Detroit bankruptcy: Creditors fare worse than city retirees in new proposal

The Detroit bankruptcy plan, filed in federal court Friday, proposes slashing $18 billion in debt, while still maintaining vital emergency services and making investments in the embattled city.

Emergency management officials for Detroit took a key step in the city’s historic bankruptcy case by filing a 120-page plan, outlining a financial reorganization, in federal court Friday.

In the plan, state emergency management officials propose slashing $18 billion in debt, while still maintaining vital emergency services and making investments in the embattled city.

Emergency Manager Kevyn Orr’s office filed the proposal, officially titled a plan of adjustment, less than a week before the March 1 deadline. In a statement, Mr. Orr’s office said it was “confident that the filing of the plan is the most effective and efficient method to reorganize the city’s financial affairs ... and continue efforts to once again make Detroit an attractive place in which to live, work and invest.”

At City Hall, newly elected Mayor Mike Duggan was more reserved, calling the plan “a sober reality check for our city.” Mayor Duggan indicated he would work with the state, adding, “it is no surprise there will be difficult decisions ahead that affect residents, city workers and retirees.”

The plan cuts up to 30 percent of earned pension benefits for the 23,500 municipal retirees – a move once considered off limits because of enshrined protections in the state constitution. (A judge’s ruling last month changed this.) Retired police and firefighters would be offered 90 percent of their earned pension benefits. They, and general retirees, would lose cost-of-living allowances.

At the same time, the plan calls for a 10-year, $1.5 billion investment in the city’s infrastructure, which includes “police, fire and emergency medical services, garbage removal and functioning streetlights,” as well as redevelopment efforts and improvement of the city’s information technology systems.

One-third of the investment would go toward blight removal over the next five years.

Creditors fare far worse than retirees under the proposal. Under the plan, they would receive “approximately 20 percent recovery on their claims in the form of new securities” issued by the city.

Following the July 18 filing for bankruptcy protection, Detroit has taken a rocky path to this moment. Lawsuits have been filed by creditors and pension groups, court challenges have debated the legality of Orr’s actions, conflicts have arisen about potentially selling the city art collection, and a new mayoral administration arrived at the beginning of this year.

All these developments played an important role in shaping the current proposal, but the story does not end here. Not only must US Bankruptcy Judge Steven Rhodes approve the plan, but Michigan lawmakers must also approve the proposed $350 million in state money put into a special fund to protect retirees. The plan also relies on $450 million pledged by private foundations to protect the artwork.

There are also those pending lawsuits, which are expected to escalate as parties with vested interests dissect the proposal.

Already, there are signs that creditors and pension groups are not pleased.

“Governor [Rick] Snyder and Kevyn Orr might consider this blueprint a ‘comeback’ and the best path forward,’ but don’t believe the hype,” said Jordan Marks, executive director of the National Public Pension Coalition in Washington, in a statement. The cuts, he added, “are devastating to the people who dedicated a career to Detroit, and depend on these benefits to meet basic needs. Wall Street, which posted record profits in 2013, can afford to pay for the damage it reaped on the City. We can and must do better.”

Likewise, a committee representing city retirees released a statement saying that, under the plan, about 20 percent of current retirees would be forced below the poverty line in 10 years. The group contends that the proposal is using an “unjustifiably low rate of interest” in calculating cuts to pensions to shore up money for investment.

“Of course the city needs investment, but there is no reason for it to come at the expense of its pensioners,” said Ron Bloom, a financial adviser to the Official Committee of Retirees. “The city seeks to use assumptions regarding the health of the pension plans that are significantly different” from those used by the state and other municipalities. “The difference is then used to attempt to justify substantial reductions in pension benefits that are simply not necessary,” Mr. Bloom said.

In the past, Orr has stated he wants the city to emerge from bankruptcy by the fall, but it is uncertain if that is realistic, given the many moving parts that are yet to be decided. In a statement, he emphasized expediency.

“We must move swiftly to emerge from bankruptcy so that the financial distress harming the city can end,” he said.