03.24.14

Readying An Exit Strategy.The Motor City hopes to accelerate a process to solicit votes from some 32,000 of its retirees and beneficiaries on a blueprint for restructuring the city’s debt—a process in which U.S. Bankruptcy Judge Steven Rhodes has instructed the city’s attorneys, they must take great care to ensure the retirees have a very clear understanding about what impact such proposed cuts would have on their pensions and health care benefits, according to the Detroit News. Under the draft schedule, Detroit will send a ballot and copy of the city’s proposal to reduce its $18 billion debt to its retirees by the end of April—providing these retirees and other creditors until June 30th to submit their votes. Emergency Manager Kevyn Orr’s spokesperson said the city’s bankruptcy team is working with a group representing retirees to finalize ballots, in a process which he said be outlined in a filing with the federal court this week. Should a majority of retirees and other creditors vote in support of the city’s plan of adjustment, that would free up the Motor City to ask U.S. Bankruptcy Judge Steven Rhodes to utilize a so-called cram-down on all the Motor City’s other creditors, provided Judge Rhodes determines the proposed plan is fair and equitable. The city’s plan of adjustment proposes a 26 percent pension reduction for non-uniformed city employees—provided they agree not to pursue a sale of city-owned art or drag out litigation over a state constitutional protection of their pensions. If they reject a so-called “timely settlement,” the plan would impose a 34 percent cut. In contrast, retired police and firefighters – who have a better-funded pension fund, would receive a 4 percent cut if they accept the city’s proposal, or a 10 percent cut if they continue to oppose the offer court, according to the plan. In response, the Official Committee of Retirees has termed the proposal “non-confirmable;” it has disagreed with the city’s analysis, instead predicting the proposed plan of adjustment would cut retirees’ pensions by between 40 to 50 percent for the Motor City’s 5,658 active Detroit employees and 12,118 retirees in the General Retirement System, including the city’s proposed elimination of cost-of-living increases for 10 years. The committee believes that under Detroit’s proposed plan of adjustment, as many as 20 percent of the city’s retirees would fall below the federal poverty line. Under the proposed plan, the Motor City would mail each retiree a CD-ROM containing the city’s plan of adjustment, a ballot, and a return envelope. But, as the union’s attorney testified before Judge Rhodes early this month: “They need a simplified version of the plan and the treatment of retirees…I can’t imagine sending out CDs to a population that has thousands of people over 85 (years old).” That was a sentiment with which Judge Rhodes concurred: “There are two things they want to know: how much they will be paid and when.”

Retirees’ Health Care. The Motor City’s plan of adjustment proposes very different retiree health care changes. Under the plan, which will be part of retirees’ vote, Detroit would put $526.5 million into the trust over 20 years to provide health care for current and future city retirees and dependents. If approved, the city would create a health care trust overseen by a board of trustees. Once established, the city would cease providing life insurance or death benefits to its retirees. Future health insurance benefits for retirees are still subject to negotiation.

Analysis. Like the Motor City, its retirees and employees have a significant stake in speedy resolution. Every hour of every day consumes fiscal resources that will then later be unavailable to provide for investments in the city’s future sustainability—and reduce resources available to meet the city’s health care and retirement benefit promises. The situation, moreover, is further complicated in Detroit, because Mr. Orr’s proposed plan of adjustment does not divvy up or allocate cuts in the amounts due to its 170,000 creditors equally; rather it proposes significantly smaller reductions to its retirees than, say, its bondholders. Yet the plan, put together by attorneys and fiscal experts, is long and complex. As the retirement committee attorney Carole Neville noted to Judge Rhodes, the proposed fast-track Kevyn Orr is proposing complicates the task of helping retirees to fully comprehend – and translate—what is in the proposal, and what it might mean for them. At the same time, further delays would mean there would be less to divvy up amongst creditors, including retirees.     

 

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