firms to oversee the pension fund's fixed-income portfolio early next year as part of a broader restructuring. The number of firms is undetermined, Mr. Bigelow said.
Both pension funds are also shifting away from individual real estate investments and are shedding properties when possible. Some real estate deals were tied up in the corruption scandal, while others were bad investments, like the Westin Book Cadillac Detroit hotel, pension fund officials said. In the future, the retirement systems are more likely to participate in a commingled real estate fund with other investors.
“There's still garbage in the portfolio that needs to be cleaned up, and we're working hard on that,” Mr. Bigelow said. “The Book Cadillac was a dog.”
Both pension funds were involved in a complex 2006 financing transaction that renovated the Book Cadillac Hotel. The GRS pension fund loaned $9 million toward the Book Cadillac project, while the police and fire plan backed a $15 million loan from First Independence Bank.
The investments are tied up in a lawsuit that alleges a secretive scheme bumped the $718 million Carpenters Pension Trust Fund ahead of other investors, including the pension funds.
All investments are now being overseen by independent committees populated by people with finance and investment backgrounds, including members appointed by Gov. Rick Snyder. That's a new level of oversight and replaces the old system of pension fund boards approving investments with, in some cases, friends, acquaintances and businessmen who lavished board members with cash, gifts and free trips to the Caribbean.