One More Lap. Just hours after Chief U.S. Judge Gerald Rosen, the Motor City bankruptcy mediator selected by U.S. Bankruptcy Judge Steven Rhodes, announced that that the Detroit Police and Fire Fighters Association had agreed to support Emergency Manager’s revised plan of adjustment, negotiators for Detroit pension boards agreed late yesterday to retiree benefit cuts that were dramatically reduced from those initially proposed: “This settlement agreement was reached after intensive negotiating sessions over the past several months in which the parties’ interests were fully and vigorously represented by counsel and all issues robustly negotiated.” The twin pension developments late yesterday, after just under a year of intense negotiations over pension benefit reductions—and which lie at the heart of the pending appeal of the city’s eligibility for federal bankruptcy protection in the 6th U.S. Circuit Court of Appeals—could prove to be a game changer. With the city’s two pension funds, two global banks and major bondholders now supporting Detroit emergency manager Kevyn Orr’s revised plan of adjustment, the elements are coming in place that could accelerate federal approval of an exit from municipal bankruptcy of the largest bankruptcy in U.S. history. The agreements tentatively agreed to yesterday would raise the expected rate of annual investment returns for pension funds to 6.75%―a change which signally alters their funding outlook―and provide that such pension cuts be reduced over time if the pension funds outperform their expected rate of return. In return, the agreement would require pension board trustees and retirees to withdraw their opposition to the pending $816 million state/DIA plan, under which the Detroit Institute of Arts would be allowed to spin off as an independent institution in exchange for $816 million over 20 years from the state of Michigan, nonprofit foundations, and the DIA itself. With the agreement, Detroit’s pension boards are expected to: recommend a “yes” vote to retirees to support Detroit’s plan of adjustment; withdraw their pending appeal of the city’s eligibility for federal bankruptcy protection; and give up the right to sue the state over pension cuts.
The Agreement. The Motor City has approximately 32,000 retirees, beneficiaries, and active employees currently eligible for monthly retiree benefits. Under the proposed agreement, civilian retirees would receive 4.5% cuts to their monthly pension checks and the elimination of cost-of-living adjustment (COLA) increases, while police and fire retirees would benefit from no cuts to monthly checks, but realize a reduction in COLA increases. Yesterday’s agreement comes in the wake of the city’s proposed 26% cuts for general retirees and 6% for police and fire―with no COLA benefits. If the retirees rejected the grand bargain, those cuts were set to rise to 14% and 34%, respectively. The proposed agreement would distinguish between general city retirees, as opposed to police and fire retirees, because their pension fund was not managed as well as the police and fire fund for years. The police and fire retirees are expected to keep 1% annual COLA increases, down from 2.25%. Civilian retirees, however, would lose their COLA. Retirees still face cutbacks in health insurance benefits, estimated to be as much as an 85 percent decline in city-paid benefits. Under the proposed agreement, the two pension fund boards would remain intact, but an independent investment advisory committee would be established to review all the investments the respective boards would make. In addition, the police and fire retiree association also agreed to support the establishment of a Voluntary Employee Beneficiary Association (VEBA) to manage retiree health care, which is expected to deliver significantly reduced benefits to retirees. Under the proposed deal, GRS members could get some portion of the benefits restored in later years if the pension fund’s investments meet certain benchmarks. Police and firefighters also could get their cost-of-living-allowance increased if their pension investment returns reach a certain benchmark as well, according to a source. The settlement with some 23,000 vested pensioners represents a major change of fortune for retirees who faced the prospect of being paid 20 cents on the dollar for their claims last June before the city sought bankruptcy protection from its creditors a month later. The Motor City’s attorneys on Monday disclosed that Detroit would assume the Police and Fire Retirement System’s $3.3 billion in assets would grow in value by 6.75 percent annually, a slight adjustment upward from its earlier proposed rate of 6.5 percent. Under the agreement, the city has agreed to create two separate Voluntary Employee Beneficiary Associations, or VEBA, for police and firefighters and members of the city’s GRS or General Retirement System. A separate VEBA is to be set up for general retirees. To win approval for the proposal, a majority of retirees representing two-thirds of the city’s unfunded pension liabilities must approve the plan. The General Retirement System board will hear details of the plan at its meeting today; the Police and Fire Retirement System board meets Thursday to consider the proposed agreement.
A Little Help from Washington? The Detroit Free Press this morning reports that Obama administration and Michigan officials are in discussions on a proposal which could free up an additional $100 million to assist in facilitating the Motor City’s efforts to exit municipal bankruptcy. The issue involves support for a move by the state to give Detroit $100 million in federal money for blight remediation—a transfer which would, in turn, free up $100 million of the more than $500 million that emergency manager Kevyn Orr had planned to devote to blight remediation over the next decade. The federal funds would come from the Hardest Hit Fund, a $7.6-billion Obama administration effort established in 2010 to help the 18 states most hurt by the housing downturn. Just under half a billion of those funds were awarded to Michigan to operate homeowner assistance programs, including those offering mortgage subsidies, home loan rescues, mortgage modifications, and principal debt reductions. Nevertheless, as of last summer, Michigan had used less than $100 million—leading the U.S. Treasury to permit the Michigan State Housing Development Authority to devote up to $100 million in unspent funds on demolitions in five cities, with the bulk going to Detroit. It is that $100 million which is in discussion currently.
