Detroit bankruptcy plan includes deep pension cuts
Detroit’s plan to emerge from bankruptcy this year largely hinges on significant cuts to city workers’ pensions and retiree health benefits — actions vehemently fought by public employee unions — as well as decreased payments to bondholders, according to a blueprint filed Friday to restructure the city’s $18-billion debt.
Although the employee cuts were largely expected after U.S. District Court Judge Steven Rhodes found in December that Detroit was eligible for bankruptcy protection, Detroit’s bankruptcy plan is being closely watched by other financially troubled cities around the country also struggling with underfunded pension plans. And, setting up a potential court battle between major stakeholders, creditors complained that the plan unfairly favors city workers because it is “politically popular.”
For some retirees, the plan brought the news they have feared most.
“They might as well just go and shoot me,” said Donald Smith, 69, who worked for the city as a parking enforcement officer and receiving clerk for 29 years and gets about $850 a month in pension payments. “I already have to make choices between food and medicine. I don’t know what I’m going to do.”
In the plan, which probably will be amended in the weeks ahead, police, firefighters and those departments’ retirees will take a 10% cut to their current pension payment. The pensions of all other city employees and retirees will be cut more than three times as much: 34%. Neither group will receive cost of living adjustments in the future.
The city says pension plans are underfunded by $3.5 billion, though unions dispute that number.
Bondholders can expect to receive about 20 cents on the dollar.
The plan treats pension holders better than bondholders in part because of $700 million from foundations and the state of Michigan that could be used to bolster the pension funds. That could create problems in court, said George South, a partner at DLA Piper in New York.
“There is still much work in front of us to continue the recovery from a decades-long spiral,” Detroit Emergency Manager Kevyn Orr said in a statement. “We must move swiftly to emerge from bankruptcy so that the financial distress harming the city can end.”
Michigan Gov. Rick Snyder also praised the plan and the work of Orr, whom he appointed. “Detroit’s comeback is underway,” he said in a statement.
The plan also sets aside $1.5 billion over the next decade for Detroit to provide basic services to residents, attract new residents and businesses, reduce crime and demolish blighted properties.
Unions immediately decried the bankruptcy blueprint.
“The plan is unfair and unacceptable,” Al Garrett, president of the Michigan branch of the American Federation of State and Municipal Employees, said in a statement Friday. “Retirees cannot survive these drastic cuts.”
Many city employees maintain that pensions are protected under the Michigan Constitution, and that the state must chip in to make sure pensioners are made whole.
“A more than 30% cut combined with the virtual elimination of healthcare is devastating to the people who dedicated a career to Detroit,” Jordan Marks, executive director of the National Public Pension Coalition, said in a statement.
Creditors also objected to the plan Friday.
“While we understand that favoring pensioners and discriminating against bondholders and other creditors might be politically popular, we believe this is contrary to bankruptcy law and will result in costly litigation that will hamper the city’s emergence from bankruptcy,” Steve Spencer, financial advisor to the single largest unsecured creditor in the case, Financial Guaranty Insurance Company, said in a statement.
The city is continuing to negotiate with creditors, and is urging everyone involved to support the plan.
Next, Judge Rhodes will be asked to approve the disclosure statement filed with the plan. Once approved, ballots will be distributed to creditors, who can vote on the plan. Often creditors will support the plan even if they’re taking big losses, because they fear the alternative of receiving even less money is worse.
“I’ve never seen a creditor happy with whatever a plan is proposing, this is just part of the whole process,” said H. Nathan Resnick, a Detroit bankruptcy attorney.
Under bankruptcy law, only one class of impaired creditors is required to support the plan for it to go forward. Mayor Orr probably already has that vote, since Michigan is an impaired creditor, and Gov. Snyder has said he supports the plan. But Orr said in a call with reporters Friday that he anticipated the state wouldn’t be the only impaired class to support it.
The next steps largely depend on how city employee unions decide to proceed. They filed a lawsuit in December after Rhodes ruled that the city was eligible for bankruptcy protection; the 6th Circuit Court of Appeals agreed Friday to hear that case, bypassing the district court. That could pave the way to an eventual Supreme Court hearing. But the $700 million from the state and foundations hinges on the unions reaching a settlement with the city and agreeing to drop all lawsuits.
On Friday, Orr repeatedly emphasized his hope that all parties come to an agreement soon. The plan treats city employees much better than in other cities, he said. “Some other cities have walked away from retiree healthcare, we haven’t done that,” Orr said. “We’re probably paying more than we anticipated.”
The plan also builds in motivation for unions to immediately drop their objections. If pension groups “enter into a timely settlement with the city and the State of Michigan,” according to the disclosure statement, police and firefighters would get a 4% pension cut rather than 10%, and city employees would get a 26% cut, not 34%.
“It is crucial that we reach an agreement,” Orr said Friday. “We really do not have time for a lot of acrimony and litigation.”
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