01.30.14

The Art of Adjusting.  Noting that time is of the essence, Detroit emergency manager Kevyn Orr yesterday released a draft plan of adjustment to major Motor City creditors, as the breakthrough we reported yesterday with the Detroit Institute of Arts appeared to open the way towards the final stage of negotiations on a massive restructuring proposal of the city’s estimated $18.5 billion in debt and liabilities which must be submitted to and approved by U.S. Bankruptcy Judge Steven Rhodes by March 1st. Mr. Orr noted: “[T]he longer we remain entrenched in our positions and fail to reach an agreement, the worse life gets for Detroit’s 700,000 residents (please note next item on “Detroit’s Future” below) and the greater our collective challenges become…We need to move quickly and efficiently. My team and I believe this plan presents each interested party with fair and equitable treatment, and we look forward to working with our creditors to adopt this plan and put Detroit back on the path to stability and success.” The draft plan provides detailed information on Mr. Orr’s initial offers to creditors, including banks, bondholders, retirees, unions, and city vendors, and, as Mr. Orr noted yesterday: “Our focus has been to help Detroit regain a strong economic footing…There is much work still to do, and we believe the proposed plan provides the road map for all parties to resolve all outstanding issues and facilitate the city’s efforts to achieve long-term financial health.” The plan, meant to serve as a platform for the final rounds of intense negotiations, sets out how the emergency manager city proposes to treat each class of creditors. With in excess of 100,000, that makes this next—and final—stage of negotiations critical to the city’s ability to emerge from the country’s largest municipal bankruptcy in history. Mr. Orr’s office released a statement describing the plan distributed to creditors participating in the court-ordered mediation as reflecting “some of the discussions the city and its creditors have held to date and offers a good platform for those discussions moving forward…The negotiations and the federal mediation process have been progressing well, as evidenced by the city’s entry into a five-year contract with the city’s EMS union. Also, the city is gratified by the tremendous efforts of the mediators in generating the proposed financial support by the state of Michigan and several philanthropic organizations that will help support the city’s public employee pension funds and help resolve issues surrounding the Detroit Institute of Arts. Additional recent accomplishments in the restructuring process include an agreement to transfer the long-challenged City electrical grid to DTE Energy, and the beginning of blight removal and restoration of public lighting.” Describing the preliminary plan as a road map for the city and its 100,000+ creditors, Mr. Orr’s office indicated he is also trying to achieve an agreement on the spinoff of its massive water and sewer system, as well as to finalize the proposal by a group of foundations and the State of Michigan to raise funds for the city’s pensions while protecting its art collection. Any final plan is expected to embrace the blueprint crafted by U.S. Chief District Court Judge Gerald Rosen to combine some $820 million from charitable foundations—including the new $100 million pledge from the Detroit Institute of Arts, and the $350 million bipartisan package crafted by Governor Rick Snyder—with those serving as the catalyst for yesterday’s bid to enter final negotiations. Nevertheless, the most treacherous and difficult challenges remain as Mr. Orr seeks to ensure his final plan of adjustment ensures sufficient revenues and resources to provide for a sustainable future for the Motor City, but debtors will engage in what is expected to be fierce opposition. For instance, it was not immediately clear whether yesterday’s initial version of the plan of adjustment includes information on proposed pension cuts that would impact the Motor City’s 24,000 retirees—or how those pensions might be structured. Judge Rosen, for instance, noted the importance of the DIA commitment to the city’s retirees, but had indicated some reductions would likely still be necessary: “While everyone understands that current proposed pension funding levels are not sufficient to provide full restoration of pension benefits for Detroit’s retirees, the mediators deeply appreciate the DIA’s very positive and constructive contribution as yet another important step forward.” The Motor City has about 24,000 retirees. Judge Rhodes, who last week said that “profound change” might be necessary in pension benefits to resolve the case, will then bear the burden of weighing whether Mr. Orr’s final plan is fair and equitable to all parties and ensures a sustainable future for Detroit.

Detroit’s Future.  As critical as the right plan of adjustment is to Detroit’s future may be, The Detroit News’ report on child deaths in the Motor City by Staff Writer Karen Bouffard as a project for the National Health Journalism Fellowship, is more sobering of the kinds of challenges that lie ahead. The study finds that children are dying in Detroit at a greater rate than in any U.S. city its size or larger, mostly of conditions resulting from prematurity, the most significant indicator, followed by violence, which ranks second. Infants, of course, will not be amongst the creditors invited to the table for these last few weeks of negotiations over the Motor City’s plan of adjustment. Nevertheless, as Dr. Herman Gray, executive vice president of pediatric health services for the Detroit Medical Center and former president of DMC Children’s Hospital of Michigan, told the News: “This is a public health emergency in the city of Detroit…We are losing our future in really socially unacceptable ways.” According to the report, the City’s children, through the age of 18, died at a rate of 120 per 100,000 children in 2010, the most recent year for which complete data is available―making Detroit the only city whose death rate among children topped 100 per 100,000; Philadelphia, at 95.7, was a distant second. The News reported that in 2010, Detroit (population about 713,000) and Cleveland (population about 390,000) had the highest infant mortality rates of major U.S. cities: 13.5 deaths for every 1,000 live births — higher than in Panama, Romania, or Botswana. The measure includes deaths from all causes in a child’s first 12 months, but most are the result of premature birth, which carries with it a host of potentially deadly conditions. Violence, the second-biggest killer of Detroit kids, claimed 32 young lives in 2010. The rates of infant mortality and child homicide worsened in Detroit during the Great Recession, according to state health data: “when the recession hit, Detroit already was wracked by pervasive poverty. Many of its neighborhoods had long been food deserts, where families with spotty access to transportation must travel miles for fresh food. They also have few primary care physicians, and fewer still who accept government-provided Medicaid insurance. Families lucky enough to find a doctor often postpone visits or delay picking up prescriptions due to a lack of transportation.” All of this makes the commitment of Judges Rhodes and Rosen to Detroit’s future one of very great import for the city’s smallest and youngest creditors who will otherwise have no access to the table.

Taking Stock in Stockton.  The City of Stockton, whose own plan of adjustment was approved by the U. S. Bankruptcy Court last November 18th, will now be the host of a related development: Bishop Stephen E. Blaire of the Catholic Diocese of Stockton said the Diocese would become the 10th U.S. diocese to file for Chapter 11 bankruptcy protection in the wake of the church’s sexual-abuse scandal, explaining this week that the diocese was seeking federal bankruptcy protection Wednesday, because it was the church’s only option for dealing with mounting legal costs related to abuse by priests. According to Bishop Blaire, the diocese has spent $14 million in legal settlements and judgments over the past 20 years dealing with abuse allegations; now it simply does not have funds available to settle pending lawsuits or address future allegations: “Very simply, we are in this situation because of those priests in our diocese who perpetrated grave, evil acts of child sexual abuse.” Similar to chapter 9 municipal bankruptcy, the Diocese’s Chapter 11 filing would halt pending litigation against the diocese and likely would ultimately allow it to discharge liabilities stemming from sexual-abuse allegations by setting up a trust to compensate victims. The diocese said it hopes to arrive at a resolution with victims and insurers through the process. In the Stockton diocesan bankruptcy, the parties will likely agree on a figure that the diocese would pay, in addition to potentially pulling in funds from insurers. However, the diocese says it holds “relatively little property and assets.” Other holdings, including schools, parishes and several parcels of land, are incorporated separately. The diocese, unlike corporations, but like municipal corporations, is seeking federal bankruptcy protection in order to continue to operate and provide services to its community.

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