Next Up: U.S. Bankruptcy Judge Steven Rhodes will hold a hearing tomorrow on the following matters in Detroit’s bankruptcy:
- A status conference on schedule for July trial on Detroit’s debt-cutting plan of adjustment;
- Unresolved creditor objections to 600-page disclosure statement to creditors detailing the plan;
- A request by Wayne County for mediation sessions with Detroit, Macomb, and Oakland counties on creation of a regional water authority;
- The City’s motion on establishing procedures for retiree voting on changes to pensions and other post-employment benefits; and
- A motion by insurers on voting procedures and rights for water and sewer bondholders.
Motor City Assessments. The Michigan State Tax Commission has approved a plan to overhaul Detroit’s process and procedures with regard to property tax assessments as part of a process of a citywide reassessment of all its 386,000 parcels by December 2016. In the wake of multiple reports about over-assessments, rampant tax delinquencies, and mismanagement in the Assessment Division—in our report, we noted the city’s property tax revenues were adversely affected by “state limitation, as well as a city property tax administration system described as ‘riddled with errors and singular inability to address delinquencies….with the Detroit News finding some 47% of property owners were delinquent on their property taxes and fees in 2012.” The News found the city was over-assessing homes by an average of 65%, leading to higher tax bills, according an analysis of more than 4,000 appeal decisions over the past three years by a state board. The reassessment, which is expected to cost nearly $10 million, could also facilitate Mayor Mike Duggan announced plans after his inaugural last January to lower residential property assessments 5-20 percent this year.
Emergency Expert Wanted. In response to U.S. Bankruptcy Judge Steven Rhodes’ request to hire a municipal finance expert to review the city’s bankruptcy plan, he has received five responses, from: Dean Kaplan, a managing director at Public Financial Management Inc., who would lead a team of PFM colleagues; Richard Ravitch, a former New York lieutenant governor who was part of New York City’s high-profile restructuring in the late 1970s and who has the Co-Chairman of the State Budget Crisis Task Force with Paul Volcker—for whom we completed the Virginia report in December of 2012; Peter Hammer, a Wayne State University law professor; William Brandt, a Chicago-based turnaround consultant and chairman of the Illinois Finance Authority; and Martha Kopacz, from Phoenix Management Services LLC, whose team would include Bob Childree, the longtime controller of the state of Alabama. Judge Rhodes will interview the applicants in open court this Friday, Good Friday, with assistance from two attorneys — Guy Neal, who was the financial creditors’ nominee, and Barbara Patek, labor’s nominee. In addition, the city of Detroit has been offered the opportunity to name one attorney to participate.
Analysis. While it is not fully clear what Judge Rhodes is seeking, it appears to be remarkably similar to the concerns raised Monday in Harrisburg by U.S. Bankruptcy Judge Thomas Bennett, who presided over the Jefferson County municipal bankruptcy in Alabama. Judge Bennett noted that while the federal municipal bankruptcy law includes a “best interests of the creditors’ test,” a provision that any final resolution must be “fair and equitable,” and that the final decision “cannot discriminate unfairly;” neither the federal law, nor the legal processes clearly address the best interest of the public—or the citizens and taxpayers of the municipality. Judge Bennett added that taxpayers (here Detroit’s citizens) have no formal role in municipal bankruptcy. Neither Mayor Duggan, nor the taxpayers are parties to the federal court proceedings—nor provided any specific rights under the federal law. Judge Bennett, in light of his experience in Alabama, was querying—in a broader sense—who, in these complex cases represents or advocates for the public of the city or county in bankruptcy? Similarly, the federal law, mirroring corporate bankruptcy law, provides for balancing or debt adjustment amongst the creditors of the entity—but neither the citizens nor the taxpayers of Detroit—nor the city’s elected leaders—is amongst the 170,000 plus creditors. This morning’s Bond Buyer reports that the applicants “Each hopes to be hired by (Judge) Rhodes to act as a municipal finance expert witness to independently review the long-term feasibility of Detroit’s plan to exit the largest municipal bankruptcy in the U.S. and rebuild the struggling city. None of the five live in Detroit, or were sought by Detroit leaders to take this position. Yet, Judge Rhodes has raised a fundamental concern: the federal municipal bankruptcy law not only excludes a city’s democratically elected leadership from any formal role, but it also excludes a city or county’s future sustainability as a critical criterion for exiting municipal bankruptcy. It would appear this is the unprecedented and critical focus of Judge Rhodes—who surely does not want to approve of any final plan which might fail—only to result in Detroit returning to his very same court in the future, insolvent again.
Brrr! When it snows, it really snows: The National Weather Service reports that Detroit and Flint, Mich., have experienced their snowiest winters on record. By yesterday morning, 3.1 inches had fallen at Detroit Metropolitan Airport, which the weather service duly reported increased the Motor City’s seasonal total to 94.8 inches, exceeding the previous record that stood for more than a century. In the winter of 1880-1881, 93.6 inches of snow fell. Flood warnings are in effect along rivers in a wide swath of the Lower Peninsula.