Detroit's bankruptcy exit plan includes pension cuts, millions for blight removal, technology
Detroit Free Press (MI), 2014-02-21
DETROIT _ Detroit's comprehensive bankruptcy reorganization blueprint calls for shedding billions of dollars in debt, spending more than $500 million for blight removal and investing another $1 billion to improve city services.
The city's Chapter 9 bankruptcy "plan of adjustment" _ filed Friday in U.S. Bankruptcy Court _ details offers to more than 100,000 creditors, and a "disclosure statement" reveals Emergency Manager Kevyn Orr's plan to dramatically reshape the city's bureaucracy.
The documents illuminate a potential path to resolve the city's bankruptcy, paving the way for the city to dramatically reduce an estimated $18 billion in debt and liabilities.
The city will continue negotiations with creditors in a bid to reach a consensual restructuring plan, which must be approved by Judge Steven Rhodes. That means the plan could change significantly before it's approved.
The city's goal is to pay less money to Wall Street, retirees and bondholders _ which collectively receive about 4 in 10 of the city's sparse general fund dollars _ and to invest about $1.5 billion over 10 years to improve public protection, restore services and reduce blight.
Orr proposed 34 percent cuts to the pension checks of general city retirees and 10 percent to police and fire retirees.
But those cuts would be reduced to 26 percent and 4 percent, respectively, if the city's two independently controlled pension boards agree to support the plan of adjustment. The city has about 24,000 retirees.
The city proposed paying secured bondholders 100 percent of what they're owed, while unsecured general obligation bondholders would receive 20 percent.
Fewer debt collectors, fewer murders, fewer abandoned homes. That's Orr's goal.
"My advisers and I have now expended many months in negotiations, including within bankruptcy court-mandated mediations, with all classes of creditors to get to this point, and we are satisfied with the progress made thus far," Orr said in a statement.
"However, there is still much work in front of all of us to continue the recovery from a decades-long downward spiral. We must move swiftly to emerge from bankruptcy so that the financial distress harming the City can end."
The city proposed paying about 20 percent to 30 percent of its retiree health care liabilities to a newly created trust fund called a VEBA, or Voluntary Employees' Beneficiary Association, which would manage insurance benefits. Orr proposed contributing $526.5 million over 20 years
AFSCME Council 25 President Al Garrett, who represents the city's largest employee union, vowed to fight Orr's restructuring plan.
"The proposed plan of adjustment is a gut punch to Detroit city workers and retirees," Garrett said in a statement. "The plan essentially eliminates health care benefits for retirees and drastically cuts earned pension benefits. Retires cannot survive these huge cuts to the pensions they earned. The plan is unfair and unacceptable."
Orr blamed poor investment strategies and a pattern of excessive bonuses _ called "13th checks" _ for underfunding the city's pension funds and making cuts necessary.
Attorneys for Jones Day, which represents the city in Bankruptcy Court, proposed a much less aggressive rate of annual investment returns for the pension funds: 6.25 percent, compared to the current rates of 7.9 percent and 8 percent. That move drastically increases the underfunded amount of the pensions, but the pension boards and creditors are fighting that calculation.
Friday's filings pave the way for a contentious round of court hearings over Detroit's restructuring plan, which is likely to be altered as the city continues negotiations with creditors.
Creditors may seek to block Orr's proposal to invest $1.5 billion in city services.
Among the improvements the city plans is $520 million to remove blight over six years. With that cash, the city would demolish about 450 abandoned homes per week, up from a weekly pace of 114 in a city with an estimated 78,000 unsalvagable structures.
Blight is one of many factors that contributes to Detroit's extraordinarily high violent crime rate and low property values.
The city proposed fresh investments in public services, including police, blight removal, upgrading antiquated computer and technology systems.
Those investments would include $148 million in technology improvements to rehab Detroit's antiquated IT system and $447 million on major capital improvements, including the city's vehicle fleet and facilities for police and fire services and the city's recreation department.
Over the next five years, the plan would invest $114 million in increased funding for the Police Department and $82 million for the Fire Department.
The documents call for "significant modifications" to union contracts, compensation and work rules for active employees. The city said it would consider outsourcing some services.
"However, the potential for reductions in wages and salaries must be balanced against likely reductions in benefits and the City's need to attract and retain skilled workers," according to the disclosure statement.
The city had more than $246 million in uncollected taxes and fees as of 2011 _ and is pursuing actions to increase its collection rates.
Rhodes has firmly emphasized that the plan must be "feasible" and must improve people's lives while also treating creditors fairly.
As expected, the city proposed higher payouts for its 24,000 retired pensioners than other unsecured creditors, in part because several nonprofit foundations and potentially the state of Michigan may donate more than $800 million to reduce pension cuts and preserve the Detroit Institute of Arts.
The DIA's building and artwork would be donated to the nonprofit that currently operates the museum as part of the restructuring proposal. But a coalition of bond insurers have vowed to fight the proposal, seeking a selloff of city-owned DIA artwork to pay off debts.
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Republican Gov. Rick Snyder, who appointed Orr, said that securing $350 million in state funding to reduce pension cuts and spin off the DIA is a work in progress. He'll have to convince state legislators to sign off, but Republicans are sensitive to the prospect of a Detroit bailout.
"Detroit's comeback is underway," Snyder said in a statement. "Kevyn Orr has submitted a thoughtful, comprehensive blueprint directing the city back to solid financial ground, a crucial step toward a fully revitalized Detroit."
Snyder added: "There will be difficult decisions and challenges for all sides as this process moves forward. The state's focus is on protecting and minimizing the impact on retirees, especially those on fixed, limited incomes, restoring and improving essential services for all 700,000 Detroit residents and building a foundation for the city's long-term financial stability and economic growth."
Missing from the city's proposed plan of adjustment is a deal to spin off the Detroit Water and Sewerage Department, which the city has estimated could be worth $1.9 billion over 40 years to the city.
The city is still negotiating a potential water deal, which suburban politicians have opposed.
With a deal to spin off the water department, creditors could get more, including retirees.
As part of its restructuring plan, the city said it plans to obtain $300 in new financing as it leaves bankruptcy. The city said it will need the new financing to help operate the city and provide services.
The city previously arranged $350 million in new financing from London-based Barclays, but that credit agreement was contingent on the city's ability to settle its disastrous swaps agreement with UBS and Merrill Lynch in 2005. That settlement has been rejected by Judge Rhodes twice. A third agreement has been reached and details are expected in a few days when the new deal is filed in bankruptcy court.
Separately, the city has filed a lawsuit seeking to wipe out $1.4 billion in pension debt held mostly by European banks that was issued in 2005 by Mayor Kwame Kilpatrick's administration to eliminate the city's unfunded pension liabilities.
The city argued the so-called pension obligation certificates of participation were illegal and do not have to be paid.
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