A drawn-out dispute over a 70% pay raise for a Detroit police and fire pension fund investment contractor — which threatened to upset terms of the city's bankruptcy exit plan — resulted in a federal lawsuit Tuesday.

The dispute revolves around the pay of Kevin Kenneally, who was hired in February 2018 as deputy chief investment officer for the city's pension funds with an annual salary of $166,855.

A move last year to raise Kenneally's salary to $224,000 was disapproved by the Detroit Police and Fire Retirement System board. But the chairman of the pension fund's investment committee then pushed a plan to circumvent the board's rejection by having Kenneally quit and immediately get hired doing similar work as an independent contractor making $285,000 a year, according to the lawsuit. The new contract also included a one-time incentive payment of $60,000.

Over objections from some pension board members, the investment committee's chairman, Bob Smith, signed the contractor agreement with Kenneally's newly formed company, KJK Associates.

The board filed the lawsuit after it recently received the first invoices from Kenneally's firm — a $60,000 bill for a "contractual fee" and another bill for $11,875 for work performed from Jan 6. to Jan. 15.

"In practical terms, the (investment committee) has contracted with Kenneally to do half of the work he was previously performing at nearly twice the pay," the lawsuit reads.

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The lawsuit was filed in federal bankruptcy court as part of the city's bankruptcy case, which is being overseen by Judge Thomas J. Tucker.

The lawsuit accuses the investment committee of breaching its fiduciary duty and overstepping its authority by entering into a contract with a former employee. The pension board is asking the court to void the contract with Kenneally's company and declare that the board has exclusive authority over pension workers' compensation, with the sole exception of the chief investment officer.

The investment committee for the police and fire pension fund was created as part of the city's bankruptcy exit plan to help ensure the pension fund is making wise investments. The city's other pension fund, the General Retirement System, also has an investment committee, but that panel has refused to support the moves to increase Kenneally's pay, according to the lawsuit.

Smith, the investment committee chairman who supported Kenneally's pay increases and signed the contract with his company, said he is hopeful the bankruptcy court judge will resolve the dispute quickly.

"We mutually agreed the best thing to do is go to bankruptcy court and let the bankruptcy judge sort it out," Smith said. "This is a bit of a hiccup we hit and now we want to get some resolution and clarity. We think there's some gray area we need the bankruptcy judge to decide."

Smith defended Kenneally's pay increase. He said competitive pay is an employee retention issue. Kenneally's predecessor was hired away, Smith said.

The Free Press was unable to reach Kenneally for comment.

Police and fire pension board chairman Matthew Gnatek did not respond to a message seeking comment. The board's spokesman, Bruce Babiarz, said the lawsuit speaks for itself.

Last year, the dispute over Kenneally's pay threatened to disrupt payments to the pension fund under the "Grand Bargain" — a deal to help the city navigate its bankruptcy by shoring up municipal pensions and safeguarding the collection of the Detroit Institute of Arts.

According to the lawsuit, the investment committee signaled it would seek to delay or prevent payments to the police and fire pension fund of about $18 million from the "Grand Bargain" if the board didn't fund the pay hikes. The $18 million payment, however, has not been interrupted.

While the pension board continues to fight Kenneally's pay increases, it does not have the authority to prevent pay bumps to the pension funds' chief investment officer, Ryan Bigelow.

The investment committee raised Bigelow's salary in December 2018 to $264,000 and again last March to $315,000.

Joe Guillen has been covering city governance and development issues for the newspaper since 2013. He has covered Detroit city hall, been a member of the investigations team and previously worked at The (Cleveland) Plain Dealer covering county and state government. Contact him at 313-222-6678 or jguillen@freepress.com.