Detroit bankruptcy: Judge to see city's plan to emerge from Chapter 9

The city of Detroit is preparing final documents to present to a federal bankruptcy judge Friday that could set the stage for the city's emergence from Chapter 9 bankruptcy as soon as October.

The legal move Friday follows a tentative debt-cutting agreement reached earlier this week between the city and a coalition of union organizations. But the plan still depends upon a $350 million cash injection from the State of Michigan, which lawmakers have yet to vote on.

The judge in the case, Steven Rhodes, has indicated that he wants any plan submitted to be something that everyone involved agrees upon. So far, this plan has generated more agreement than have previous proposals.

But the vote by state lawmakers, expected to take place by June, is not guaranteed to result in approval of the cash injection. Some lawmakers said this week that the unions are obligated to share responsibility with the state and should contribute their own share of the cash. Thus taxpayers – particularly those who live far outside Detroit – would not carry the burden by themselves.

“The state and the unions both face protracted legal battles and big legal bills if the bankruptcy is not settled. I hope the unions will join the state’s taxpayers in putting money that would otherwise go to legal bills into protecting their retirees,” House Speaker Jase Bolger (R) said in a statement.

Detroit sought relief under Chapter 9 last summer because it was saddled with $18 billion in debt, making it the largest municipal bankruptcy in US history.

Under the plan to be submitted to the judge Friday, money from the state would roughly match the $466 million pledged by nonprofit foundations to protect the collection at the Detroit Institute of Arts and keep the museum’s most valuable works from ending up at auction. The total sum, $816 million, would also be used to help reduce pension cuts and shore up money for other obligations.

This week, the office of Kevyn Orr, the emergency manager for Detroit, said it got the unions to agree to cuts that are less draconian than originally proposed. A statement from the federal mediators who have been involved said the terms of the tentative agreement are “fair and balanced” and “provide security for union workers and, at the same time, provide an economically feasible agreement” for the city.

The union coalition represents more than 3,500 public workers.

Mr. Orr also lobbied state lawmakers for two days this week to persuade them to vote for the state money, saying it would bring a quick end to the bankruptcy, which would ultimately benefit the state.

Michigan Gov. Rick Snyder (R) supports the plan, but some state lawmakers are not convinced. One issue: Where will the money come from? Governor Snyder says he wants it pulled from the state’s tobacco lawsuit settlement fund.

There are also concerns about the timeline for a cash injection. Some say a single payment is preferable because it would save money. The original proposal called for stretching payments over two decades.

Other lawmakers say they want assurances that the pension funds will have stronger oversight than in the past, and they’re suggesting the creation of an advisory board.

Snyder told reporters Wednesday he is open to the possibility of a state advisory board to ensure financial collapse is not in Detroit’s future. Such a board could provide oversight after Orr and his team exit following the restructuring.

“I think there’s more than one way [that oversight] could be done, but if [a board] gives legislators more confidence in the settlement to make sure it's going to be complied with, I’m very open to that,” Snyder said. “That's their prerogative.”

The city has already forged tentative agreements with some bond insurers, several banks, and four groups representing retirees. For the retiree groups, pension cuts are reduced. Also, current and former city employees must give up their right to sue the state and must agree to allow the Detroit Institute of Arts to transition to an independent entity.

The agreement with the unions is considered a political win for Mayor Mike Duggan. But he has since suggested that, in moving forward, the city should transition from its current pension system to a defined contribution, 401(k)-type plan.

“In the 14 years I was deputy county executive in Wayne County, we had 100 percent defined contributions, in my nine years as the CEO of the Detroit Medical Center, we had 100 percent defined contributions, and so if you were to ask people here in the private sector, the vast majority would be in a 401(k)-type arrangement,” Mayor Duggan told a local CBS News outlet.

If Judge Rhodes rules to approve the plan, all the groups that have reached tentative agreements will officially vote on it in May or June.